BUTTERFLY NETWORK, INC. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto for the year endedDecember 31, 2020 contained in Amendment No. 2 to the Current Report on Form 8-K filed with theSEC onMarch 29, 2021 . This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" sections of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as amended, and of this Quarterly Report on Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references to "we", "us", "our", and "the Company" are intended to mean the business and operations ofButterfly Network, Inc. and its consolidated subsidiaries. The unaudited condensed consolidated financial statements for the three and six months endedJune 30, 2021 and 2020, respectively, present the financial position and results of operations ofButterfly Network, Inc. and its wholly-owned subsidiaries.
Overview
We are an innovative digital health business whose mission is to democratize healthcare by making medical imaging accessible to everyone around the world. Powered by our proprietary Ultrasound-on-Chip™ technology, our solution uses a unique combination of software and hardware enabling medical imaging to drive more clinical insight at patient point-of-care. With this technology, Butterfly created the only ultrasound transducer that can perform "whole-body imaging" in a single handheld probe using semiconductor technology. We are currently commercializing the second generation of our hardware product, the Butterfly iQ+, which was launched inOctober 2020 . The first-generation product, Butterfly iQ, was launched in 2019. Our proprietary software and artificial intelligence ("AI") solution are intended to make the product easy to use, integrated with the clinical workflow, and accessible on a user's smartphone or tablet, as well as healthcare enterprise systems. Our portable, usable, accessible and affordable handheld solution is protected by a robust intellectual property portfolio with more than 800 patents granted or pending. The Butterfly iQ / iQ+ is currently cleared as a Class II medical device by theU.S. Food and Drug Administration ("FDA"), received a medical device license inCanada and has the CE mark inEurope for use by health care practitioners. It is commercially available in over 20 countries includingthe United States ,Canada ,Australia ,New Zealand and throughout greaterEurope . We are focused on driving the adoption of our handheld solution in order to democratize healthcare globally. We believe that the potential global addressable ultrasound market is estimated to be$8 billion . We seek to expand the addressable market through three strategies: increasing users, expanding use cases and expanding to more care settings where the Butterfly solutions are used. We also seek to increase touchpoints with our existing and potential customers through new sales channels such as medical and nursing schools, veterinarian usage, non-governmental organizations and distributors. Generally, we currently sell directly to users through our ecommerce channel and also sell to enterprise customers through our direct sales force and distributors. We plan to continue to invest in the development of our products and solutions across the Butterfly platform. With the launch of Butterfly iQ+, we lowered manufacturing costs and improved capabilities including lower power consumption, Needle Viz™ technology, faster frame rates and improved interoperability. Additionally, over the course of 2021, we launched multiple new software features that improve image acquisition, added features for use cases and enhanced ease of use.
While we are driving revenue growth, we are also focused on improving gross profits by working to drive operational efficiencies in our supply chain and incorporate a greater mix of higher margin products and services over time.
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
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impact public health conditions. The uncertainty and potential economic volatility impact our customer base, supply chains, our business practices and our 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. However, more recently we have observed some improvements and decreased effects on our customer base with regards to the financial strain caused by the pandemic, resulting in increased sales volume. In addition, COVID-19 continues to have an on-going 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 been able to partially manage the cost impact on our supply chain as we have a multi-year purchase commitment for a key inventory component in our manufacturing process. We are also actively implementing new operating efficiencies in our supply chain 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 positive developments we have experienced may change based on new information that may emerge concerning COVID-19, the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets.
