Butterfly Network, Inc.: Form 10-Q for the period ended Sep 30, 2026

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto contained in our 2025 Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the caption "Risk Factors" in Item 1A of Part I of our 2025 Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.

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 developed ultrasound devices that can perform whole-body imaging in a single handheld probe because they are powered by our proprietary semiconductor technology instead of piezoelectric crystals. 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 (which we refer to herein as our "core business"), to healthcare systems, physicians, and healthcare providers through a direct sales force, distributors, and our eCommerce channel. We also license our proprietary Ultrasound-on-Chip™ semiconductor platform for co-development of novel technologies in non-competitive markets through our Embedded program.

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 the performance of our business period over period.

For the three months ended

Units fulfilled increased by 264 units, or 5.4%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was largely driven by higher probe sales volume in the U.S. through direct sales to health systems, sales to our distribution partners, and sales through our eCommerce 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 Embedded program and 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.

Software and other services mix increased by 19.8 percentage points, to 52.1%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was primarily driven by software and other services revenue generated from our various Embedded partnerships, including our co-development partnership with Midjourney, Inc.

Description of Certain Components of Financial Data

Revenue

Product revenue consists of revenue from the sale of products, such as medical devices, accessories, and semiconductor chips. Our software and other services revenue consists of revenue from the sale of SaaS subscriptions, extended warranties, services related to our Embedded partnerships, implementation and integration services, and software development kits ("SDKs"), which may be perpetual or term-based. SaaS subscriptions include licenses for teams and individuals as well as enterprise-level subscriptions. Services related to our Embedded partnerships include out-licensing arrangements and related research and development services.

For sales of products and perpetual SDKs, revenue is recognized at a point in time upon transfer of control to the customer. Sales of SaaS subscriptions, extended warranties, and term-based SDKs are generally related to stand-ready obligations or continued provision of access, and the revenue for those offerings is recognized ratably over time. For sales of services related to our Embedded partnerships and implementation and integration services, revenue is recognized over time using input methods to determine a measure of progress.

Over time, as adoption of our devices increases through further market penetration, as practitioners in the Butterfly network continue to use our devices, and as our Embedded partnerships continue to grow and develop, 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.

To date, we have invested in building out our commercial footprint, with the ultimate goal of growing adoption at large-scale healthcare systems and driving awareness of the usability of ultrasound. 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 includes manufacturing costs, inbound freight, packaging, warranty replacement costs, royalty fees for licensed intellectual property, 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 to fluctuate 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 includes personnel costs, cloud hosting costs, and payment processing fees. Because the costs and associated expenses to deliver our software and other service offerings are less than the costs and associated expenses of manufacturing and selling our products, we anticipate an improvement in profitability and margin expansion over time as our revenue mix shifts increasingly toward software and other services. We plan to continue to invest additional resources to expand and further develop our SaaS and other service offerings which will be reflected in cost of revenue as amortization expense.

Research and development

Research and development expenses primarily consist of personnel costs and benefits, professional services, 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 increase our investments in our commercial capabilities.

General and administrative

General and administrative expenses primarily consist of personnel costs and benefits, insurance, patent fees, software costs, facilities-related expenses, and outside services. Outside services consist of professional services, legal fees, and other professional fees.

Other

Operating expenses classified as other are expenses that we do not consider representative of our ongoing operations. These other expenses primarily consist of employee severance and benefits costs related to reductions in force, litigation costs, loss contingencies and related loss recoveries related to ongoing litigation, and legal settlements.

Results of Operations

We operate as a single reportable segment to reflect the way our CODM reviews and assesses the performance of the business. The accounting policies are described in Note 2 "Summary of Significant Accounting Policies" in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

(in thousands)

Comparison of the three months ended September 30, 2026 and 2025

Revenue

(in thousands)

24

Product revenue increased by $1.1 million, or 7.4%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was primarily driven by the increase in probe sales volume across multiple sales channels.

Software and other services revenue increased by $10.0 million, or 144.8%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was primarily driven by software and other services revenue generated from our various Embedded partnerships, including our co-development partnership with Midjourney, Inc.

Cost of revenue

(in thousands)

Cost of product revenue decreased by $16.7 million, or 71.0%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025, primarily driven by a non-recurring $17.4 million charge during the three months ended September 30, 2025 for excess and obsolete inventory due to technological advancements in the underlying components of our devices and changes in our product portfolio.

Cost of software and other services revenue increased by $0.3 million, or 15.8%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025, primarily driven by an increase in costs related to providing services to our Embedded partners.

Research and development

(in thousands)

Research and development expenses increased by $1.5 million, or 16.9%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was primarily driven by a $1.5 million increase in personnel costs as we invested in additional headcount for our product and software development projects and a $0.3 million increase in software costs as we leveraged more third-party artificial intelligence ("AI") and design tools to optimize our employee workflows during the period. These increases were partially offset by a $0.3 million decrease in product engineering costs as we optimized our engineering processes while continuing to progress along our product development roadmap.

