Item 7 describe additional factors that could adversely affect the business, financial condition or results of operations of the
Company. New risk factors emerge from time to time, and it is not possible to predict all such risk factors, nor can the Company assess
the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results
to differ materially from those contained in any forward-looking statements. Forward-looking statements are not guarantees of performance.
You should not put undue reliance on these statements, which speak only as of the date hereof. All forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The
Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
4
Summary of Risk Factors
Our business is subject to numerous risks and
uncertainties that you should consider before investing in our securities. Some of the principal risk factors are summarized below:
5
These and other material risks we face are described
more fully in Item 1A, Risk Factors, which investors should carefully review prior to making an investment decision with respect to the
Company or its securities.
6
PART I
All brand names or trademarks appearing in
this report are the property of their respective holders. Use or display by us of other parties’ trademarks, trade dress, or products
in this report is not intended to, and does not, imply a relationship with, or endorsements or sponsorship of, us by the trademark or
trade dress owners. Unless the context requires otherwise, references in this report to the “Company,” “we,” “us,”
and “our” refer to Butterfly Network, Inc. and its wholly-owned subsidiaries.
Item 1. BUSINESS
Overview
Prior to
February 12, 2021, we were a blank check company incorporated as a Delaware corporation and formed for the purpose of effecting
a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On
February 12, 2021, we completed the Business Combination pursuant to the Business Combination Agreement dated November 19, 2020
that we entered into with Legacy Butterfly. Upon the completion of the Business Combination, we changed our name to “Butterfly Network, Inc.”
and the business of Legacy Butterfly became our business.
We are an innovative digital health business with
a mission of democratizing healthcare by making medical imaging accessible to everyone around the world. Powered by our proprietary Ultrasound-on-ChipTM
technology, our solution addresses the needs of point of care imaging with a unique combination of software and hardware technology. Butterfly
iQ, followed by our recently launched Butterfly iQ+, is our first product powered by Butterfly’s Ultrasound-on-ChipTM, and
is the only ultrasound transducer that can perform “whole-body imaging” in a single handheld probe using semiconductor technology.
Our Ultrasound-on-ChipTM reduces the cost of manufacturing, 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. Through our portable proprietary, handheld solution, protected by a robust intellectual property portfolio and empowered
in part by its proprietary software and Artificial Intelligence (“AI”), Butterfly aims to enable earlier detection throughout
the body and remote management of health conditions around the world.
Digital health is systematically changing the
way healthcare practitioners deliver care by increasing access and significantly reducing patient care costs. Butterfly iQ+ is designed
for this new wave of medical care with an easy-to-use interface that portrays ultrasound images on your smartphone in real-time. Historically,
the global ultrasound market has been dominated by traditional cart-based devices. These devices are accessible only to highly specialized,
highly trained technicians and are located predominantly in hospitals, imaging centers, and physicians’ offices. Many healthcare
institutions throughout the world lack the facilities and capital necessary to acquire and maintain expensive cart-based devices and cannot
afford the highly trained individuals required to operate them. Traditional cart-based equipment typically ranges from $45,000 to $60,000
per new device in the mid-range and is required to be operated by trained healthcare professionals. More recently, we have seen the introduction
of Point-of-Care Ultrasound (“POCUS”) devices with an average price point of $21,000, based on $5,000 to $7,000 per probe,
generally requiring two to three probes to cover a comparable range of cleared indications to the single probe Butterfly iQ+. However,
these POCUS devices are limited by their application of the same 60 year-old piezoelectric crystal technology with which the traditional
cart-based devices operate, leaving limited opportunity for future progress. Although still required to be operated by trained healthcare
practitioners, we believe that Butterfly iQ+ is the next generation of point-of-care devices that will further drive costs down and expand
the current approximately $8 billion ultrasound imaging market.
In 2018, Legacy Butterfly commercially launched
Butterfly iQ, the world’s first handheld, single-probe, whole-body ultrasound system using semiconductor technology that is commercially
available, and in 2020, Legacy Butterfly launched the Butterfly iQ+ with additional features and improved performance. Since then, the
Butterfly iQ and Butterfly iQ+ has been shipped to more than 30,000 medical professionals globally. Butterfly iQ+’s price through
our eCommerce website is $1,999 per device, making it a high-quality and affordable alternative to the costly traditional cart-based equipment
and other handheld devices currently on the market. Powered by our Ultrasound-on-ChipTM, Butterfly’s high-performance imaging
capabilities support fast and confident clinical decision-making. Butterfly iQ+ is comprised of both durable hardware and dynamic software
solutions designed to make ultrasound imaging accessible to all healthcare practitioners, including nurses. In the future, we hope to
develop and introduce an even more advanced product that can ultimately be used by patients to self-scan ultrasound images with a device
and transfer these images to doctors electronically in real-time.
The Butterfly iQ+ is an affordable solution that
is designed to help healthcare practitioners save time in their diagnosis and treatment of patients, not only improving overall patient
outcomes but also increasing direct revenue per patient encounter while reducing the need for external imaging or specialist referrals.
We believe the adoption of the Butterfly iQ and iQ+ device by healthcare practitioners is a positive for all healthcare system stakeholders.
Through our ongoing collaborations with the healthcare community, we are continuing to optimize our software ecosystem, including by harnessing
AI to develop additional clinical and product advancements for our users. We believe that these efforts could drive ease-of-use for image
acquisition, improve analysis, and expand its most utilized features with extensive quality control. Our AI has and is expected to continue
to allow us to develop programs that guide and educate healthcare practitioners on how to utilize the Butterfly iQ+ device, with the goal
of improving their clinical impact and productivity globally.
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Legacy Butterfly received 510(k) clearance
from the U.S. Food and Drug Administration, or FDA, in 2017 for the Butterfly iQ, which was commercially launched in 2018, and thereafter
commercially launched the Butterfly iQ+ under the same 510(k) in 2020. Our ultrasound system has been cleared by the FDA for the
following uses: peripheral vessel (including carotid, deep vein thrombosis and arterial studies), procedural guidance, small organs (including
thyroid, scrotum and breast), cardiac, abdominal, urology, fetal/obstetric, gynecological, musculoskeletal (conventional), musculoskeletal
(superficial) and opththalmic.
