Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K.
Overview
We are an innovative digital health business transforming care through a unique combination of portable, semiconductor-based ultrasound technology, intuitive software, services and educational offerings that can make medical imaging more accessible than ever before. Butterfly’s solution enables the practical application of ultrasound information into the clinical workflow through affordable hardware that fits in a healthcare professional’s pocket and is paired with cloud-connected software that is easily accessed through a mobile application.
Butterfly iQ+ and iQ3 are ultrasound devices that can perform whole-body imaging in a single handheld probe using semiconductor technology. Our Ultrasound-on-ChipTM makes ultrasound more accessible outside of large healthcare institutions, while our software is intended to make the product easy to use, fully integrated with the clinical workflow, and accessible on a user’s smartphone, tablet, and almost any hospital computer system connected to the Internet. We aim to enable the delivery of imaging information anywhere at point-of-care to drive earlier detection throughout the body and remote management of health conditions. We market and sell the Butterfly system, which includes probes, related accessories, and software subscriptions, to healthcare systems, physicians, and healthcare providers through a direct sales force, distributors, and our eCommerce channel.
In 2023 and 2022, we took significant actions to reduce our cost of operations and extend our cash runway. Over the two years, we reduced our annual cash requirements by approximately $170 million, to approximately $60 million assuming no revenue growth or further reductions in expenses. As such, we conservatively expect our cash to last into 2026. As we look forward, we expect to continue to invest our business in order to grow revenue. Before we reach 2026, we expect to raise capital in order to reach profitability. We expect to first seek nondilutive capital in the form of grants or debt and then potentially in the form of equity securities.
Business Combination
On February 12, 2021 we completed the Business Combination. The transaction resulted in the Company’s Class A common stock and warrants to purchase Class A common stock commencing trading on the New York Stock Exchange (“NYSE”) on February 16, 2021 under the symbol “BFLY” and “BFLY WS”, respectively. As a result of the Business Combination, we received gross proceeds of approximately $589 million.
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Key Performance Measures
We review the key performance measures discussed below to evaluate the business and measure performance, identify trends, formulate plans and make strategic decisions. Our key performance measures may fluctuate over time as the adoption of our devices increases which may shift the revenue mix more toward software and other services. The quarterly measures may be impacted by the timing of device sales.
Units fulfilled
We define units fulfilled as the number of devices whereby control is transferred to a customer. We do not adjust this measure 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 measure is useful to investors because it presents our core growth and performance of our business period over period.
Units fulfilled decreased by 1,498, or 26.0%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, primarily due to decreased device sales volume from our direct sales and eCommerce channels. The decreases were partially offset by increased sales from our distributor channel.
Software and other services mix
We define software and other services mix as a percentage of our total revenue recognized in a reporting period that is based on software subscriptions and other related services, consisting primarily of our software as a service (“SaaS”) offering. We view software and other services mix as a key indicator of the profitability of our business, and thus we believe that this measure is useful to investors.
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Software and other services mix increased by 5.2 percentage points, to 38.5% for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. The increase was due to increases in software subscription renewals and an expansion of software subscription offerings. In addition, the increase is due to the timing of revenue recognition for our SaaS and other software subscription contracts as revenue from such contracts is deferred and recognized over the service period. We saw an increase in our enterprise software sales while our individual licenses where flat. For the full year 2023 versus 2022 enterprise licenses accounted for 32.9% of licenses versus 26.7% respectively.
Description of Certain Components of Financial Data
Revenue
Revenue consists of revenue from the sale of products, such as medical devices and accessories, and the sale of software related services, classified as software and other services revenue on our consolidated statements of operations and comprehensive loss, which are SaaS subscriptions and product support and maintenance (“Support”). SaaS subscriptions include licenses for teams and individuals as well as enterprise-level subscriptions. For sales of products, 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 software and other services. The quarterly revenue mix may be impacted by the timing of device sales. In 2024, due to the launch of our next generation device iQ3, we are expecting our software as a percentage of total revenue to remain flat or decrease.
To date, we have invested heavily in building out our direct salesforce, with the ultimate goal of growing adoption at large-scale healthcare systems. As we expand our healthcare system software offerings and develop relationships with larger healthcare systems, we continue to expect a higher proportion of our sales in healthcare systems compared to eCommerce.
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 fluctuate
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as a percentage of product revenue over time as our focus on operational efficiencies in our supply chain may be offset by increased prices of certain inventory components.
