Butterfly Network(BFLY) - 2021 Q4 - Annual Report

Part I Business Butterfly Network, Inc. develops a handheld, whole-body ultrasound system with cloud-connected software, generating $62.6 million in revenue for 2021 and expanding into healthcare and international markets Financial Performance (2021 vs. 2020) | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Revenue | $62.6 million | $46.3 million | | Net Loss | $32.9 million | $162.7 million | - The company's core product is the Butterfly iQ+, a single-probe, whole-body ultrasound system powered by its proprietary Ultrasound-on-Chip™ technology, which integrates with cloud-connected software and a mobile app[14][15] - As of December 31, 2021, the company employed approximately 463 people and sold its products in about 30 countries through a direct sales force, distributors, and an eCommerce channel[18] - The company's business strategy focuses on four key areas: U.S. hospitals and healthcare systems, international market expansion, moving into home-based care (subject to authorizations), and exploring adjacent markets[38] Products The company has sold over 57,000 Butterfly iQ and iQ+ devices, with the iQ+ offering 22 AI-generated presets and six imaging modes, supported by annual software subscriptions - The company has sold and shipped over 57,000 Butterfly iQ and iQ+ devices. The Butterfly iQ+ has a list price of approximately $2,400 per device[45] - The Butterfly iQ+ device offers 22 AI-generated pre-set settings and six imaging modes, including B-Mode, Color Doppler, and Pulsed Wave Doppler, along with specialized tools for obstetrics and bladder volume calculations[47][49] - Software subscriptions are a key component, with plans like Pro Individual priced at $420 per year, offering HIPAA-compliant cloud storage and EMR integration[54][55] - In 2021, the company launched Butterfly iQ+ Vet, a specialized handheld ultrasound system for veterinarians, available in 21 international markets as of year-end[58][59] Marketing and Sales The company uses direct sales, eCommerce, and distributors, shifting focus in 2021 to large health systems through enterprise solutions, supported by a global team of 124 employees - The company utilizes three main sales channels: a direct sales force for large healthcare systems, an eCommerce website for individual practitioners, and a network of distributors and affiliate relationships[61] - In 2021, there was a strategic shift towards increasing sales to large health systems through enterprise solutions like Butterfly Blueprint and Compass software, which offer better integration and economies of scale compared to individual eCommerce sales[63] - As of December 31, 2021, the global sales, sales support, and marketing team consisted of 124 employees[64] Manufacturing All Butterfly iQ probes are manufactured by a single contract manufacturer, Benchmark Electronics, Inc., relying on single-source suppliers for key custom components - All Butterfly iQ probes are manufactured, tested, and shipped by a single contract manufacturer, Benchmark Electronics, Inc., from its facility in Thailand[90] - The key custom component, the ultrasound transducer module, is built with custom chips and lenses from suppliers in China, Taiwan, and Thailand. The company relies on single sources for some components, including the transducer module[88][89] Key Agreements The company has key agreements with TSMC for integrated circuit manufacturing, Benchmark Electronics for exclusive product production, and Cardinal Health for U.S. distribution - The company has a Foundry Service Agreement with Taiwan Semiconductor Manufacturing Company Limited (TSMC) for the manufacture of integrated circuits used in its probes. The initial term expires on December 31, 2022, with minimum purchase obligations[91][95] - A Manufacture and Supply Agreement with Benchmark Electronics, Inc. grants Benchmark global production exclusivity for current products. The agreement has an initial three-year term and renews automatically[97][99][100] - A Distribution Agreement with Cardinal Health 105, Inc. designates Cardinal Health as the distribution agent and authorized distributor of record for products to customers in the United States[101] Intellectual Property The company's IP portfolio includes 352 issued patents and 455 pending applications, and it holds a co-exclusive license from Stanford University for wafer bonding technology - As of December 31, 2021, the company's intellectual property portfolio included approximately 352 issued patents and 455 pending patent applications worldwide, covering aspects like device architecture, ultrasonic transducers, and machine learning applications[106][107] - The company has a co-exclusive worldwide license from Stanford University for wafer bonding technology used in ultrasound applications. The license becomes non-exclusive after December 23, 2023, with the last licensed patent expected to expire in 2030[111] Government