Butterfly iQ+ is commercially available in
over 20 countries, including the United States, Canada, Australia, New Zealand, throughout greater Europe and in parts of Latin
America. Our commercialization strategy is predicated on three primary channels. Namely, we have an eCommerce website through which
we sell our Butterfly iQ+ to healthcare practitioners in these geographies. We also have a targeted enterprise salesforce focused on
large healthcare system-wide implementations. Lastly, we have distributor, veterinary and affiliate relationships to unlock
additional channels to supplement our direct and eCommerce sales. We market our products through our targeted sales organization,
which is engaged in sales efforts and promotional activities primarily to health systems or institutions. Outside the United States,
we also market our products directly to healthcare institutions. In the United States, we sell to or have agreements in place with
most of the top 100 U.S. healthcare systems. Moreover, positive feedback about Butterfly iQ+ among practitioners has historically
been a significant driver of sales, as healthcare practitioners share their appreciation for Butterfly iQ within their medical
communities, which has yielded a strong net promoter score. A net promoter score is a metric used as a measure of customer
satisfaction and word of mouth referrals. A strong net promoter score has been shown to correlate with revenue growth relative to
competitors. We calculate our net promoter score by asking our customers the following question: “How likely are you to
recommend Butterfly iQ to a friend or colleague” on a scale of 1 (not at all likely) through 10 (extremely likely)?
Respondents rating us 6 or below are considered “Detractors,” 7 or 8 are considered “Passives,” and
9 or 10 are considered “Promoters.” To calculate our net promoter score, we subtract the percentage of
Detractors from the percentage of Promoters. For example, if 50% of respondents were Promoters and 10% were Detractors, our net
promoter score would be 40. We measure net promoter score continuously among cloud users by automatically sending net promoter score
survey emails to these users three months after they create their Butterfly user account and every six months thereafter.
Because our net promoter score is measured continuously it is subject to fluctuation; however, our net promoter score historically
has remained strong. As of March 1, 2021, our net promoter score was 64 (USA) and reflects responses received since we began
collecting net promoter score data in 2019, including multiple responses from users that respond to our survey over time. Net
promoter scores vary broadly by industry, with averages generally ranging from 18 (health insurance) to 47 (tablet computers)
based on data published in 2016 by Satmetrix, co-developer of Net Promoter®. Within technology industries, the top net promoter
scores correspond to well-known businesses such as Amazon (66), Apple (66) and Netflix (64) according to Satmetrix. We believe
that this method of calculation aligns with medical device industry standards and that this metric is meaningful for investors
because of the correlation between net promoter score and future growth.
Outside of our core commercial geographies, Butterfly
iQ+ is also being utilized in over 45 low resource settings around the world, where we have partnerships with non-governmental organizations
like the Bill & Melinda Gates Foundation to deliver our technology to underserved communities. Currently, we have over 30 global
health partnerships in place with organizations that align with our mission to democratize medical imaging and bring lifesaving medical
imaging to patients, often for the first time.
Legacy Butterfly was founded in 2011 by Dr. Jonathan
Rothberg, a serial entrepreneur who received the Presidential Medal of Technology & Innovation in 2016 for inventing a novel
next generation DNA sequencing method and has founded more than 10 healthcare/technology companies, including 454 Life Sciences, Ion
Torrent and CuraGen. Legacy Butterfly has raised over $400 million in equity investments and partnership milestones from leading
institutional investors, including Baillie Gifford, and strategic partners, including the Bill & Melinda Gates Foundation.
Legacy Butterfly sold and shipped approximately
20,200 devices in the year ended December 31, 2020, an increase from approximately 12,900 devices in the year ended December 31,
2019, representing a growth rate of approximately 56.2% year over year. Legacy Butterfly generated total revenue of $46.3 million and
$27.6 million in the years ended December 31, 2020 and 2019, respectively. Legacy Butterfly also incurred net losses of
$162.7 million and $99.7 million for the years ended December 31, 2020 and 2019.
Our Competitive Strengths
We believe that our competitive strengths include the following:
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The low penetration from handheld devices
in a sizable market provides us with significant opportunity for growth. We also believe that the portability, ease-of-use, fast frame
rates and other differentiating features of our ultrasound imaging technology could be attractive to consumers. We believe our differentiated
Butterfly iQ handheld device and our growing user base of Butterfly iQ practitioners, with sales to or agreements with most of the top
100 U.S. healthcare systems and across more than 40 countries, position us well to compete in the existing ultrasound market and to potentially
expand into emerging markets.
Additionally, the technology driving
the Butterfly iQ and Butterfly iQ+ devices may be able to continually scale and improve if Moore’s Law, which is a historical trend
that the number of transistors on an integrated circuit will increase over time, remains accurate. For example, the Butterfly iQ+, which
was commercially launched in October 2020, is much less expensive to produce, yet has faster frame rates and further enhanced interoperability
than the Butterfly iQ, which was commercially launched in 2018, and we expect these trends to continue in future products. One aspect
of our software strategy is our Software Development Kit, or SDK, which is meant to provide a governed ecosystem for third parties to
create content and applications that will serve to enrich the overall software ecosystem and deliver additional clinical and product
advancements for our users. To date, we are working with partners, including the Bill & Melinda Gates Foundation, to build applications
on our SDK that we expect to then validate, obtain any necessary marketing authorizations for, and deploy to our users. The SDK is important
to our software strategy and overall mission of democratizing medical imaging. Through these product enhancements, and SDK specifically,
we believe our solution will be the primary platform for point of care ultrasound, functioning as an operating system in which new features
can continually be built onto and a central component of all handheld imaging.
We expect to continue development of
the hardware with product offerings that may include enhanced performance, improved image quality and alternative form factors.
Furthermore,
as of December 31, 2020, we owned approximately 280 issued patents and approximately 540 pending patent applications. In total,
we own approximately 175 patent families directed to its ultrasound products, including manufacturing, circuit components, and add-on
features.