Cost of software and other services revenue consists of personnel costs, cloud hosting costs and payment processing fees. Because the costs and associated expenses to deliver our SaaS offerings are less than the costs and associated expenses of manufacturing and selling our device, we anticipate an improvement in profitability and margin expansion over time as our revenue mix shifts increasingly towards software and other services. We plan to continue to invest additional resources to expand and further develop our SaaS and other service offerings.
Also included in cost of revenue are losses on product purchase commitments relating to inventory supply agreements where the expected losses exceed the benefits of the contracts. We consider a variety of factors and data points when determining the existence and scope of a loss for the minimum purchase commitment. The factors and data points include Company-specific forecasts which are reliant on our limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends. Determining the loss is subjective and requires significant management judgment and estimates.
Research and development
Research and development expenses primarily consist of personnel costs and benefits, facilities-related expenses and depreciation, fabrication services, and software costs. Most of our research and development expenses are related to developing new products and services that have not reached the point of commercialization and improving our products and services that have been commercialized. 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 and software development, clinical, and regulatory capabilities.
Sales and marketing
Sales and marketing expenses primarily consist of personnel costs and benefits, advertising, conferences and events, facilities-related expenses, and software costs. We expect to continue to make substantial investments in our sales capabilities.
General and administrative
General and administrative expenses primarily consist of personnel costs and benefits, insurance, patent fees, software costs, facilities costs and outside services. Outside services consist of professional services, legal fees and other professional fees.
Other
Operating expenses classified as other are expenses which we do not consider representative of our ongoing operations. These other expenses primarily consist of employee severance and benefits costs related to our reductions in force, litigation costs, and legal settlements.
Results of Operations
We operate as a single reportable segment to reflect the way our chief operating decision maker reviews and assesses the performance of the business. The accounting policies are described in Note 2 “Summary of Significant Accounting Policies” in our consolidated financial statements included in this Annual Report on Form 10-K.
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Year ended December 31,
% of % of % of
(in thousands) Dollars revenue Dollars revenue Dollars revenue
Revenue:
Cost of revenue:
Loss on product purchase commitments — — — — 13,965 22.3
Operating expenses:
Interest expense — — (2) (0.0) (651) (1.0)
Other income (expense), net (2) (0.0) 98 0.1 (2,577) (4.1)
Provision for income taxes 82 0.1 42 0.1 121 0.2
Comparison of the Years Ended December 31, 2023 and 2022
Revenue
Year ended December 31,
(in thousands) 2023 2022 Change % Change
Product revenue decreased by $10.2 million, or 20.3%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was primarily driven by a decline in probe sales in our distribution, global health and ecommerce channels. Additionally, there were a number of large sales in these channels in 2022 that did not reoccur in 2023. Partially offsetting these declines were increases in overall prices.
Software and other services revenue increased by $2.7 million, or 11.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily driven by a higher volume of SaaS subscriptions sold in conjunction with new device sales, current year subscription renewals and expanded service offerings. We saw an increase in enterprise software sales of $2.4 million while individual subscriptions were flat. Enterprise as percentage of software sales increased 6%.
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Cost of revenue
Year ended December 31,
(in thousands) 2023 2022 Change % Change
Percentage of revenue 74.4 % 46.2 %
Cost of product revenue increased by $13.9 million, or 51.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily driven by a $21 million loss on excess inventory related to inventory on-hand that was deemed excess due to a shift in our strategy and market conditions. This was partially offset by lower probe volume and operating efficiencies in manufacturing Butterfly iQ+.
Cost of subscription revenue increased by $1.3 million, or 17.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily driven by higher amortization expenses related to newly deployed internally developed software that supports our SaaS offerings.
Research and development
Year ended December 31,
(in thousands) 2023 2022 Change % Change
Percentage of revenue 84.4 % 120.0 %
Research and development expenses decreased by $32.4 million, or 36.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was primarily driven by reductions of $23.5 million in personnel costs resulting from our reductions in force over the past year, a decrease of $2.6 million in engineering and testing costs, and a decrease of $4.6 million in consulting fees as we developed our internal capabilities to perform previously outsourced functions.
Sales and marketing
Year ended December 31,
(in thousands) 2023 2022 Change % Change
Percentage of revenue 59.3 % 81.1 %
Sales and marketing expenses decreased by $20.4 million, or 34.3%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was primarily driven by reductions of $13.6 million in personnel costs resulting from our reductions in force over the past year. Reductions of $3.3 million in marketing expenses and $2.3 million reduction in travel expenses also contributed to the decrease. We have started to reinvest in direct sales to drive top-line growth.