Regulation The company's diagnostic ultrasound products are regulated as Class II medical devices by the FDA, requiring compliance with QSR and MDR, and are subject to U.S. and international laws like HIPAA and GDPR, as well as the new EU MDR - The company's diagnostic ultrasound products are regulated as Class II medical devices by the U.S. Food and Drug Administration (FDA), requiring compliance with Quality System Regulation (QSR), establishment registration, and medical device reporting (MDR)[115][120][129] - The Butterfly iQ probe received 510(k) clearance from the FDA in 2017, and the FDA determined the Butterfly iQ+ was eligible to be marketed under the original 510(k)[140][291] - The company is subject to various U.S. and international laws, including anti-kickback statutes, the False Claims Act, HIPAA for data privacy, and the EU's General Data Protection Regulation (GDPR), which imposes stringent requirements on handling personal data[151][153][159] - In Europe, the company must comply with the new Medical Device Regulation (MDR), which replaced the previous Medical Device Directive (MDD) and imposes stricter life-cycle requirements, greater clinical data emphasis, and more robust vigilance[171][304] Risk Factors The company faces risks from its limited operating history, net losses, funding needs, market acceptance, competition, single-source supply chain reliance, extensive government regulations, cybersecurity threats, intellectual property protection, and governance issues Risks Related to Financial Condition and Capital Requirements The company has a limited operating history, has incurred significant net losses since inception, and anticipates continued losses, potentially requiring additional funding that may not be available on acceptable terms - The company has a limited operating history, has generated limited revenue, and has incurred significant losses since inception, with net losses of $32.4 million in 2021 and $162.7 million in 2020. It anticipates continued significant losses for the next several years[185][190] - Additional funding may be required to expand commercialization and R&D efforts, but such financing may not be available on acceptable terms, or at all, potentially forcing delays or termination of operations[191] Risks Related to Business and Operations Business success depends on market acceptance and faces competition from established players, reliance on single-source suppliers, impacts from the COVID-19 pandemic, and increased costs as a public company - Success depends on market acceptance of its products, which face competition from established manufacturers like General Electric and Phillips Healthcare, who have greater financial and marketing resources[194][200] - The company relies on a single supplier, TSMC, for a key semiconductor component and a single contract manufacturer, Benchmark Electronics, for finished products. Disruption with either could negatively impact the ability to source devices[221][225] - The COVID-19 pandemic has negatively affected the business by causing longer sales cycles, straining customers' finances, and creating global supply chain constraints, leading to increased component costs and lead times[261][262][264] - As a public company, Butterfly will incur increased costs for legal, accounting, and corporate governance compliance, including requirements under the Sarbanes-Oxley Act[269][270] Risks Related to Government Regulation and Other Legal Compliance Matters The company's products are subject to extensive pre-market and post-market regulation by the FDA and other authorities, complex privacy laws like HIPAA and GDPR, and cybersecurity threats, all carrying risks of penalties and business impact - The company's products are subject to extensive pre-market and post-market regulation by the FDA and other government authorities, which could restrict development, marketing, and sales[286][287] - Failure to obtain or maintain necessary 510(k) clearance or PMA approval from the FDA for future products or modifications would adversely affect business growth[294] - The company is subject to complex U.S. and foreign laws regarding privacy and data protection, such as HIPAA and GDPR, which carry risks of significant monetary penalties and changes to business practices for non-compliance[335][338] - Cybersecurity incidents could compromise confidential data, leading to potential liability under HIPAA and other laws, litigation, and reputational damage[343] Risks Related to Intellectual Property Maintaining competitive advantage depends on protecting its intellectual property, including 352 issued patents and 455 pending applications, and the company licenses key wafer bonding technology from Stanford University, with potential for costly infringement litigation - The company's ability to maintain a competitive advantage is dependent on protecting its intellectual property, including its portfolio of approximately 352 