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Our Strategies
We believe that our strategies include the following:
We plan to develop future
applications, subject to appropriate marketing authorization, to leverage our unique hardware foundation and commitment to improving
our software using AI. Simultaneously, we plan to enhance our device’s software capabilities, pursuing marketing
authorizations as necessary, with new features such as anatomical labeling, image quality improvements, and further workflow
automations, in order to more deeply integrate our platform with hospital systems. Additionally, our SDK allows users to create
content and applications on our platform that, subject to validation and any necessary marketing authorization, can be deployed
across all users, further enhancing our software offerings. In this way, our solution will continue to innovate naturally, as well
as through our enhancements to our proprietary technology. In order to pave the way for the potential future at-home use of
Butterfly iQ+ and other future form factors, we anticipate we will need to validate the at-home applications through focused
clinical trials and also seek additional marketing authorizations.
We believe these hardware developments,
along with our software enhancements and user education initiatives, will bring ultrasound to new markets and users. We believe that with
our differentiated and continually expanding solution, we can drive user adoption in new markets. Beyond these hardware and software product
roadmaps, we plan to use the “Butterfly Labs” innovation center to develop new innovative products, services and software
applications, leveraging our core technology and platform capabilities.
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We have only begun to penetrate this
healthcare practitioner market and plan to continue to grow this through continually increasing adoption and maintaining high user retention.
Initially, we have focused on the approximately three million medical practitioners across anesthesiology, primary care, medical education,
emergency medicine, hospital medicine, musculoskeletal treatments, and urology as well as five million nurses in our core geographies.
Currently, our device is commercially available in over 20 countries including the United States, Canada, Australia, New Zealand, throughout
greater Europe and in parts of Latin America. With such a large addressable market, we believe we can expand successfully over time into
geographies across Latin America and Asia, as well as other geographies in Europe, the Middle East and Africa.
We believe our device’s
affordability (all-in hardware and software estimated cost of less than $3 per day over an illustrative 3 year ownership period with
Butterfly’s individual user license software subscription), mobility, and ease-of-use, will drive further penetration and
adoption in our existing markets and geographies. We believe our roadmap for product enhancements will supplement this penetration
as well as provide avenues for expansion to new markets. One of our largest growth opportunities is the potential expansion into
remote patient monitoring and products designed for use in the home, subject to appropriate marketing
authorizations. This potential market contains more than 100 million patients with chronic diseases in the United States alone,
including more than 25 million patients in the United States with urinary incontinence, more than 5 million patients in
the United States with congestive heart failure, and approximately 500,000 patients in the United States in need of regular
dialysis. We believe that, subject to appropriate marketing authorization, this technology could enable patient-driven scanning for
monitoring of chronic disease. We believe our application-based platform allows for even further personalization to improve health
outcomes over time. Eventually, as these applications are deployed across the whole user base, we believe this would create a cycle,
leading to more product enhancement and drawing in more users. Ultimately, we strive to create a solution that will be the primary
operating system for all ultrasound scanning.
We believe that through the penetration
of the existing addressable market, and the potential subsequent expansion into new markets and geographies that currently do not use
medical imaging technology, we can bring the adoption of medical imaging to greater scale than ever achieved before.
In addition to social impact, we believe
our solution will also have significant clinical impact. Through our software solution, empowered by AI, users can upload scanned images
to our HIPAA-compliant cloud, which has unlimited storage, links to hospital and office systems, and can be accessed from a desktop computer.
This allows practitioners to access and transfer their scanned images in a seamless and secure way, leading to additional opportunities
for observation and therefore, we believe, earlier diagnosis and treatment. Furthermore, our solution delivers billing codes directly
in the user interface application following scanning, both enhancing practitioner compliance adherence and increasing revenue in fee-for-scan
environments. In these ways, we believe the technology behind our solution and the data that it is able to gather can provide new and
meaningful clinical insights.
Beyond optimizing care in developed
markets, our solution has the potential to expand into markets and geographies that traditionally have restricted access to care, through
its mobility, ease-of-use and affordability. By providing an imaging solution that can connect to practitioners remotely and backing this
solution with continued clinical investment, we believe our solution can significantly increase access to healthcare, empowering healthcare
practitioners to not only help their patients live safer and healthier lives but also provide medical imaging to patients who otherwise
would not have access or could not afford it. We plan to reach these markets primarily through non-profits, non-government organizations,
or NGOs, and in some cases, military and paramedic channels. We believe the accessibility our solution brings could have a profound social
impact on these markets.
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Furthermore, to increase customer
accessibility to our device, we sell through multiple channels, including eCommerce; enterprise (direct); and distributor,
veterinary and affiliates. With its interoperability, image transfer / storage, and mobility / remote-monitoring capabilities, our
solution can integrate and connect with critical healthcare interfaces such as EMR and imaging systems, critical to coordinated
delivery of care. This has helped us to build relationships with and make sales to or agreements with most of the top 100 U.S.
healthcare systems, leading to many of our large volume enterprise (direct) sales. Additionally, our sales channel and support has
strengthened these relationships. These relationships have increased user accessibility to our solution and the breadth of our
network.
As we continue to simplify
enterprise workflow and develop relationships with larger health systems, we have experienced an increase in the proportion of our
sales from enterprise sales compared to eCommerce. Because institutions often make decisions to purchase on a system-wide level,
enterprise sales typically generate economies of scale with larger volumes and larger numbers of users, while also increasing user
retention. The enterprise channel also yields a higher subscription price, which further increases our profitability on devices and
subscriptions sold. We are working towards increasingly integrated solutions to maximize our value to large healthcare customers, as
well as continuing to improve our sales and support infrastructure. Our ability to connect and govern traditional third party
ultrasound systems gives enterprise customers a solution to the governance and workflow challenges that have limited the utilization
and billing of point of care imaging devices. Enterprise customers deploying our solution can benefit from a streamlined clinical
workflow that reduces the exam documentation burden typically associated with traditional ultrasound systems. By adopting Butterfly
Enterprise software, customers can responsibly manage and optimize value from their fleets of point of care imaging devices.