General and administrative
Year ended December 31,
(in thousands) 2023 2022 Change % Change
Percentage of revenue 75.3 % 105.7 %
General and administrative expenses decreased by $28.0 million, or 36.1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was primarily driven by reductions of $22.0 million in personnel costs resulting from our reductions in force over the past year and $4.9 million in professional service fees for legal and other administrative services.
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Other
Year ended December 31,
(in thousands) 2023 2022 Change % Change
Percentage of revenue 27.6 % 10.0 %
Other increased by $10.8 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily driven by $6.7 million of higher employee severance and benefits costs resulting from our reductions in force in 2023 and $4.1 million of higher legal costs due to litigation and other legal matters. These costs are not representative of our ongoing operations.
Comparison of the Years Ended December 31, 2022 and 2021
Revenue
Year ended December 31,
(in thousands) 2022 2021 Change % Change
Product revenue increased by $2.4 million, or 5.0%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily driven by higher prices of products sold due to a price increase at the end of the third quarter of 2021. We also saw an increase in volume in our direct sales and distributor channels that was partially offset by lower volume in our eCommerce channel.
Software and other services revenue increased by $8.4 million, or 57.4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily driven by a higher volume of SaaS subscriptions sold in conjunction with new device sales, current year subscription renewals and expanded service offerings.
Cost of revenue
Year ended December 31,
(in thousands) 2022 2021 Change % Change
Loss on product purchase commitments — 13,965 (13,965) (100.0)
Percentage of revenue 46.2 % 72.7 %
Cost of product revenue decreased by $2.5 million, or 8.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This decrease was primarily driven by our second-generation device, the Butterfly iQ+, being less costly to produce due to operational efficiencies, partially offset by increased prices of certain inventory components.
Cost of subscription revenue increased by $4.9 million, or 218.4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily driven by higher headcount that supports our software and other services and increases in cloud hosting costs and amortization expenses.
Loss on product purchase commitments decreased by $14.0 million, or 100.0%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The loss on product purchase commitments is related to an inventory supply agreement expected to result in excess inventory due to a shift in our strategy and market conditions. The loss on product purchase commitments did not recur in 2022.
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Research and development
Year ended December 31,
(in thousands) 2022 2021 Change % Change
Percentage of revenue 120.0 % 119.0 %
Research and development expenses increased by $13.5 million, or 18.2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily driven by increased personnel costs of $8.1 million due to having a higher headcount in 2022 than 2021. Personnel costs primarily comprised of increases in salaries and bonuses of $4.5 million and stock-based compensation expenses of $3.8 million. Costs of software for use in R&D activities increased by $1.9 million due to new tools being implemented to enhance productivity and purchases of additional licenses to support the higher headcount. Engineering costs increased by $1.8 million, primarily due to increased spending on new product design and development.
.
Sales and marketing
Year ended December 31,
(in thousands) 2022 2021 Change % Change
Percentage of revenue 81.1 % 79.3 %
Sales and marketing expenses increased by $9.8 million, or 19.9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Personnel costs increased by $7.4 million due to having a higher headcount in 2022 than 2021, primarily comprised of increases in salaries and bonuses of $6.9 million. Travel and entertainment costs increased by $2.1 million as our salesforce increased its in-person engagement with our customers and attendance at sales conferences and events. These increases in sales and marketing expenses were partially offset by decreased digital and social marketing expenses of $1.5 million as we shifted our strategic focus from the eCommerce channel to our direct sales channel.
General and administrative
Year ended December 31,
(in thousands) 2022 2021 Change % Change
Percentage of revenue 105.7 % 137.0 %
General and administrative expenses decreased by $8.1 million, or 9.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This decrease was primarily due to lower stock-based compensation expense of $6.9 million as a result of the expense recognized in 2021 for awards that vested alongside the closing of the Business Combination. Consulting expenses decreased by $3.8 million as more activities were brough in-house during 2022. Recruiting expenses decreased by $3.2 million, primarily due to the recruiting expenses incurred during our CEO transition in 2021. These decreases were partially offset by increases in other personnel costs of $4.7 million due to having a higher headcount in 2022 than 2021 and increases in software costs of $1.3 million to support our internal resources as we shifted our administrative functions away from external service providers.