issued patents and 455 pending applications as of December 31, 2021[365][366] - The company licenses key wafer bonding technology from Stanford University; loss of this license could prevent the sale of its products[380] - The company may be subject to costly and time-consuming litigation if sued for infringing on the intellectual property rights of third parties[390] Risks Related to Securities and Being a Public Company As a 'controlled company' with a dual-class stock structure, Dr. Rothberg controls 76.9% of voting power, exempting it from certain governance rules and limiting other investors' influence, while also facing risks related to internal controls and financial reporting accuracy - The company is a 'controlled company' under NYSE rules because its founder, Dr. Rothberg, controls approximately 76.9% of the voting power, exempting it from certain corporate governance requirements like having a majority of independent directors[436] - The dual-class stock structure concentrates voting power with Dr. Rothberg, who holds all Class B shares (20 votes per share), limiting other investors' ability to influence major corporate transactions[438][439] - Failure to maintain effective internal controls could impair the ability to produce accurate financial statements. A material weakness related to warrant accounting was identified in 2020 and remediated as of December 31, 2021[428][430] Unresolved Staff Comments The company reported that it has no unresolved staff comments from the SEC - None[457] Properties The company maintains executive offices in Guilford, Connecticut, and expects to occupy a new corporate headquarters in Burlington, Massachusetts, in the first half of 2022, with additional leased offices in New York, Palo Alto, and Taiwan - The company's principal executive offices are located at 530 Old Whitfield Street, Guilford, Connecticut[458] - In 2021, a lease was signed for a new corporate headquarters in Burlington, Massachusetts, for approximately 61,138 rentable square feet, with the lease expiring in 2032[458] Legal Proceedings The company is facing a putative class action lawsuit filed on February 16, 2022, alleging violations of the Securities Exchange Act due to false and misleading statements regarding its post-Business Combination financial prospects, which it intends to vigorously defend - A putative class action lawsuit, Rose v. Butterfly Network, Inc., et al., was filed on February 16, 2022, against the company and certain current and former officers and directors[460] - The lawsuit alleges violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, claiming false and misleading statements were made about the company's business and financial prospects between February 16, 2021, and November 15, 2021[460] Mine Safety Disclosures This section is not applicable to the company - Not applicable[461] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock and warrants trade on the NYSE under 'BFLY' and 'BFLY WS' respectively, with 325 holders of record for Class A common stock and five for Class B common stock as of February 1, 2022 - Class A common stock trades on the NYSE under the symbol 'BFLY'[462] - Warrants to purchase Class A common stock trade on the NYSE under the symbol 'BFLY WS'[462] Shareholders of Record (as of Feb 1, 2022) | Security | Shares Outstanding (shares) | Holders of Record (count) | | :--- | :--- | :--- | | Class A Common Stock | 171,733,179 | 325 | | Class B Common Stock | 26,426,937 | 5 | | Public Warrants | 13,799,457 | 1 | | Private Placement Warrants | 6,853,333 | 1 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Butterfly Network's revenue grew 35.3% to $62.6 million, with a net loss of $32.4 million, a significant improvement from 2020 due to a non-cash gain, while operating expenses increased substantially, and liquidity was strengthened by $589 million from its Business Combination Results of Operations In 2021, total revenue increased by 35.3% to $62.6 million, driven by product and subscription growth, while total operating expenses rose by 109.0%, leading to a net loss of $32.4 million, an 80.1% improvement from 2020 Comparison of Years Ended December 31, 2021 and 2020 (in thousands) | Line Item | 2021 ($) | 2020 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $62,565 | $46,252 | $16,313 | 35.3% | | Product Revenue | $47,868 | $38,347 | $9,521 | 24.8% | | Subscription Revenue | $14,697 | $7,905 | $6,792 | 85.9% | | Gross Profit | $17,054 | ($61,223) | $78,277 | N/A | | Total Operating Expenses | $209,782 | $100,396 | $109,386 | 109.0% | | R&D | $74,461 | $49,738 | $24,723 | 49.7% | | Sales & Marketing | $49,604 | $26,263 | $23,341 | 88.9% | | G&A | $85,717 | $24,395 | $61,322 | 251.4% | | Loss from Operations | ($192,728) | ($161,619) | ($31,109) | 19.2% | | Net Loss | ($32,409) | ($162,745) | $130,336 | (80.1)% | Comparison of Years Ended December 31, 2020 and 2019 (in thousands) | Line Item | 2020 ($) | 2019 