During the year ended December 31,
2020, Legacy Butterfly’s device sales generated approximately 82.9% of its revenue, with its subscription revenue comprising the
remaining 17.1%. As adoption of our devices increases through further penetration and healthcare practitioners in the Butterfly network
continue to use our devices, we expect our revenue mix to shift toward subscriptions. Because the cost and associated expenses to maintain
our software are less than the costs and associated expenses of manufacturing and selling our device, we anticipate an improvement in
margin over time.
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We are also supported by long-term investors
that share this commitment to our mission. Longview’s Sponsor, an affiliate of Glenview, brings to the Company extensive public
market experience in the healthcare industry with a long-term orientation across provider, payor, distributor and medical product companies.
Our long-term investors include Baillie Gifford, The Bill & Melinda Gates Foundation and Fosun Industrial Co., Limited, and other
investors that have invested in us to promote and enable our vision.
Finally, to enact our vision, we have
developed strong relationships with healthcare institutions as we have sold to or have agreements with most of the top 100 United States
health systems. We believe these institutions and our relationships with them are key elements that underpin our ability to achieve our
mission. Together with these institutions, we have the potential to bring our imaging solution to millions of patients, reducing healthcare
costs and improve outcomes on an enormous scale.
Industry & Market Opportunity
Medical imaging has existed for over 100 years
with the purpose of effectively diagnosing and treating patients. The global ultrasound market has historically consisted of the legacy
cart-based incumbents and more recently developed point-of-care / handheld devices. Built using expensive piezoelectric crystal technology,
these legacy systems limit wider access and usage due to high upfront costs. Legacy cart-based incumbent devices that are used in traditional
hospital systems have a mid-range price point of $45,000 to $60,000 per new system, in addition to burdensome maintenance or service contracts.
These devices are often siloed within hospitals and health systems requiring referrals and coordination between different departments,
and extensive training for the personnel that operate them, limiting utilization of these devices. Limited IT integration and interoperability
capabilities have resulted in image archives that are difficult to move between systems, presenting yet another barrier to care coordination
and optimization. The point-of-care / handheld competitors are less expensive than legacy cart-based systems, with price points ranging
from $5,000 to $7,000 per probe, generally requiring two to three probes to cover a comparable range of cleared indications to the single
probe Butterfly iQ+. Historically, these competitive point-of-care / handheld competitors lack the AI capabilities that the Butterfly
iQ+ provides healthcare practitioners and are less core focal points of large capital equipment focused sales forces, which creates a
unique opportunity for us to not only disrupt and take market share in the existing market, but create and be the leader in new markets.
Between these legacy cart-based incumbent devices
and the point-of-care / handheld competitors, the global ultrasound market in 2017 was valued at approximately $8 billion, consisting
of $6 billion in equipment and $2 billion in services. This market is currently limited to traditional scan settings in developed
markets, such as hospitals, niche doctor offices, and imaging centers. Per IHI Markit data, less than 3% of global ultrasound units
are handheld devices. General Electric, Phillips, Canon Medical Systems (f/k/a Toshiba), Hitachi and Siemens Healthineers are the top
five incumbent ultrasound players.
Through development of our proprietary technology,
we were the first company to successfully put ultrasound on a semiconductor chip and connect it to an iPhone, tablet or Android for ease-of-use.
This has allowed us to create a solution that has the potential to disrupt the current ultrasound market and significantly expand the
total addressable market beyond its current limitations. Butterfly iQ+ takes a small form factor, allowing the user to transport the device
anywhere. Butterfly iQ+’s price through our eCommerce website is $1,999 per device and when factoring in an illustrative single-user
software subscription license over a three year period is estimated to be less than $3 per day, which enables a material return on investment
for healthcare practitioners given common pre-existing CPT codes ranging from $20-150. Finally, our software harnesses AI designed to
drive ease-of-use for image acquisition, improve analysis, guide and educate healthcare practitioners, and provide quality control. The
Butterfly iQ is designed to be intuitive and greatly reduces the amount of training needed for operation, thereby expanding the ultrasound
user base to non-experts, and eventually to patients directly, subject to clearance of at-home uses by the appropriate regulatory authorities.
We believe the mobility, affordability, and ease-of-use characteristics of the device will empower users to operate the Butterfly iQ device
outside traditional scan settings, such as pre-hospital environments, urgent care clinics, long-term care and rehabilitation centers,
dialysis centers, ambulatory surgery centers, veterinary clinics, and potentially, the home, all in both developed and emerging markets.
We believe that the Butterfly iQ can greatly increase accessibility to medical imaging and enable the development of new ultrasound markets
with expanded users (practitioners and patients) and scan settings globally that are uncommon or nonexistent today.
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By increasing accessibility to medical
technology outside of traditional settings, the Butterfly iQ has the potential to significantly expand the current total addressable
market for medical imaging. We believe there is strong interest from healthcare practitioners to utilize handheld ultrasound devices
in their day-to-day work, as primary care practitioners represent our largest group of users. We believe the Butterfly iQ device has
the potential to reach up to 40 million global healthcare practitioners, across both developed and emerging markets. Of the
approximately 40 million global healthcare practitioners, we view a subset of approximately eight million as our initial target
market, which is comprised of approximately three million medical doctors across anesthesiology, primary care, medical education,
emergency medicine, hospital medicine, musculoskeletal, and urology, as well as approximately five million nurses, defined as
one-third of the nurses and midwives, all within our core geographies of North America, Asia, Europe and Latin America. Beyond this
initial market, we believe there are approximately nine million additional medical doctors (12 million total) and approximately
23 million additional nurses and midwives (approximately 28 million total) that would benefit from use of handheld
ultrasound devices.
Furthermore, as patient-focused, value-based care
delivery models continue to scale, we believe handheld ultrasound devices will find a potential market with at-home medical personnel
and, subject to appropriate marketing authorizations, with patients directly.
