# Butterfly Network, Inc. (BFLY) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Butterfly Network, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1804176/000155837024002308/bfly-20231231x10k.htm
Accession: 0001558370-24-002308
Filing date: 2024-03-04
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BFLY/
All MD&A years: /company/BFLY/mda/
Previous year: /company/BFLY/mda/fy2022/ (FY 2022)
Next year: /company/BFLY/mda/fy2024/ (FY 2024)

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

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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-Chip™ 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.

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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

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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

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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.

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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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Comparison of the Years Ended December 31, 2023 and 2022

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Revenue

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[[/GREPCENT_TABLE]]

​

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

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​

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

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​

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

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​

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

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​

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

​

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​

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

​

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[[/GREPCENT_TABLE]]

​

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

​

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[[/GREPCENT_TABLE]]

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","\u200b","2022","\u200b","2021","\u200b","Change","\u200b","% Change"],["Research and development","","$","88,044","","$","74,461","","$","13,583","","18.2","%"],["Percentage of revenue","\u200b","","120.0","%","","119.0","%","","","","","\u200b"]]
[[/GREPCENT_TABLE]]

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","\u200b","2022","\u200b","2021","\u200b","Change","\u200b","% Change"],["Sales and marketing","","$","59,494","","$","49,604","","$","9,890","","19.9","%"],["Percentage of revenue","\u200b","","81.1","%","","79.3","%","","","","","\u200b"]]
[[/GREPCENT_TABLE]]

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","\u200b","2022","\u200b","2021","\u200b","Change","\u200b","% Change"],["General and administrative","","$","77,596","","$","85,717","","$","(8,121)","","(9.5)","%"],["Percentage of revenue","\u200b","","105.7","%","","137.0","%","","","","","\u200b"]]
[[/GREPCENT_TABLE]]

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","\u200b","2022","\u200b","2021","\u200b","Change","\u200b","% Change"],["Other","","$","7,346","","$","\u2014","","$","7,346","","\u200b","\u200b"],["Percentage of revenue","\u200b","","10.0","%","","\u2014","%","","","","","\u200b"]]
[[/GREPCENT_TABLE]]

​

55

Table of Contents

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:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,"],["(in thousands)","\u200b","2023","\u200b","2022","\u200b","2021"],["Net cash used in operating activities","","$","(98,820)","","$","(169,115)","","$","(189,187)"],["Net cash provided by (used in) investing activities","","\u200b","70,414","","\u200b","(93,779)","","\u200b","(9,870)"],["Net cash provided by financing activities","","\u200b","228","","\u200b","2,881","","\u200b","565,692"],["Net decrease in cash, cash equivalents and restricted cash","","$","(28,178)","","$","(260,013)","","$","366,635"]]
[[/GREPCENT_TABLE]]

​

56

Table of Contents

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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Table of Contents

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:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Hardware devices and accessories;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Software subscriptions, including renewal subscriptions, which represent an obligation to provide the customer with ongoing access to our cloud-hosted software applications on a continuous basis throughout the subscription period;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Implementation and integration services; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Extended warranties."]]
[[/GREPCENT_TABLE]]

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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Table of Contents

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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Table of Contents

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.

​