Other
Year ended December 31,
(in thousands) 2022 2021 Change % Change
Percentage of revenue 10.0 % — %
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Other increased by $7.3 million for the year ended December 31, 2023 driven by $5.3 million of legal expenses and $2.0 million of severance expenses related to the Company’s reduction in force in July of 2022. Expenses classified as “Other” are not representative of ongoing operations. Such expenses were insignificant for the year ended December 31, 2021.
Liquidity and Capital Resources
Since our inception, our primary sources of liquidity are cash flows from operations, proceeds from the Business Combination and issuances of preferred stock and convertible notes. Our primary uses of liquidity are operating expenses, working capital requirements and capital expenditures. The Company has incurred net losses and negative cash flows from operating activities in each year since inception, and we expect to continue to incur losses and negative cash flows for a few years as we continue to commercialize existing and new products and services. We expect that our existing cash 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.
During the year ended December 31, 2023, the Company utilized $103.4 million of cash, cash equivalents, and marketable securities. This was impacted by $8.7 million of employee severance and benefits costs resulting from our reductions in force and $9.5 million of higher legal costs due to litigation and other legal matters. These costs are not representative of our ongoing operations. As a result of the actions taken to date to reduce our cash requirements, the Company expects to save $170 million on an annualized basis. As of December 31, 2023, our cash and cash equivalents balance was $134.4 million. Our future spending on capital resources may vary from those currently planned and will depend on various factors, including our rate of revenue growth and the timing and extent of spending on strategic business initiatives.
We have restricted cash of $4.0 million as of December 31, 2023 to secure a letter of credit for one of our leases, which is expected to be maintained as a security deposit for the duration of the lease. In addition, we have restricted cash of $0.2 million as of December 31, 2023 for an agreement with the Gates Foundation. The restriction is expected to lapse as we fulfill our obligations in the agreement with the Gates Foundation.
Our material cash requirements include contractual obligations with third parties for office leases, technology licensing agreements, and inventory supply agreements. Our fixed office lease payment obligations were $31.5 million as of December 31, 2023, with $3.6 million payable within the next 12 months. During the third quarter of 2023, we terminated one of our office leases and modified another resulting in a net decrease of $6.0 million in fixed office lease payment obligations. Our fixed technology license payment obligations were $15.5 million as of December 31, 2023, with $1.5 million payable within the next 12 months. Our fixed purchase obligations for inventory supply agreements were $14.8 million as of December 31, 2023, with $6.8 million payable within the next 12 months. We expect to pay for approximately 21% of the amount payable within the next 12 months using vendor advances.
As of December 31, 2023, we had no obligations, assets or liabilities, which would be considered off-balance sheet arrangements.
Cash Flows
The following table summarizes our sources and uses of cash for the years ended December 31, 2023, 2022 and 2021:
Year ended December 31,
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Comparison of the period for the years ended December 31, 2023 and 2022
Cash flows used in operating activities
Net cash used in operating activities represents the cash receipts and disbursements related to our activities other than investing and financing activities. We expect cash provided by historical financing activities 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 decreased by $70.3 million, or 41.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was driven by a $9.3 million decrease in net working capital cash and $60.9 million decrease in net loss adjusted for certain noncash items, primarily driven by the loss on excess inventory, the change in fair value of warrant liabilities, and net income. The decrease in net working capital cash usage was driven by a $17.7 million reduction in cash used for changes in our inventory and the related vendor advances and accrued purchase commitments, partially offset by a $4.5 million increase in cash used by accrued expenses and other liabilities, $2.9 million increase in cash used by operating lease assets and liabilities, and a $0.8 million increase in cash used by prepaid expenses and other assets.
Cash flows used in investing activities
Net cash used in investing activities decreased by $164.1 million, or 175.1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to the purchase of marketable securities in 2022, and the subsequent sale of those securities in 2023. Additionally, there was a $12.5 million decrease in purchases of fixed assets.
Cash flows provided by financing activities
Net cash provided by financing activities decreased by $2.6 million, or 92.1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to the non-recurrence of net proceeds from exercise of stock options and warrants of $2.7 million, partially offset by $0.1 million from other financing activities.