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $46,252 | $27,583 | $18,669 | 67.7% | | Gross Profit | ($61,223) | ($20,895) | ($40,328) | 193.0% | | Loss from Operations | ($161,619) | ($102,296) | ($59,323) | 58.0% | | Net Loss | ($162,745) | ($99,697) | ($63,048) | 63.2% | Liquidity and Capital Resources The company's liquidity was significantly boosted by $589 million from the February 2021 Business Combination, resulting in $422.8 million in cash and cash equivalents at year-end, expected to fund operations for at least 12 months, with material lease and inventory purchase obligations - The company's primary source of liquidity is the approximately $589 million in gross proceeds received from the Business Combination in February 2021. As of December 31, 2021, the cash and cash equivalents balance was $422.8 million[530][533] Summary of Cash Flows (in thousands) | Cash Flow Activity | 2021 ($) | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($189,187) | ($81,700) | ($120,432) | | Net cash used in investing activities | ($9,870) | ($2,376) | ($4,468) | | Net cash provided by financing activities | $565,692 | $54,280 | $324 | - As of December 31, 2021, the company had material cash requirements including $42.6 million in fixed lease payment obligations and $116.1 million in fixed inventory purchase obligations[534] Critical Accounting Policies and Estimates Revenue recognition requires significant judgment in allocating transaction prices, stock-based compensation valuation uses subjective assumptions, and inventory valuation involves estimating excess and obsolete inventory and recognizing losses on purchase commitments - Revenue recognition requires significant judgment, particularly in allocating the transaction price to multiple performance obligations (e.g., hardware, software subscriptions, support) based on their relative standalone selling prices (SSP)[548][549] - Stock-based compensation for stock options is valued using a Black-Scholes model, which requires subjective assumptions for inputs like expected term and stock price volatility[553][554] - Inventory valuation requires management to estimate excess and obsolete inventory, considering factors like new product development schedules and market conditions. The company also recognizes expected losses on firm, non-cancelable purchase commitments[556][557][558] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate, inflation, and foreign exchange, with interest rate risk considered low due to short-term cash and no floating-rate debt, inflation not materially affecting results but posing future margin risk, and foreign exchange risk limited by U.S. dollar transactions - Interest Rate Risk: The company does not have floating rate debt, and its cash equivalents are short-term, so it does not expect significant impact from interest rate changes[563] - Inflation Risk: While not currently material, the company acknowledges that inflationary pressures on costs may not be fully offset by price increases, potentially harming future results[564] - Foreign Exchange Risk: The majority of business is conducted in U.S. dollars, limiting foreign currency translation risk[565] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for 2021, 2020, and 2019, including the Independent Registered Public Accounting Firm's report and notes, with a critical audit matter identified regarding the valuation of reserves for product purchase commitments - The financial statements were audited by Deloitte & Touche LLP, who expressed an unqualified opinion[824] - A critical audit matter identified was the valuation of reserves for loss on product purchase commitments, due to the significant judgments and estimates required for management to project future sales and determine the reserves[829][833][834] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable to the company - Not applicable[569] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021. A material weakness in internal control over financial reporting related to the accounting for warrants, identified in the 2020 fiscal year, was successfully remediated as of December 31, 2021 - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[571] - A material weakness related to the accounting for public and private placement warrants, previously disclosed for the year ended December 31, 2020, has been remediated as of December 31, 2021[574][576] Part III Directors, Executive Officers and Corporate Governance This section details the company's board and executive officers, noting its 'controlled company' status due to Dr. Rothberg's majority voting power, which exempts it from certain NYSE governance rules, and outlines its four standing board committees and adopted code of conduct - As of February 1, 2022, the executive team is led by President and CEO Todd M. Fruchterman, M.D., Ph.D., and the Board of Directors is chaired by founder Jonathan M. Rothberg, Ph.D.