Butterfly Network(BFLY) - 2022 Q4 - Annual Report

Part I Business The company develops and sells a handheld ultrasound device, the Butterfly iQ+, with a recurring revenue model - The company's core product is the Butterfly iQ+, a handheld, single-probe, whole-body ultrasound system powered by its proprietary Ultrasound-on-Chip™ technology[133][159] Financial Performance Snapshot (2021-2022) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenue | $73.4 million | $62.6 million | | Net Loss | $168.7 million | $32.4 million | - The business strategy focuses on hospitals, international market expansion, home-based care, and adjacent market opportunities[143] - As of January 31, 2023, the company employed approximately 330 people and has sold products in about 30 countries[161] Products and Services The product portfolio includes the iQ+ device, software subscriptions, and the enterprise-level Butterfly Blueprint™ platform - The Butterfly iQ+ device has a list price of approximately $2,700 and connects to a compatible smartphone or tablet[174][206] - Software subscriptions are a key part of the business, with plans like Pro Individual priced at about $500 per year, offering cloud storage and access to advanced tools[180][213] - Butterfly Blueprint™ is an enterprise-level platform designed for hospitals and health systems, enabling scaled deployment and integration with existing clinical systems like PACS and EMR[183][216] - The company launched Butterfly iQ+ Vet in 2021, a specialized version of its device for the veterinary market, available in approximately 20 international markets as of year-end 2022[185][244] Marketing, Sales, and Geographic Areas The company utilizes a multi-channel sales strategy focused on enterprise sales, with a majority of revenue from the U.S - Sales channels include a direct sales force for healthcare systems, an eCommerce website, and distributor/affiliate relationships[245][246] - The company is increasingly focusing on enterprise sales to large healthcare systems, as these deals yield larger volumes and more comprehensive software subscriptions[188][221] - The company has a global health program, highlighted by a $5.5 million grant from the Bill & Melinda Gates Foundation to deploy 1,000 Butterfly iQ+ devices in Sub-Saharan Africa[248] - For the fiscal year ended December 31, 2022, a substantial majority of revenues were derived from sales to customers based in the United States[223] Manufacturing and Key Agreements The company employs a lean manufacturing strategy relying on key single-source suppliers like TSMC and Benchmark Electronics - The company has a Foundry Service Agreement with Taiwan Semiconductor Manufacturing Company (TSMC) to manufacture the integrated circuits for its probes, which includes monthly minimum purchase obligations[233] - A Manufacture and Supply Agreement is in place with Benchmark Electronics, Inc. for the assembly and supply of finished products, granting Benchmark global production exclusivity for a specified period[262][266][267] - An Exclusive Distribution Agreement with Cardinal Health makes it the distribution agent and authorized distributor of record for products in the United States[268] Intellectual Property The company's core strength is its intellectual property, including a large patent portfolio and a key license from Stanford - As of December 31, 2022, the company's IP portfolio included approximately 900 issued patents and pending patent applications in the U.S. and foreign jurisdictions[304][566] - The company has a co-exclusive worldwide license from Stanford University for its wafer bonding technology used in ultrasound applications, which requires royalty payments and meeting specific development and sales milestones[241][306] - Protection strategies also include trademarks, trade secrets, and confidentiality agreements with employees, consultants, and suppliers[271] Government Regulation The company operates in a highly regulated industry, subject to FDA oversight, fraud laws, and data privacy rules like HIPAA - In the U.S., Butterfly's iQ devices are classified as Class II medical devices and received 510(k) clearance from the FDA. The company must comply with ongoing regulations including the Quality System Regulation (QSR)[311][314] - The company is subject to U.S. healthcare fraud and abuse laws, such as the federal Anti-Kickback Statute, the False Claims Act, and the Stark Law, which constrain sales and marketing activities[276][319][289] - Internationally, products must comply with regulations like the EU Medical Device Regulation (EU MDR) to obtain a CE mark for marketing in the European Economic Area[297][361] - The company is subject to stringent data privacy laws, including HIPAA in the U.S. and the General Data Protection Regulation (GDPR) in the EU, which govern the use and protection of health information[291][300] Human Capital Resources The company has a mission-driven culture, focuses on DEI, and recently underwent significant workforce reductions - As of January 31, 2023, the company had approximately 330 employees. It implemented workforce reductions of approximately 10% in August 2022 and 25% in January 2023[228] - The company offers comprehensive benefits, including 100% covered medical, dental, and vision insurance, and a generous parental leave policy[229] - Butterfly is committed to Diversity, Equity, and Inclusion (DEI), implementing initiatives such as unconscious bias training for hiring managers and using applicant tracking software to reduce bias[258][231][260] Risk Factors The company faces significant financial, operational, regulatory, and legal risks, including supplier dependency and litigation Financial and Operational Risks The company has a history of significant net losses and faces intense competition and