Comparison of the period for the years ended December 31, 2022 and 2021
Cash flows used in operating activities
Net cash used in operating activities represents the cash receipts and disbursements related to our activities other than investing and financing activities. We expect cash provided by historical financing activities 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 decreased by $20.1 million, or 10.6%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was driven by a $21.8 million decrease in net working capital cash usage partially offset by a $1.7 million increase in net loss adjusted for certain noncash items, primarily driven by the change in fair value of warrant liabilities and stock-based compensation expense. The decrease in net working capital cash usage was mainly due to a $14.5 million decrease in cash used by prepaid expenses and other assets, $7.7 million decrease in cash used by vendor advances and $8.6 million decrease in cash used by accounts payable and accrued expenses, partially offset by a $13.2 million increase in cash used by inventories.
Cash flows used in investing activities
Net cash used in investing activities increased by $83.9 million, or 850.1%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to an increase of $73.5 million in purchases and sales of marketable securities and an increase in purchases of property and equipment of $10.4 million related to the Company’s new office space and additional investments into our software platform.
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Cash flows provided by financing activities
Net cash provided by financing activities decreased by $562.8 million, or 99.5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease was primarily due to the non-recurrence of net proceeds from the Business Combination of $548.4 million and an $18.7 million decrease in option exercises, partially offset by the non-recurrence of the $4.4 million repayment of the Paycheck Protection Program loan.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The process of preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the period. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
While our significant accounting policies are described in more detail in Note 2 “Summary of Significant Accounting Policies” in our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue recognition
We generate revenue from the sale of products and software and other services. Our contracts with customers often include multiple performance obligations. Generally, we have identified the following performance obligations can be promised in our contracts with customers:
● Hardware devices and accessories;
● Implementation and integration services; and
● Extended warranties.
Transaction price is allocated to all identified performance obligations based on relative standalone selling prices of the underlying goods or services. Each sale of a hardware device or accessory is a performance obligation satisfied at a point in time when control of the good transfers from us to the customer. Our software subscriptions and extended warranties are stand-ready obligations that are satisfied over time, and we use the time-elapsed (i.e., straight-line) measure of progress to recognize revenue for these services. Our implementation and integration services are a performance obligation satisfied over time, and we use costs incurred as inputs into the measure of progress to recognize revenue for these services.
We account for the warranty as an assurance-type warranty. When product revenue is recognized, an estimate of future warranty costs is recognized as cost of product revenue and accrued expenses. Factors that affect the estimate of future warranty costs include historical and current product failure rates, service delivery costs incurred in correcting product failures, warranty policies and business practices.
Our contracts with customers include variable consideration in the form of refunds and credits for product returns and price concessions. We estimate variable consideration based on the individual contract characteristics or may apply a portfolio approach depending on the circumstances.
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Stock-based compensation
Our stock-based compensation program includes restricted stock units and stock option grants to our employees, directors and consultants. Stock options are granted at exercise prices not less than the fair market value of our common stock at the dates of grant. For purposes of restricted stock unit grants, the grant date fair value is calculated as the fair market value of the stock on the date of grant. Stock-based compensation expense is recognized over the requisite service periods of awards, which is typically three to four years. We do not apply a forfeiture rate assumption to our awards.
The fair values of stock option grants are estimated using a Black-Scholes option-pricing model. Key inputs and assumptions include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, stock price and exercise price. Many of the assumptions require significant judgment and changes in assumptions could have a significant impact in the determination of stock-based compensation expense.
No related tax benefits of the stock-based compensation expense have been recognized and no related tax benefits have been realized from the exercise of stock options due to our net operating loss carryforwards.
Inventory and inventory valuation
Inventories are stated at the lower of actual cost, determined using the average cost method, or net realizable value (“NRV”). We routinely evaluate quantities and value of our inventories in light of current market conditions and market trends and record a write-down against the cost of inventories for NRV below cost. NRV is based upon an estimated average selling price reduced by the estimated costs of completion, disposal, and transportation. The determination of NRV involves numerous judgments including estimating selling prices, existing customer orders, and estimated costs of completion, disposal, and transportation. If actual market conditions differ from our estimates, future results of operations could be materially affected. We reduce the value of our inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the estimated market value.
The valuation of inventory also requires us to estimate excess and obsolete inventory. We periodically review the age, condition and turnover of our inventory to determine whether any inventory has become obsolete or has declined in value and incur a charge to operations for known and anticipated inventory obsolescence. We also consider the rate at which new products will be accepted in the marketplace and how quickly customers will transition from older products to newer products, including whether older products can be re-manufactured into new products. The evaluation also takes into consideration new product development schedules, the effect that new products might have on the sale of existing products, product obsolescence, product merchantability and other factors. Market conditions are subject to change and if actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on gross margin.