Products & Services
We provide a complete solution to address an unmet
need in point-of-care medical imaging through a unique combination of hardware and software services. Our hardware is powered by the first
and only currently available ultrasound on a semiconductor chip. Our software addresses the traditional ease-of-use challenges and the
complex clinical workflow throughout a patient’s care pre-and post-examination. Our integrated system with EMRs provides healthcare
practitioners with a tool that enables fast and confident clinical decision-making.
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As a diagnostic tool with broad applicability
across numerous medical specialties, Butterfly iQ+ has the potential to serve as the go-to device for healthcare practitioners in determining
approaches to treatment. We believe there is strong applicability for ultrasound devices across anesthesiology, primary care, medical
education, emergency medicine, hospital medicine, musculoskeletal, and urology. Historically, technology and excessive costs have limited
the use of ultrasound devices. As new technology has catalyzed the mobility and ubiquity of medical imaging, the range of uses for ultrasound
devices has greatly expanded. This momentum is supported by clinical evidence that shows that use of ultrasound devices in this modality
can improve patient health outcomes, while significantly lowering the cost of care. The high cost of ultrasound imaging has deterred some
medical professionals from utilizing these devices to prevent the unnecessary costs on providers or patients. However, the Butterfly iQ
device offers providers the use of these images at a low cost that may promote early detection of patient malignancies that, in turn,
reduces costs for providers and reduces the need for external imaging, specialist referrals, and emergency room visits. High-risk patients
who suffer from congestive heart failure and pulmonary diseases will be able to receive regular ultrasound imaging at a low cost, which
is associated with reduced emergency visits and overall patient costs.
Our Ultrasound-on-ChipTM technology enables
whole-body complete ultrasound imaging with a single probe, as the Butterfly iQ and iQ+ have a frequency range that enables our device
to produce ultrasound imaging anywhere on the body. Our solution is the only ultrasound transducer that can perform whole-body imaging
in a single handheld probe using semiconductor technology. In addition, the 60 year-old piezoelectric crystal technology used in existing
devices has been less affordable and has not been able to achieve the same versatility or system interoperability. Because our device
is portable, practitioners can easily carry this device with them, providing access to ultrasound virtually anywhere. While currently
our device is used in traditional scan settings, such as hospitals, imaging centers, and physicians’ offices, we believe our device’s
mobility will enable expansion to pre-hospital settings, urgent care clinics, long-term care and rehabilitation centers, dialysis centers,
ambulatory surgery centers, veterinary clinics, and, subject to marketing authorization, homes.
We currently sell the Butterfly iQ+ device
through our eCommerce website, with an optional accompanying software membership at various prices depending on the type of
subscription. We offer a Pro subscription with one user license included, a Pro Team subscription with five user licenses included,
and an enterprise subscription with tiered level pricing. We also sell accessories that supplement our device, including a carrying
case, charger (complimentary with the purchase of the device), holster, and cable accessories. Legacy Butterfly has been selling the
first generation Butterfly iQ since 2018 and launched the second generation Butterfly iQ+ in October 2020.
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Our Butterfly iQ+ device connects directly to
an iPhone or Android smartphone and tablet to provide its imaging and software features for more than two consecutive hours and charges
to full battery in approximately five hours. Our proprietary software harnesses AI designed to drive ease-of-use for image acquisition
and improved analysis, further used to guide and educate practitioners, as well as provide quality control. The Butterfly iQ+ has 20 pre-set
settings generated in part with AI that optimize images obtained from scanning different areas of the body. Within the Butterfly application,
users can utilize five imaging modes, including B-Mode, Color Doppler, M-Mode Power Doppler and Pulsed Wave Doppler, as well as additional
measuring tools and obstetrician calculations. These features allow healthcare practitioners to perform surface area and volume measurements
on the anatomical objects that are imaged and can use color Doppler to identify movement of fluid, similar to features provided by legacy
products in the market. For the obstetric clinicians, the device tools can perform gestational age and amniotic fluid index calculations.
We believe these pre-set settings and intuitive operation features through smartphones will enable healthcare practitioners who are not
medical imaging experts to adopt our device, expanding our user base beyond the traditional, limited ultrasound user base. This traditional
base of ultrasound users has been limited because existing ultrasound devices often require unique environments and extensive training
to operate, while the Butterfly iQ+ device can be used by general and other healthcare practitioners across the healthcare industry.
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3D Bladder scan with AI-based Auto Bladder Volume tool /
Education and Image Storage /
Color Doppler tool
Through our software subscription options, users
can upload scanned images to our HIPAA-compliant cloud, which has unlimited storage and links to hospital and office systems, allowing
for seamless transfer of images that can also be accessed from a desktop computer. As telemedicine continues to make headway through our
healthcare system, our software application features TeleGuidance, which is the world’s first integrated ultrasound telemedicine
platform. This tool, if eventually approved, would allow a remote, trained healthcare practitioner to view the ultrasound imaging through
the smartphone application and live video. Our platform also features education tools to enable users to quickly gain proficiency in conducting
exams. As we continue to expand on these features, our software updates are implemented real-time, equipping users with new features and
techniques with each update.
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Our Butterfly iQ+ device is competitively priced
at $1,999 per device through our eCommerce website, and combined with our standard single-user software license, the total estimated cost
of use amounts to a daily average of less than $3, assuming an illustrative three year ownership period. This compares to the cost of
$5,000 to $7,000 per device for point-of-care / handheld competitors, generally requiring two to three probes to cover a comparable range
of cleared indications to the single probe Butterfly iQ+, and pricing of legacy cart-based incumbents, which are $5,000 to $30,000 per
new device on the low end and can be as much as $100,000 to $250,000 per new device on the high end, before service and maintenance fees.
Additionally, the Butterfly iQ+ device’s remote capabilities, interoperability with other systems, ease-of-use, and affordability
allow trained practitioners to perform ultrasounds from any location where healthcare is provided and we believe will eventually increase
the user base to consumers and non-experts should the appropriate marketing authorizations be obtained for such intended uses, in accordance
with our mission to democratize healthcare by increasing accessibility to medical imaging. We believe this user base expansion and subsequent
adoption is our largest growth driver and represents the forefront of a medical imaging revolution.