Recent Developments
OnFebruary 12, 2021 we completed the business combination with Longview (the "Business Combination") pursuant to the terms of the Business Combination Agreement, dated as ofNovember 19, 2020 (the "Business Combination Agreement"), by and amongLongview Acquisition Corp. ("Longview"),Clay Merger Sub, Inc. , aDelaware corporation ("Merger Sub"), andButterfly Network, Inc. , aDelaware corporation ("Legacy Butterfly"). The Business Combination was approved by Longview's stockholders at its special meeting held onFebruary 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 theNew York Stock Exchange ("NYSE") onFebruary 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 . OnMay 27, 2021 , we entered into an office lease agreement (the "Lease") withNEEP Investors Holdings LLC (the "Landlord") for approximately 61,138 rentable square feet consisting of the entire building located at1600 District Avenue ,Burlington, Massachusetts (the "Premises"). The Premises covered by the Lease will serve as our new principal office. The initial term of the Lease is ten (10) years and eight (8) months beginning on the lease commencement date, which is expected to beJanuary 14, 2022 . We delivered a security deposit in the amount of$4.0 million in the form of a letter of credit to the Landlord as
ofJune 30, 2021 . Key Performance Metrics
We review the key performance measures discussed below, to evaluate 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 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.
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[[Image Removed: Graphic]]
Units fulfilled increased by 1,488, or 29.8%, for the three months ended June
30, 2021 compared to the three months ended June 30, 2020 , primarily due to
increased international and domestic demand driven by additional investment in
sales and marketing activities.
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]]
Subscription mix increased by 5.9 percentage points, to 21.2% for the three
months ended June 30, 2021 compared to the three months ended June 30, 2020 . The
increase was due to increased volume of device sales and increases in
subscription renewals, as well as the timing of revenue recognition for our SaaS
and other subscription contracts. Revenue from such contracts is deferred and
recognized over the service period.
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Non-GAAP Financial Measures
We present non-GAAP financial measures in order to assist readers of our condensed 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 and non-recurring changes to our warranty liability. We calculate Adjusted Gross Margin as gross margin adjusted to exclude depreciation and amortization and non-recurring changes to our warranty liability. 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 periods shown below do not include such expenses.
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
Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Revenue $ 16,513 $ 11,792 $ 28,958 $ 20,462
Cost of revenue 8,293 11,627 14,320 21,133
Gross profit $ 8,220 $ 165 $ 14,638 $ (671)
Gross margin 49.8% 1.4% 50.5% (3.3)%
Add:Depreciation and amortization 72 24 160 46 Warranty liability policy change - -
(560) -
Adjusted gross profit $ 8,292 $ 189 $ 14,238 $ (625)
Adjusted gross margin 50.2% 1.6% 49.2% (3.1)%
Adjusted EBITDA
We calculate Adjusted EBITDA as net loss adjusted to exclude interest income,
interest expense, other expense, net, provision for income taxes, depreciation
and amortization, stock-based compensation, changes in the fair value of warrant
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liabilities and other non-recurring items. The other non-recurring items include
costs related to our executive transition, discretionary transaction bonuses and
other fees incurred with the close of the Business Combination and adjustments
for the warranty liability policy changes. 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. We also exclude from Adjusted EBITDA 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
periods shown below do not include such expenses.
The following table reconciles Adjusted EBITDA to net loss, the most directly
comparable financial measure calculated and presented in accordance with U.S.
GAAP.
Three months ended June 30, Six months ended June 30,(In thousands) 2021 2020 2021 2020 Net loss$ (2,942) $ (23,241) $ (3,632) $ (47,595) Interest income (607) (23) (846) (222) Interest expense 7 113 645 118 Change in fair value of warrant liabilities (33,458) - (87,570) - Other expense, net 262 70 895 99 Provision for income taxes 51 10 75 20 Stock based compensation 7,738 2,662 28,035 5,345
Depreciation and amortization 456 308 915 593 CEO transition costs - - 5,398 - Warranty liability policy change - -
(560) -
Transaction bonus - - 1,653 -
Adjusted EBITDA $ (28,493) $ (20,101) $ (54,992) $ (41,642) 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 condensed 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. 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 mix shifts increasingly
towards subscriptions.
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We plan to continue to invest additional resources into our products to expand
and further develop our offerings. The level and timing of investment in these
areas could affect our cost of revenue 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, we expect R&D spending as a percentage of revenues will increase in the near term and then fluctuate over time due to the level and timing of our product development efforts. 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. We expect that sales and marketing expenses as a percentage of revenues will increase in the near term and then fluctuate over time as we evaluate expansion opportunities.