Losses expected to arise from firm, non-cancelable and unhedged commitments for the future purchase of inventory items are recognized unless the losses are recoverable through firm sales contracts or other means. We consider a variety of factors and data points when determining the existence and scope of a loss for the minimum purchase commitment. The factors and data points include Company-specific forecasts which are reliant on our limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends. Determining the loss is subjective and requires significant management judgment and estimates. Future events may differ from those assumed in our assessment, and therefore the loss may change in the future.
We capitalize manufacturing overhead expenditures as part of inventory costs. Capitalized costs primarily include management’s best estimate and allocation of the direct labor, materials costs and other overhead costs incurred related to inventory acquired or produced but not sold during the respective period. Manufacturing overhead costs are capitalized to inventory and are recognized as cost of revenues in future periods based on our rate of inventory turnover.
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Recently Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 “Summary of Significant Accounting Policies – Recent Accounting Pronouncements Adopted” to our consolidated financial statements contained in this Annual Report on Form 10-K.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We did not have any floating rate debt as of December 31, 2023. Our cash and cash equivalents are comprised primarily of bank deposits and money market accounts. The primary objective of our investments is the preservation of capital to fulfill liquidity needs. We do not enter into investments for trading or speculative purposes. Due to the short-term nature and low risk profile of these investments, we do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates, including an immediate change of 100 basis points, or one percentage point. Declines in interest rates, however, would reduce future investment income.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations, other than its impact on the general economy. Nonetheless, to the extent our costs are subject to inflationary pressures, we may not be able to fully offset such higher costs through price increases or manufacturing efficiencies. Our inability or failure to do so could harm our business, financial condition and results of operations.
Foreign Exchange Risk
We operate our business primarily within the United States and currently execute the majority of our transactions in U.S. dollars. We have not utilized hedging strategies with respect to our foreign exchange exposure. This limited foreign currency translation risk is not expected to have a material impact on our consolidated financial statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited consolidated financial statements, together with the reports of our independent registered public accounting firm, for the years ended December 31, 2023, 2022 and 2021 appear beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer,
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to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2023.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the guidelines established in the Internal Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP.
Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023.
Attestation Report of the Registered Public Accounting Firm Regarding Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting because we are not an “accelerated filer” or “large accelerated filer.”
Changes in Internal Controls
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fourth quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
During the quarter ended December 31, 2023, no other director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference to the Proxy Statement.
Code of Business Conduct
We have adopted a code of business conduct that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, which is available on our website at https://www.butterflynetwork.com under About Us – Investors – Governance – Corporate Governance. Our code of business conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Please note that our Internet website address is provided as an inactive textual reference only. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above and, to the extent required by the
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listing standards of the New York Stock Exchange, by filing a Current Report on Form 8-K with the SEC, disclosing such information.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent public accounting firm is Deloitte & Touche LLP, New York, NY, USA, PCAOB Auditor ID 34.
The information required by this item is incorporated by reference to the Proxy Statement.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Item 15(a)(3) Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
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23.1 Consent of Deloitte & Touche LLP. X
97.1+ Compensation Recovery Policy X
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
* Furnished herewith.
+ Management contract or compensatory plan or arrangement.
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Item 16. FORM 10-K SUMMARY
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BUTTERFLY NETWORK, INC.
Date: March 4, 2024 By: /s/ Joseph DeVivo
Joseph DeVivo
President, Chief Executive Officer, and Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
Each person whose individual signature appears below hereby authorizes and appoints Joseph DeVivo and Heather Getz, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signatures Title Date
By: /s/ Joseph DeVivo President, Chief Executive Officer, and March 4, 2024
Joseph DeVivo Chairman of the Board (Principal Executive
Officer)
Heather C. Getz, CPA & Operations Officer (Principal Financial Officer
and Principal Accounting Officer)
By: /s/ Dawn Carfora Director March 4, 2024
Dawn Carfora
By: /s/ Elazer Edelman, M.D., Ph.D. Director March 4, 2024
Elazer Edelman, M.D., Ph.D.
By: /s/ S. Louise Phanstiel Director March 4, 2024
S. Louise Phanstiel
By: /s/ Larry Robbins Director March 4, 2024
Larry Robbins
By: /s/ Jonathan M. Rothberg, Ph.D. Director March 4, 2024
Jonathan M. Rothberg, Ph.D.