Furthermore, we believe our device’s ability
to perform ultrasound outside of traditional environments and by non-expert users will allow for prevention and earlier detection and
enable healthcare practitioners outside of traditional environments to use ultrasound to make more precise diagnosis of malignancies.
This provides patients with faster access to treatment, ultimately reducing cost and improving patient health outcomes. The reduced cost
will also result from lower-cost medical professionals performing diagnosis, enabled by the device’s intuitive user interface. We
believe our device is also more convenient for patients, as the device can be brought to the patient at the bedside (or, subject to future
marketing authorizations, to their home), thereby reducing or eliminating patient wait times while providing secure patient image access.
With our device’s differentiating characteristics, we believe our business is aligned with long-term healthcare mega-trends, most
notably the acceleration of value-based and patient-centric approach to care.
We believe that the software and analytics capabilities
of our solution coupled with the next generation Butterfly iQ+ device empowers smarter and expanded scanning and compliant coding and
documentation that can generate both incremental revenue for healthcare systems and independent practitioners, but also reduce costs for
payers from earlier detection and prevention of adverse downstream events due to suboptimal care decisions or treatment complications.
The Butterfly iQ+ leverages pre-existing, routine CPT codes that enable healthcare providers and practitioners to obtain per-scan reimbursement
in the specialties of anesthesiology, cardiology, critical care, emergency medicine, endocrinology and ultrasound-guided procedures. We
intend to pursue incremental, new or expansionary CPT codes for reimbursement in future scan categories and categories concurrent to support
the successful go-to-market strategy of the product pipeline.
Product Roadmap
Our product roadmap will continue to position
us as a leading disruptor in the medical imaging market and remote patient monitoring market, which we believes consists of over 100 million
patients in the United States alone. As the first semi-conductor based point-of-care ultrasound, the original Butterfly iQ product launched
in 2018 was a differentiated product. We plan to continually improve this product, which will allow us to continue to innovate up the
performance curve. A first step to this was the launch of the next-generation product Butterfly iQ+ in 2020, which has improved image
quality, industry-leading durability, and new functionalities such as bi-plane needle visualization through Needle VizTM technology and
3D scanning.
We expect to continue development of the hardware with product offerings that may include enhanced performance, improved
image quality and alternative form factors.
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In addition to our hardware innovations, we employ
a team of computer scientists focused on developing software features that enhance our device’s user interface and increase ease-of-use
to continue to expand our user base. Through our intuitive features and continued user education initiatives, we expect to generate high
adoption rates among healthcare practitioners and further expand our user base into the patient’s home subject to obtaining the
appropriate marketing authorizations. Furthermore, we believe our SDK will continue to drive additional enhancements generated by our
user base, simultaneously increasing the applicability of our solution and driving adoption and retention in our addressable market.
Beyond these hardware and software product roadmaps,
we plan to develop new innovative products, services and software applications,
leveraging the company’s core technology and platform capabilities. Through this product development, we believe we will be positioned
to remain on the forefront of medical imaging with a continued focus on increasing accessibility, allowing us to fulfill our mission
of democratizing healthcare by making medical imaging available to everyone around the world.
Our People
Our mission is to democratize healthcare and
to make medical imaging accessible to everyone around the world by using our proprietary technology.
We believe that our people are the reason for
our success and we have organized ourselves to maximize productivity and performance. We maintain a high bar for talent and actively work
to build diversity within our workforce.
As of March 1, 2021, we had 260 employees,
including 260 full-time employees. None of our employees are represented by a labor union or are subject to a collective bargaining agreement.
Sales and Marketing
Marketing and Brand Building
Our marketing efforts are focused on developing
a strong reputation with healthcare providers and increasing awareness of our products and services. In addition to print and digital
advertising, positive feedback about the Butterfly iQ+ among practitioners has historically been a significant driver of sales, as healthcare
practitioners share their appreciation for the Butterfly iQ and Butterfly iQ+ within their medical communities, yielding a strong net
promoter score of 64 (USA) as of March 1, 2021. We have conducted customer outreach and marketing through articles and other media
coverage about our products. We market our products through our targeted sales organization, which is engaged in sales efforts and promotional
activities primarily to health systems or institutions. Outside of the United States, we market our products directly to healthcare institutions
and through eCommerce. In the United States, we sell to or have agreements in place with most of the largest 100 U.S. healthcare systems.
We use a variety of marketing tools to drive adoption,
ensure continued usage and establish brand loyalty for our devices and software. We recognize the importance of the role of education
in accelerating adoption of our products by those medical professionals without existing ultrasound skills. To that end, we have hired
a renowned point-of-care ultrasound, or POCUS, educator to lead team expansion and offerings to include didactic, synchronous and asynchronous
coaching, quality as a service and a formal learning management system to track clinicians’ progress. In addition to creating awareness
of the benefits of our hand-held ultrasound device and the advantages of our technology for healthcare providers and patients, we engage
customer service representatives who are dedicated to educating practitioners on the unique features of our device and software and who
have published numerous training videos and tutorials in response to frequently asked questions.
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Sales
The Butterfly iQ+ is commercially available
in over 20 countries, including the United States, Canada, Australia, New Zealand, throughout greater Europe and in parts of Latin
America. We believe the Butterfly iQ device has the potential to reach up to 40 million global healthcare practitioners, across
both developed and emerging markets. Of the approximately 40 million global healthcare practitioners, we view a subset of
approximately eight million as our initial target market, which is comprised of approximately three million medical doctors across
anesthesiology, primary care, medical education, emergency medicine, hospital medicine, musculoskeletal, and urology, as well as
approximately five million nurses, defined as one-third of the nurses and midwives, all within our core geographies of North
America, Asia, Europe and Latin America. Beyond this initial market, we believe there are approximately nine million additional
medical doctors (12 million total) and approximately 23 million additional nurses and midwives (approximately
28 million total) that would benefit from use of handheld ultrasound devices. We believe the mobility, affordability, and
ease-of-use characteristics of the device will empower users to operate the Butterfly iQ device outside traditional scan settings,
such as pre-hospital environments, urgent care clinics, long-term care and rehabilitation centers, dialysis centers, ambulatory
surgery centers, veterinary clinics, and subject to future marketing authorizations, the home, all in both developed and emerging
markets.