General and administrative
General and administrative expenses primarily consist of personnel costs and benefits, patent and filing fees, facilities costs, office expenses 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. We anticipate general and administrative expenses as a percentage of revenues will fluctuate over time due to the timing and amount of these expenses.
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 in our condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q.
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Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
% of % of % of % of
(in thousands) Dollars revenue Dollars revenue Dollars revenue Dollars revenue
Revenue:
Product $ 13,012 78.8 % $ 9,990 84.7 % $ 22,608 78.1 % $ 17,199 84.1 %
Subscription 3,501 21.2 % 1,802 15.3 % 6,350 21.9 % 3,263 15.9 %
Total revenue: $ 16,513 100.0 % $ 11,792 100.0 % $ 28,958 100.0 % $ 20,462 100.0 %
Cost of revenue:
Product 7,858 47.6 % 11,385 96.5 % 13,506 46.6 % 20,647 100.9 %
Subscription 435 2.6 % 242 2.1 % 814 2.8 % 486 2.4 %
Total cost of revenue: $ 8,293 50.2 % $ 11,627 98.6 % $ 14,320 49.5 % $ 21,133 103.3 %
Gross profit $ 8,220 49.8 % $ 165 1.4 % $ 14,638 50.5 % $ (671) (3.3) %
Operating expenses:
Research and
development 17,088 103.5 % 11,940 101.3 % 32,804 113.3 % 24,456 119.5 %
Sales and marketing 10,540 63.8 % 5,955 50.5 % 20,347 70.3 % 11,870 58.0 %
General and
administrative 17,279 104.6 % 5,341 45.3 % 51,920 179.3 % 10,583 51.7 %
Total operating
expenses $ 44,907 271.9 % $ 23,236 197.0 % $ 105,071 362.8 % $ 46,909 229.2 %
Loss from operations $ (36,687) (222.2) % $ (23,071) (195.6) % $ (90,433) (312.3) % $ (47,580) (232.5) %
Interest income 607 3.7 % 23 0.2 % 846 2.9 % 222 1.1 %
Interest expense (7) (0.0) % (113) (1.0)% (645) (2.2) % (118) (0.6) % Change in fair value of warrant liabilities
33,458 202.6 % - - % 87,570 302.4 % - - %
Other income (expense),
net (262) (1.6) % (70) (0.6) % (895) (3.1) % (99) (0.5) %
Loss before provision
for income taxes
Provision for income taxes 51 0.3 % 10 0.1 % 75 0.3 % 20 0.1 % Net loss$ (2,942) (17.8) %$ (23,241) (197.1) %$ (3,632) (12.5) %$ (47,595) (232.6) %
Comparison of the three months ended
Revenue
Three months ended June 30,
(in thousands) 2021 2020 Change % Change
Revenue:
Product $ 13,012 $ 9,990 $ 3,022 30.3 %
Subscription 3,501 1,802 1,699 94.3 %
Total revenue: $ 16,513 $ 11,792 $ 4,721 40.0 %
Total revenue increased by
Product revenue increased by$3.0 million , or 30.3%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 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. For the three months endedJune 30, 2020 , revenue was positively impacted by COVID-19, as the Butterfly iQ was utilized in the monitoring of acute symptoms of COVID-19. We are unable to measure precisely the positive impact of COVID-19 on our revenue for the three months endedJune 30, 2020 . 31 Table of Contents Subscription revenue increased by$1.7 million , or 94.3%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction with sales of our devices as well as the increase from subscription renewals year over year. Cost of revenue Three months ended June 30, (in thousands) 2021 2020 Change % Change Cost of revenue: Product$ 7,858 $ 11,385 $ (3,527) (31.0) % Subscription 435 242 193 79.8 % Total cost of revenue$ 8,293 $ 11,627 $ (3,334) (28.7) % Percentage of revenue 50.2 % 98.6 %