By: /s/ Erica Schwartz, M.D., J.D., M.P.H. Director March 4, 2024
Erica Schwartz, M.D., J.D., M.P.H.
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INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID No: 34) F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Butterfly Network, Inc. and its subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Butterfly Network, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders' equity (deficit), and statement of cash flow, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory Raw Materials Valuation– Note 5 Inventories
Critical Audit Matter Description
The Company enters into inventory commitments with third-party manufacturers in the ordinary course of business, including a non-cancellable inventory supply agreement with a certain third-party manufacturing vendor. Raw materials inventory as of December 31, 2023, was $49.4 million, net of all write-downs to net realizable value taken in the current and prior periods, and current year write-down was $21.1 million.
The agreement requires monthly purchases of inventory by the Company, which represent firm commitments to take or pay for the product. The Company compares the on-hand inventory plus minimum commitments remaining, to their projected future sales of product and determines whether they would be able to sell the product for greater than cost, prior to any estimated
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obsolesce period or changes in technology, and establishes inventory write-downs for any losses on projected excess quantities of raw materials on hand as well as liabilities for any excess quantities not on hand but that they are committed to purchase. Projections of future sales of inventory are based on a number of factors, including the Company’s approved plans and strategies, the Company’s limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends, including estimates of technological and product changes. Significant judgments and estimates are made by the Company in evaluating the projected sales and evaluating expected losses on excess quantities, at the end of each reporting period.
We identified the evaluation of excess and obsolete inventory as a critical audit matter because of the judgments and estimates necessary for management to determine the total excess inventory and related write-downs. Assessing the estimates utilized in projections required a high degree of auditor judgment and an increased extent of audit effort when performing procedures to audit the recorded amount of reserves for expected losses.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the management’s estimation of write-downs for expected losses on raw materials inventory both on hand and committed included the following, among others:
◾ Compared projections to recent sales history and related trends
/s/ Deloitte & Touche LLP
New York, New York
March 4, 2024
We have served as the Company’s auditor since 2020.
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BUTTERFLY NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
Assets
Current assets:
Marketable securities — 75,250
Current portion of vendor advances 2,815 35,182
Prepaid expenses and other current assets 7,571 9,489
Intangible assets, net 10,317 —
Non-current portion of vendor advances 15,276 —
Liabilities and stockholders’ equity
Current liabilities:
Accrued purchase commitments, current 131 2,146
Accrued expenses and other current liabilities 23,425 26,116
Deferred revenue, non-current 7,394 4,957
Warrant liabilities 826 5,370
Other non-current liabilities 8,895 588
Commitments and contingencies (Note 18)
Stockholders’ equity:
Total liabilities and stockholders’ equity $ 304,274 $ 417,570
The accompanying notes are an integral part of these consolidated financial statements.
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BUTTERFLY NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except shares and per share amounts)
Year ended December 31,
Revenue:
Cost of revenue:
Loss on product purchase commitments — — 13,965
Operating expenses:
Interest expense — (2) (651)
Change in fair value of warrant liabilities 4,544 20,859 161,095
Other income (expense), net (2) 98 (2,577)
Provision for income taxes 82 42 121
The accompanying notes are an integral part of these consolidated financial statements.
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BUTTERFLY NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
Convertible Class A Class B
Preferred Common Common Additional Total
Stock Stock Stock Paid-In Accumulated Stockholders’
Net loss — — — — — — — (32,409) (32,409)
Net loss — — — — — — — (168,723) (168,723)
Net loss — — — — — — — (133,700) (133,700)
The accompanying notes are an integral part of these consolidated financial statements.
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BUTTERFLY NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
Cash flows from operating activities:
Depreciation, amortization, and impairments 10,574 5,935 2,090
Write-down of vendor advance — — 2,300
Non-cash interest expense on convertible debt — — 389
Gain on lease termination (214) — —
Changes in operating assets and liabilities:
Prepaid expenses and other assets 2,979 3,819 (10,669)
Change in operating lease assets and liabilities (635) 2,257 1,901
Accrued expenses and other liabilities (3,586) 901 4,022
Cash flows from investing activities:
Sales of marketable securities 76,484 — 1,017,010
Sales of property and equipment 10 57 —
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 228 2,982 21,707
Payment of loan payable — — (4,366)
Payments of debt issuance costs — — (52)
Other financing activities — (101) —