[579] - The company qualifies as a 'controlled company' under NYSE rules because Dr. Rothberg beneficially owns a majority of the voting power. This allows the company to be exempt from certain corporate governance standards, such as the requirement for a majority-independent board[606] - The board has established four committees: Audit, Compensation, Nominating and Corporate Governance, and Technology, each with a written charter[611] Executive Compensation The executive compensation program aims to attract and retain talent, align interests with stockholders, and reward performance, with 2021 awards reflecting 35% revenue growth and the adoption of an Executive Severance Plan 2021 Named Executive Officer (NEO) Compensation Summary | Name | Position | Total Compensation 2021 ($) | | :--- | :--- | :--- | | Todd Fruchterman | CEO | 48,436,930 | | Stephanie Fielding | CFO | 991,327 | | Stacey Pugh | CCO | 7,272,674 | | Darius Shahida | CSO & CBDO | 1,630,000 | | Andrei Stoica | CTO | 3,058,427 | | Laurent Faracci | Former CEO | 3,691,800 | - The 2021 annual cash incentive awards were paid out at 100% of target for most NEOs, reflecting the Compensation Committee's assessment of financial, operational, and strategic performance, including 35% year-over-year revenue growth[646][647] - Long-term incentives in 2021 included a mix of stock options, restricted stock units (RSUs), and performance stock units (PSUs) to align executive compensation with long-term shareholder value[649] - The company adopted an Executive Severance Plan in May 2021, providing for severance benefits upon termination without cause or resignation for good reason, with enhanced benefits if the termination occurs in connection with a change of control[655][701] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of February 2, 2022, Dr. Jonathan M. Rothberg holds 100% of Class B common stock, granting him approximately 76.9% of total voting power and making Butterfly a 'controlled company,' with other significant beneficial owners including Glenview Capital Management, FMR LLC, and The Vanguard Group Beneficial Ownership as of February 2, 2022 | Beneficial Owner | Class A Shares (%) | Class B Shares (%) | Total Voting Power (%) | | :--- | :--- | :--- | :--- | | Jonathan M. Rothberg, Ph.D. | 5.8% | 100% | 76.9% | | Glenview Capital Management | 12.4% | 0% | 2.2% | | FMR LLC | 9.4% | 0% | 2.3% | | The Vanguard Group | 7.7% | 0% | 1.9% | | Blackrock, Inc. | 5.1% | 0% | 1.3% | | Fosun Industrial Co., Limited | 6.2% | 0% | 1.5% | | All Current Directors & Executive Officers (as a group) | 19.0% | 100% | 79.1% | - The company has a dual-class stock structure. Class A common stock has one vote per share, while Class B common stock has 20 votes per share[742] Certain Relationships and Related Transactions, and Director Independence The company has engaged in related party transactions, including a Technology and Services Exchange Agreement and lease arrangements with entities controlled by Dr. Rothberg or his family, and has adopted a policy for audit committee review and approval of such transactions, with seven directors determined to be independent - The company is party to a Technology and Services Exchange Agreement (TSEA) with other companies controlled by Dr. Rothberg, allowing for the discretionary sharing of non-core technologies and personnel[772] - Butterfly leases office and lab space in Guilford, Connecticut from Oceanco, LLC, an entity owned by Dr. Rothberg's children. For the year ended December 31, 2021, payments under this arrangement were $169,400[763] - The company entered into an Advisory Agreement with Dr. Rothberg, effective upon the business combination closing, for which he receives a consulting fee of $16,667 per month[775] - The board has determined that seven of its directors are independent under NYSE and SEC rules[787] Principal Accountant Fees and Services Deloitte & Touche LLP was the independent registered public accounting firm for 2021, with total fees of $1.735 million primarily for audit services, and the audit committee pre-approves all audit and permissible non-audit services Accountant Fees Billed (Deloitte & Touche LLP) | Fees | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Audit Fees | $1,644,000 | $1,736,000 | | Tax Fees | $91,000 | - | | Total Fees | $1,735,000 | $1,736,000 | - Following the business combination on February 12, 2021, the Audit Committee dismissed WithumSmith+Brown, PC (Longview's auditor) and engaged Deloitte & Touche LLP (Legacy Butterfly's auditor) as the independent registered public accounting firm[789] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including material agreements, corporate governance documents, and certifications, and references the consolidated financial statements in Item 8 - This section provides a list of all exhibits filed with the Form 10-K, including material agreements and corporate documents[805] Form 10-K Summary This section is not applicable to the company - Not applicable[816]