Cost of product revenue decreased by$3.5 million , or 31.0%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This decrease was driven by the sale of our second generation product, the Butterfly IQ+, in the quarter endedJune 30, 2021 as opposed to the Butterfly IQ in the quarter endedJune 30, 2020 . The IQ+'s lower product cost, the non-recurrence of net realizable value inventory adjustments and excess and obsolete inventory charges and lower warranty cost primarily accounted for$3.7 million of the decrease in costs associated with product sales. The decreases were offset by items that were not significant. Cost of subscription revenue increased by$0.2 million , or 79.8%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily driven by increased cloud hosting costs. Research and development Three months ended June 30, (in thousands) 2021 2020 Change % Change Research and development$ 17,088 $ 11,940 $ 5,148 43.1 Percentage of revenue 103.5 % 101.3 %
Research and development expenses increased by$5.1 million , or 43.1%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily driven by increases in personnel costs including stock-based compensation expense of$4.4 million , as we continue to invest in expanding our internal product development capabilities. Sales and marketing Three months ended June 30, (in thousands) 2021 2020 Change % Change Sales and marketing$ 10,540 $ 5,955 $ 4,585 77.0 % Percentage of revenue 63.8 % 50.5 % Sales and marketing expenses increased by$4.6 million , or 77.0%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily driven by increases in personnel cost including stock-based compensation and benefits of$3.2 million associated with increases in sales and sales personnel and an increase in demand generation costs of$0.9 million due to investments made to promote sales growth. General and administrative Three months ended June 30, (in thousands) 2021 2020 Change % Change General and administrative$ 17,279 $ 5,341 $ 11,938 223.5 % Percentage of revenue 104.6 % 45.3 % 32 Table of Contents
General and administrative expenses increased by$11.9 million , or 223.5%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily driven by increases in personnel cost including stock-based compensation and benefits of$6.1 million associated with investments to scale up our back-office support and executive functions. In addition, the general and administrative increase is due to increased recruiting expense of$1.0 million to support our investments in personnel growth, increased professional service fees of$2.8 million and other general and administrative costs incremental to being a publicly traded company of
$1.2 million . Loss from operations Three months ended June 30, (in thousands) 2021 2020 Change % Change Loss from operations$ (36,687) $ (23,071) $ (13,616) 59.0 % Percentage of revenue (222.2) % (195.6) % Loss from operations increased by$13.6 million , or 59.0%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily a result of increases in operating expenses of$21.7 million partially offset by an increase in gross profit of$8.1 million . The increase in gross profit was primarily due to higher volume sales and lower
cost
of product revenue.
Net loss
Three months ended June 30,
(in thousands) 2021 2020 Change % Change
Net loss $ (2,942) $ (23,241) $ 20,299 (87.3) %
Percentage of revenue (17.8) % (197.1) %
Net loss decreased by $20.3 million , or 87.3%, for the three months ended June
30, 2021 compared to the three months ended June 30, 2020 . This increase was
primarily a result of an increase in the operating loss of $13.6 million , offset
by the gain for the change in the fair value of the warrant liabilities of $33.5
million . The warrant liabilities were recorded as part of the business
combination and therefore did not exist in the prior year.