One of our largest growth opportunities is the
potential expansion into remote patient monitoring with wearable products and products designed for use in the home, subject to obtaining
appropriate marketing authorizations. This potential market contains more than 100 million patients with chronic diseases in the
United States alone, including more than 25 million patients in the United States with urinary incontinence, more than 5 million
patients in the United States with congestive heart failure, and approximately 500,000 patients in the United States in need of regular
dialysis.
Butterfly iQ+ is commercially available in over
20 countries, including the United States, Canada, Australia, New Zealand, throughout greater Europe and in parts of Latin America. Butterfly’s
commercialization strategy is predicated on three primary channels:
Our eCommerce channel is focused on building awareness
of our brand, attracting qualified traffic to our website and converting healthcare practitioners who visit the website to customers that
purchase our products. The sales cycle through our eCommerce channel is short and simple, where a potential user’s positive purchase
intent is followed immediately by a purchase. For sales to individuals, our eCommerce channel replaces the need for a sales force. By
contrast, our large-volume enterprise sales reflect a complex, multi-step sales cycle involving many parties and components, including
sales and integration support and customer service personnel. Sales through distributors entails our development of relationships with
parties to whom we can delegate our sales in our target markets.
As we continue to simplify enterprise workflow
and develop relationships with larger health systems, we have experienced an increase in the proportion of our sales from enterprise sales
compared to eCommerce. Because institutions often make decisions to purchase on a system-wide level, enterprise sales typically generate
economies of scale with larger volumes and larger numbers of users, while also increasing user retention. The enterprise channel also
yields a higher subscription price, which further increases our profitability on devices and subscriptions sold. We are working to continually
shift volumes to the enterprise channel with the aim of ultimately using this as our primary channel, which may require increases in our
sales force.
During the year ended December 31, 2020,
Legacy Butterfly’s device sales generated approximately 82.9% of its revenue, with its subscription revenue comprising the remaining
17.1%. As adoption of our devices increases through further penetration and healthcare practitioners in the Butterfly network continue
to use our devices, we expect our revenue mix to shift toward subscriptions. Because the cost and associated expenses to maintain our
software are less than the costs and associated expenses of manufacturing and selling our device, we anticipate an improvement in margin
over time.
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In terms of geographic markets, for the fiscal
year ended December 31, 2020, a substantial majority of Legacy Butterfly’s revenues were derived from sales to customers based
in the United States (87% in the year ended December 31, 2020). We aim to further expand our international customer base in the
future. We believe our differentiated Butterfly iQ handheld device and our growing user base of Butterfly iQ practitioners, with sales
to or agreements with most of the top 100 U.S. healthcare systems and across more than 40 countries, position us well to compete in the
existing ultrasound market and to potentially expand into emerging markets.
We continue to develop our sales and marketing
organization, which consists of a dedicated sales team complemented by a marketing team as well as sales and marketing support personnel.
Our sales force (including marketing, sales and sales and marketing support personnel) as of December 31, 2020, consisted of 51 persons,
46 of whom were located in the United States and five of whom were located in Europe and Australia.
Manufacturing
Our Butterfly iQ products are built using both
custom-made and off-the-shelf components supplied by outside manufacturers and vendors located in China, Taiwan and Thailand. One key
custom-made component in the Butterfly IQ probe is the transducer module for the printed circuit board of the chip. The majority of the
other components for the Butterfly iQ probe are off-the-shelf.
We purchase some of our components and materials
used in manufacturing, including the transducer module, from single sources. Although we believe that alternatives would be available,
it would take time to identify and validate replacement components, which could negatively affect our ability to supply our products on
a timely basis. We cannot give assurances that any alternative supplier would be able to recreate the manufacturing processes currently
in use. To mitigate this risk, we typically carry a significant inventory of critical components.
All of our iQ probes are manufactured, tested,
shipped and supported by Benchmark Electronics, Inc., or Benchmark, from its facilities in Thailand. We believe that this manufacturing
strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for
our iQ products, we would experience additional costs, delays and difficulties in doing so, and our business could be harmed.
Key Agreements
Foundry Service Agreement with Taiwan Semiconductor Manufacturing
Company Limited
We entered into a Foundry Service Agreement, or
FSA, with Taiwan Semiconductor Manufacturing Company Limited, or TSMC, as amended, under which TSMC agreed to manufacture integrated circuits
used for the semiconductor chips in our probes. The FSA provides for us to place purchase orders with TSMC, which are not binding until
accepted by TSMC. The FSA also provides for TSMC to use commercially reasonable efforts to support us for our products to be manufactured
at TSMC and for us to meet minimum purchase obligations. Under the agreement, we prepaid an amount to TSMC to be used against a portion
of the purchase price for future purchases once the prepayment amount is reached. To the extent that we fail to fulfill our monthly wafer
consumption requirement, TSMC has the right to deduct the shortfall from payments made by us to TSMC. In addition, we are required to
buy back from TSMC unused raw wafers that TSMC purchases from its supplier.
The FSA also provides that TSMC will indemnify
us for intellectual property infringement or misappropriation claims against us related to the wafer manufacturing process and that we
will indemnify TSMC for any intellectual property infringement or misappropriation claims arising from TSMC’s compliance with our
instructions, specifications, designs or requirements to manufacture, sell, or ship the wafers or arising from any harm caused by our
medical device products.
The FSA’s initial term expires on December 31,
2022, subject to automatic renewal for successive two-year terms unless terminated by either party upon three months’ notice
prior to the end of the then-current term. The FSA may also be terminated by written notice at any time upon the bankruptcy or insolvency
of or upon or after a material breach by the other party. After the initial two-year term, either party may terminate the FSA immediately,
with or without cause, by giving the other party 12 months prior written notice of termination. TSMC may terminate the FSA if we
do not place a purchase order for a period of 12 consecutive months or upon certain change of control transactions, including a merger,
consolidation or other change of control or similar transactions to which we are party involving a semiconductor provider.