supply chain concentration risks - The company has a limited operating history and has incurred significant net losses since inception, including $168.7 million in 2022, and expects to continue incurring losses for the next several years[342][345] - The company relies on a single supplier, TSMC, for the key semiconductor chip component and a single contract manufacturer, Benchmark, for finished product assembly, creating significant supplier concentration risk[399][402] - The company faces intense competition from well-established manufacturers with greater financial and marketing resources, such as GE HealthCare, Philips, and Siemens Healthineers[414][383] - The business is exposed to product liability risks inherent in the medical device industry, and its insurance may not be adequate to cover all potential claims[92][678] Regulatory and Legal Risks The company is subject to complex regulations, data privacy laws, cybersecurity threats, and ongoing litigation - The company's products are subject to extensive pre-market and post-market regulation by the FDA and other global authorities, and failure to comply can result in significant costs, penalties, or product recalls[77][78] - The company is subject to complex U.S. and foreign laws regarding data privacy, including HIPAA, GDPR, and CCPA, with non-compliance potentially leading to significant fines and operational changes[518][485] - Cybersecurity incidents are a major risk, potentially leading to the compromise of confidential data, business interruption, litigation, and reputational harm[488][522] - The company is currently a defendant in a securities class action lawsuit alleging false and misleading statements and a patent infringement lawsuit filed by Fujifilm Sonosite, Inc[617][680][1111] Intellectual Property Risks Success depends on protecting a large patent portfolio and a critical technology license from Stanford University - Failure to protect the company's intellectual property could allow third parties to compete more effectively and diminish any technological advantage[500][566] - The company's core wafer bonding technology is licensed from Stanford University, and a breach or termination of this license agreement would have a material adverse effect on the business[541][542][573] - The company may be sued for infringing on the intellectual property rights of others, which could result in costly litigation, substantial damages, or the need to obtain licenses on unfavorable terms[546][580] - Protecting intellectual property rights in foreign countries is challenging and may not be as effective as in the United States, potentially allowing competitors to use the company's technologies in those jurisdictions[557][590] Public Company and Stock-Related Risks The company is a 'controlled company' with a dual-class stock structure that concentrates voting power with its founder - The company is a 'controlled company' under NYSE rules because its founder, Dr. Jonathan Rothberg, controls approximately 77% of the voting power, exempting it from certain corporate governance requirements like having a majority of independent directors[607][639] - The dual-class stock structure, with Class B shares holding 20 votes per share compared to one vote for Class A, concentrates voting power with Dr. Rothberg, limiting other investors' ability to influence corporate actions[610][641] - The company does not anticipate paying any cash dividends in the foreseeable future, making capital appreciation the sole source of potential gain for stockholders[11][686] - Anti-takeover provisions in the company's certificate of incorporation and Delaware law could make it more difficult for a third party to acquire the company, even if beneficial to stockholders[1][612][643] Properties The company's headquarters are in a leased 60,000 sq ft facility in Burlington, MA, with smaller offices elsewhere - The company's main executive offices are in a leased 60,000 square foot facility in Burlington, Massachusetts, with the lease expiring in 2032[689] - Additional office spaces are leased in New York City, Palo Alto, California, and Taiwan[659] Legal Proceedings The company is subject to ordinary course legal proceedings, with details referenced in the financial statement notes - The company is subject to legal proceedings and claims. For more detailed information, the report refers to Note 19 of the Consolidated Financial Statements[660][690] Mine Safety Disclosures This item is not applicable to the company - Not applicable[17][691] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A stock trades on the NYSE under 'BFLY', and no cash dividends have been or are expected to be paid - The company's Class A common stock and warrants are traded on the NYSE under the symbols 'BFLY' and 'BFLY WS'[693] - As of February 1, 2023, there were 175,689,123 shares of Class A common stock and 26,426,937 shares of Class B common stock outstanding[19] - The company has never declared or paid cash dividends and intends to retain all future earnings to finance growth[663] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 17.3% in 2022, but the net loss widened significantly due to higher operating expenses and non-cash items Results of Operations Revenue grew 17.3% in 2022, driven by software, but net loss widened due to higher expenses and warrant liability changes Consolidated Statements of Operations (2020-2022, in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $ 73,390 | $ 62,565 | $ 46,252 | | Gross profit (loss) | $ 39,460 | $ 17,054 | $ (61,223) | | Total operating expenses | $ 232,480 | $ 209,782 | $ 100,396 | | Loss from operations | $ (193,020) | $ (192,728) | $ (161,619) | | Change in fair value of warrant liabilities | $ 20,859 | $ 161,095 | $ — | | Net loss | $ (168,723) | $ (32,409) | $ (162,745) | Revenue Comparison (2022 vs 2021, in thousands) | Revenue Type | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product | $ 50,263 | $ 47,868 | $ 2,395 | 5.0% | | Software and other services | $ 23,127 | $ 14,697 | $ 8,430 | 57.4% | | Total revenue | $ 73,390 | $ 62,565 | $ 10,825 | 17.3% | - R&D expenses increased by $14.7 million (19.7%) in 2022 due to continued investment in chip technology, AI capabilities, and software applications, including higher personnel and software costs[36] - Sales and marketing expenses increased by $10.3 million (20.7%) in 2022, driven by higher personnel costs and increased travel as the salesforce engaged more with customers, partially offset by a strategic shift away from eCommerce marketing[711] Liquidity and Capital Resources The company has $237.8 million in cash and securities, which is deemed sufficient to fund operations for at least 12 months - As of December 31, 2022, the company had $237.8 million in cash, cash equivalents, and investments in marketable securities[45] Summary of Cash Flows (2020-2022, in thousands) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $ (169,115) | $ (189,187) | $ (81,700) | | Net cash used in investing activities | $ (93,779) | $ (9,870) | $ (2,376) | | Net cash provided by financing activities | $ 2,881 | $ 565,692 | $ 54,280 | - Material cash requirements as of Dec 31, 2022, include $40.6 million for facility leases and $56.5 million for fixed inventory purchase obligations, with the latter all payable within 12 months[69] - Management expects that existing cash and cash flows will be sufficient to meet liquidity and capital requirements for at least the next 12 months[742] Critical Accounting Policies and Estimates Key estimates involve revenue recognition, inventory valuation, stock-based compensation, and purchase commitment losses - Revenue recognition is complex due to contracts often including multiple performance obligations (hardware, software subscriptions, services), requiring allocation of the transaction price based on relative standalone selling prices[756][780] - Inventory is valued at the lower of cost or net realizable value, requiring management to estimate excess and obsolete inventory based on forecasts, new product schedules, and market conditions[761][762][786] - Stock-based compensation is estimated using a Black-Scholes model, which relies on significant judgments for inputs like expected stock price volatility and the award's expected term[760][784] - The company recognizes losses on non-cancelable inventory purchase commitments, which requires significant management judgment and estimates based on company-specific forecasts and market trends[787][763] Quantitative and Qualitative Disclosures About Market Risk Market risk from interest rates, inflation, and foreign exchange is considered limited for the company - The company does not expect cash flows to be significantly affected by sudden changes in market interest rates due to the short-term nature of its investments[766][790] - Inflation has not had a material effect, but the company notes that if costs are subject to inflationary pressures, it may not be able to fully offset them through price increases[767][791] - Foreign currency translation risk is not expected to have a material impact as the majority of business is conducted in U.S. dollars[767][792] Financial Statements and Supplementary Data This section contains audited financial statements, with the auditor highlighting inventory purchase commitment valuation as a critical audit matter - The report of the independent registered public accounting firm, Deloitte & Touche LLP, expresses an opinion that the financial statements present fairly, in all material respects, the financial position of the company[838] - A critical audit matter was identified concerning the valuation of vendor advances and the accrued purchase commitment liability. This was due to the high degree of judgment and complexity involved in management's estimates of future sales to determine potential losses on inventory purchase commitments[841][870][872] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[796] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[797][815] - A previously identified material weakness in internal controls related to the accounting for warrants was remediated as of December 31, 2021[636] Part III Directors, Executive Officers and Corporate Governance Information on directors, officers, and governance is incorporated by reference from the 2023 proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[799] - The company has adopted a code of business conduct applicable to all directors, officers, and employees, which is available on its website[772] Executive Compensation Information on executive compensation is incorporated by reference from the 2023 proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[801][818] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity plans is incorporated by reference from the 2023 proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[801][819] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2023 proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[801][820] Principal Accountant Fees and Services Information on accountant fees and services is incorporated by reference from the 2023 proxy statement - The information required by this item is incorporated by reference from the company's definitive proxy statement[801] - The company's independent public accounting firm is Deloitte & Touche LLP[821] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the annual report, including material contracts and governance documents - This section lists all exhibits filed with the 10-K, including material contracts, governance documents, and executive certifications[823]