Comparison of the six months ended
Revenue
Six months ended June 30,
(in thousands) 2021 2020 Change % Change
Revenue:
Product $ 22,608 $ 17,199 $ 5,409 31.4 %
Subscription 6,350 3,263 3,087 94.6 %
Total revenue: $ 28,958 $ 20,462 $ 8,496 41.5 %
Total revenue increased by
Product revenue increased by$5.4 million , or 31.4%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 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. For the six months endedJune 30, 2020 , revenue was positively impacted by COVID-19, as the Butterfly iQ was utilized in the monitoring of acute symptoms of COVID-19. We are unable to measure precisely the positive impact of COVID-19 on our revenue for the six months endedJune 30, 2020 . Subscription revenue increased by$3.1 million , or 94.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction with sales of our devices as well as the increase from subscription renewals year over year. 33 Table of Contents Cost of revenue Six months ended June 30, (in thousands) 2021 2020 Change % Change Cost of revenue: Product$ 13,506 $ 20,647 $ (7,141) (34.6) % Subscription 814 486 328 67.5 % Total cost of revenue$ 14,320 $ 21,133 $ (6,813) (32.2) % Percentage of revenue 49.5 % 103.3 % Cost of product revenue decreased by$7.1 million , or 34.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This decrease was driven by the sale of our second generation product, the Butterfly IQ+, in the period endedJune 30, 2021 as opposed to the Butterfly IQ in the period endedJune 30, 2020 . The IQ+'s lower product cost, the non-recurrence of net realizable value inventory adjustments and excess and obsolete inventory charges and lower warranty cost primarily accounted for$7.6 million of the decrease in costs associated with product sales. The decreases were offset by items that were not significant. Cost of subscription revenue increased by$0.3 million , or 67.5%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily driven by increased cloud hosting costs. Research and development Six months ended June 30, (in thousands) 2021 2020 Change % Change Research and development$ 32,804 $ 24,456 $ 8,348 34.1 % Percentage of revenue 113.3 % 119.5 %
Research and development expenses increased by$8.4 million , or 34.1%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily driven by increases in personnel costs including stock-based compensation expense of$8.4 million , as we continue to invest in expanding our internal product development capabilities. These expenses were partially offset by items that were not significant. Sales and marketing Six months ended June 30, (in thousands) 2021 2020 Change % Change Sales and marketing$ 20,347 $ 11,870 $ 8,477 71.4 % Percentage of revenue 70.3 % 58.0 % Sales and marketing expenses increased by$8.5 million , or 71.4%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily driven by increases in personnel cost including stock-based compensation and benefits of$6.0 million associated with increases in sales and sales personnel and an increase in demand generation costs of$1.8 million due to investments made to promote sales growth. General and administrative Six months ended June 30, (in thousands) 2021 2020 Change % Change General and administrative$ 51,920 $ 10,583 $ 41,337 390.6 % Percentage of revenue 179.3 % 51.7 %
General and administrative expenses increased by$41.3 million , or 390.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase is primarily due to an increase in stock-based compensation expense of$19.5 million due to the additional awards granted and the performance condition for certain restricted stock units being achieved in connection with the Closing of the Business Combination. We began to recognize expense for 34 Table of Contents those awards upon the Closing of the Business Combination. In addition to stock-based compensation, the increase was primarily driven by increased personnel costs of$9.6 million due to investments made to scale up our back-office support and executive functions and personnel costs with regards to our CEO transition, recruiting expense of$2.9 million , increased consulting and professional services of$6.3 million and other general and administrative costs incremental to being a publicly traded company of$1.8 million . Loss from operations Six months ended June 30, (in thousands) 2021 2020 Change % Change Loss from operations$ (90,433) $ (47,580) $ (42,853) 90.1 % Percentage of revenue (312.3) % (232.5) % Loss from operations increased by$42.9 million , or 90.1%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily a result of increases in operating expenses of$58.1 million offset by an increase in gross profit of$15.3 million . The increase in gross profit was primarily due to higher volume sales and lower cost of product revenue. Net loss Six months ended June 30, (in thousands) 2021 2020 Change % Change Net loss$ (3,632) $ (47,595) $ 43,963 (92.4) % Percentage of revenue (12.5) % (232.6) % Net loss decreased by$44.0 million , or 92.4%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily a result of an increase in the operating loss of$42.9 million , offset by the gain for the change in the fair value of the warrant liabilities$87.6 million . The warrant liabilities were recorded as part of the business combination and therefore did not exist in the prior year.