In connection with the FSA, we and TSMC developed
a propriety manufacturing process and continue to collaborate on manufacturing process improvements.
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Manufacture and Supply Agreement with Benchmark Electronics, Inc.
In October 2015, we entered into a Manufacture
and Supply Agreement with Benchmark, which was amended in August 2019, or the MSA. Under the MSA, as amended, Benchmark agreed to
manufacture our products pursuant to binding purchase orders, as well as non-binding forecasts. The parties have agreed to meet periodically
regarding any minimum order quantities under the MSA.
Under the terms of the MSA, we granted Benchmark
a non-exclusive, non-transferable, revocable, fully-paid, royalty-free license, without the right to sublicense, to use our technology
solely to manufacture our products. The MSA provides that we will own any right, title and interest in any improvements or modifications
to our technology made in the course of performance of Benchmark’s obligations under the MSA. We and Benchmark also agreed to indemnify
each other against certain third-party claims.
The MSA has an initial three-year term and will
renew automatically for additional two-year terms unless either party gives 180 days’ prior written notice before the end of
the then-current term to the other party electing not to renew the agreement. The MSA or any purchase order under the MSA may be terminated
by either party for convenience upon 90 days’ prior written notice to the other party. The MSA may also be terminated by either
party by written notice upon the occurrence of (i) a breach by the other party under the agreement which is not cured within 30 days
after written notice by the terminating party, (ii) other party becomes insolvent, dissolves, liquidates or ceases to conduct business
or (iii) the occurrence of payment-related breaches. Benchmark may also terminate the agreement upon the filing of any petition against
us under bankruptcy or similar laws, where such petition is not vacated within 10 days via court order.
Distribution Agreement with Cardinal Health 105, Inc.
In July 2018, we entered into a Distribution
Agreement with Cardinal Health 105, Inc., or Cardinal Health. Under the Distribution Agreement, we are responsible for delivery of
our products to Cardinal Health’s facilities, and Cardinal Health acts as the distribution agent and authorized distributor of record
of our products to our customers, including, but not limited to, wholesalers, specialty distributors, physicians, clinics, hospitals,
pharmacies and other healthcare providers in the United States. Under the Distribution Agreement, we provide Cardinal Health with forecasts
of the volume of our products to be handled and distributed by Cardinal Health. We make payments to Cardinal Health for its distribution
services pursuant to a fee schedule.
The initial term of the Distribution Agreement
expired in August 2020. The Distribution Agreement is subject to automatic renewal for additional successive two-year terms unless
we terminate the agreement upon 90 prior written days’ notice or Cardinal Health terminates the agreement upon written notice of
non-renewal to us at least 180 days prior to the end of a term. Either party may terminate the Distribution Agreement upon (i) the
other party’s entry into bankruptcy proceedings, receipt of a bankruptcy order that is not discharged within 30 days, or similar
events, or (ii) a material breach by the other party that is not cured within 30 days after the non-breaching party gives written
notice. Additionally, if we breach our payment obligations under the Distribution Agreement and such breach is not cured within 15 days
after Cardinal Health provides written notice of non-payment, Cardinal Heath may terminate the agreement upon 90 days’ prior
written notice.
Intellectual Property
Protection of our intellectual property is a strategic
priority for its business. We rely on a combination of patents, trademark, copyright, trade secret and other intellectual property rights
protection and contractual restrictions to protect our proprietary technologies.
The patents owned and in-licensed by us are generally
directed to the architecture of our ultrasonic imaging devices, our microfabricated ultrasonic transducers and machine learning for ultrasound
applications. We have developed a portfolio of issued patents and pending patent applications directed to commercial products and technologies
for potential development. We believe that our intellectual property is a core strength of our business, and our strategy includes the
continued development of our patent portfolio.
Butterfly iQ, iQ+ and Related Technology
As of December 31, 2020, we owned approximately
280 issued patents and approximately 540 pending patent applications. Of our approximately 280 issued patents, approximately 80 were issued
U.S. utility patents and approximately 30 were issued U.S. design patents. Of our approximately 540 pending patent applications, approximately
145 were pending U.S. utility patent applications and approximately 15 were pending U.S. design applications. In addition, as of December 31,
2020, we owned approximately 170 issued patents in foreign jurisdictions, including Australia, Canada, Europe, Japan, China, Taiwan and
Korea, and approximately 380 pending patent applications in foreign jurisdictions, including Australia, Canada, Europe, Japan, China,
Taiwan, Korea and India, corresponding to the foregoing. In total, as of December 31, 2020, we owned approximately 175 patent families
generally directed to our ultrasound products, including manufacturing, circuit components, and add-on features. These issued patents
and pending patent applications (if they were to issue as patents) have expected expiration dates ranging between 2030 and 2040.
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In addition to patents, we also rely on trade
secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary
information and other intellectual property by generally requiring our employees, consultants, contractors, suppliers, outside scientific
collaborators and other advisors to execute non-disclosure and assignment of invention agreements on commencement of their employment
or engagement. Agreements with our employees also forbid them from using or incorporating the proprietary rights of third parties during
their engagement with us. We also generally require confidentiality or material transfer agreements from third parties that receive our
confidential data or materials.
License Agreements
We have entered into exclusive and non-exclusive
licenses in the ordinary course of business relating to our technologies or other intellectual property rights or assets.
Exclusive (Equity) Agreement with Leland Stanford Junior University
In June 2013, we entered into an Exclusive
(Equity) Agreement, or the Stanford Agreement, with the Board of Trustees of the Leland Stanford Junior University, or Stanford. Pursuant
to the Stanford Agreement, Stanford granted us a co-exclusive, worldwide license to make, have made, use, import, offer to sell and sell
products covered by patent rights to Stanford’s wafer bonding technology. The rights licensed tous are for ultrasound applications