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 net losses in the short term, as we continue to invest in research and development of our products and invest in the sales and marketing and expand into new 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 and investment in marketable securities balance as ofJune 30, 2021 was$509.5 million , including$4.0 million of restricted cash. 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. The Company has restricted cash of$4.0 million as ofJune 30, 2021 to secure a letter of credit for one of the Company's leases. The Company expects to have a letter of credit as security deposit for the duration of the lease. 35 Table of Contents Cash flows
Comparison of the period for the six months ended
The following table summarizes our sources and uses of cash for the six months
ended
Six months ended June 30,
(in thousands) 2021 2020Net cash used in operating activities$ (99,929) $ (39,406) Net cash used in investing activities (492,343)
(1,908)
Net cash provided by financing activities 555,671
24,740
Net decrease in cash, cash equivalents and restricted cash$ (36,601) $ (16,574)
Net cash 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 historical 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$60.5 million , or 153.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase in net cash used in operating activities was due to a$18.1 million increase in inventory resulting from increased purchases largely stemming from our minimum purchase commitments, a$6.9 million increase in prepaid expenses and other assets to be used in operations, as well as a$11.7 million decrease in accounts payable and accrued expenses due to the timing of expenses and payments and a$64.8 million decrease in adjustments to reconcile net loss partially offset by a$44.0 million decrease in net losses.
Net cash used in investing activities
Net cash used in investing activities increased by$490.4 million for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase was primarily due to the investment activity for the funds received from the Business Combination.
Net cash provided by financing activities
For the six months endedJune 30, 2021 , net cash provided by financing activities increased by$530.9 million compared to the six months endedJune 30, 2020 . The increase was primarily due to net proceeds from the Business Combination of$547.8 million . Additionally, the proceeds from the exercise of stock options increased by$11.5 million which was partially offset by a$4.4 million loan repayment under the Paycheck Protection Program and the non-recurrence of$20.2 million of proceeds from the issuance of convertible debt in fiscal 2020. Contractual Obligations
As of
(in thousands) Total < 1 year 1-3 Years 3-5 Years > 5 years Operating leases$ 43,163 $ 1,612 $ 7,508 $ 9,345 $ 24,698 Purchase obligations (1) 142,801 53,040 89,761 - - Total contractual obligations$ 185,964 $ 54,652 $ 97,269 $ 9,345 $ 24,698
Purchase obligations include all legally binding contracts and relate to firm
commitments for inventory purchases. Our purchase obligations are related to (1) a contract for a key inventory component in our manufacturing process.
Purchase orders that are not binding agreements are excluded from the table
above.
36
Table of Contents
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except as described in Note 2 "Summary of Significant Accounting Policies - Recent Accounting Pronouncements Adopted" and "Summary of Significant Accounting Policies - Recent Accounting Pronouncements Issued but Not Yet Adopted" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K.
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 condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.
Emerging Growth Company
We are an "emerging growth company", as defined in the Jumpstart Our Business
Startups Act of 2012 ("JOBS Act"). Pursuant to the JOBS Act, an emerging growth
company is provided the option to adopt new or revised accounting standards that
may be issued by the FASB or the SEC either (i) within the same periods as those
otherwise applicable to non-emerging growth companies or (ii) within the same
time periods as private companies. We intend to take advantage of the exemption
for complying with new or revised accounting standards within the same time
periods as private companies. Accordingly, the information contained in this
report may be different than the information you receive from other public
companies.
We also intend to take advantage of some of the reduced regulatory and reporting
requirements of emerging growth companies pursuant to the JOBS Act so long as we
qualify as an emerging growth company, including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404(b)
of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation and exemptions from the requirements of holding non-binding
advisory votes on executive compensation and golden parachute payments.
However, based on the market value of the Company's common stock held by
non-affiliates as of June 30, 2021 , the Company expects to become a
large-accelerated filer and thus cease to be an emerging growth company on
December 31, 2021 . At that time, the Company will be required to adopt new or
revised accounting standards as required by public companies, including those
standards which the Company had previously deferred pursuant to the JOBS Act.
Additionally, the Company will no longer be able to take advantage of the
reduced regulatory and reporting requirements of emerging growth companies
described above.
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