Sales and marketing

(in thousands)

Sales and marketing expenses increased by $1.0 million, or 9.2%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was primarily driven by a $0.9 million increase in personnel costs as we invested in additional headcount for our sales force and sales support teams as well as a $0.2 million increase in marketing costs as we invested more heavily in digital and social media advertising.

General and administrative

(in thousands)

General and administrative expenses increased by $2.3 million, or 24.5%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was primarily driven by a $1.7 million increase in personnel and other employment-related costs, including stock-based compensation expenses, as we increased headcount in our back office support functions to better support our growing business.

Other

(in thousands)

Other increased by $1.3 million, or 46.6%, for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. This increase was driven by the recognition of $4.3 million of estimated liabilities for loss contingencies related to ongoing litigation and $0.9 million of higher legal costs due to litigation. These increases were partially offset by the recognition of a $3.7 million loss recovery for expected insurance recoveries related to our estimated liabilities for loss contingencies and a $0.1 million reduction in employment-related costs. We believe these costs are not representative of our ongoing operations.

Comparison of the nine months ended September 30, 2026 and 2025

Revenue

(in thousands)

Product revenue increased by $0.7 million, or 1.5%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was primarily driven by $3.6 million of higher product revenue generated from the increase in probe sales volume across multiple sales channels. This increase was partially offset by the non-recurrence of prior-year sales of semiconductor chips to one of our Embedded partners, reducing current-year product revenue by $2.8 million.

Software and other services revenue increased by $25.0 million, or 120.4%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was primarily driven by increases in software and other services revenue generated by our various Embedded partnerships, including our co-development partnership with Midjourney, Inc.

Cost of revenue

(in thousands)

26

Cost of product revenue decreased by $15.5 million, or 43.0%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025, primarily driven by a non-recurring $17.4 million charge during the nine months ended September 30, 2025 for excess and obsolete inventory due to technological advancements in the underlying components of our devices and changes in our product portfolio. This decrease was partially offset by a $1.5 million increase in the cost of devices sold as a result of our higher probe sales volume and a $0.9 million increase in costs for our warranty reserve and replacements.

Cost of software and other services revenue increased by $0.3 million, or 4.9%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was primarily driven by a $1.4 million increase in costs related to providing services to our Embedded partners, partially offset by a $1.2 million decrease in amortization expense for software development investments that we made in prior years.

Research and development

(in thousands)

Research and development expenses increased by $3.3 million, or 12.3%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was primarily driven by a $1.9 million increase in personnel costs as we invested in additional headcount for our product and software development projects, a $0.7 million increase in software costs as we leveraged more third-party AI and design tools to optimize our employee workflows during the period, and a $0.5 million increase in product engineering costs as we progressed along our product development roadmap.

Sales and marketing

(in thousands)

Sales and marketing expenses increased by $0.7 million, or 2.0%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was primarily driven by a $1.2 million increase in personnel costs as we invested in additional headcount for our sales force and sales support teams, partially offset by a $0.2 million decrease in marketing costs as we optimized our marketing investments, including a shift towards more digital and social media advertising, while delivering higher sales volume.

General and administrative

(in thousands)

General and administrative expenses increased by $5.7 million, or 20.4%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was primarily driven by a $3.9 million increase in personnel and other employment-related costs, including stock-based compensation expenses, as we increased headcount in our back office support functions to better support our growing business as well as a $0.5 million increase in professional service costs for legal, accounting, and auditing services.

Other

(in thousands)

Other increased by $2.6 million, or 47.1%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This increase was driven by the recognition of $11.5 million of estimated liabilities for loss contingencies related to ongoing litigation and $5.3 million of higher legal costs due to litigation. These increases were partially offset by the recognition of a $13.7 million loss recovery for expected insurance recoveries related to our estimated liabilities for loss contingencies and a $0.3 million reduction in employment-related costs. We believe these costs are not representative of our ongoing operations.

Liquidity and Capital Resources

Since our inception, our primary sources of liquidity have been cash flows from operations and proceeds from stock issuances and the Business Combination. Our primary uses of liquidity are operating expenses, working capital requirements, and capital expenditures.

During the three months ended September 30, 2026, we utilized $2.4 million of cash and cash equivalents for ongoing operations. As of September 30, 2026, our cash and cash equivalents balance was $122.3 million. Our future spending will depend on various factors, including our rate of revenue growth and the timing and extent of spending on strategic business initiatives. We expect that our existing cash and cash flows from operations will be sufficient to meet our anticipated liquidity, working capital, and capital expenditure requirements and fund our operations for at least the next 12 months.

As of September 30, 2026, we have restricted cash of $4.0 million 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.

Our material cash requirements include contractual obligations with third parties for office leases, technology licensing agreements, and outsourced services. Our fixed office lease payment obligations were $21.5 million as of September 30, 2026, with $3.8 million payable within the next 12 months. Our fixed technology license payment obligations were $10.5 million as of September 30, 2026, with $1.5 million payable within the next 12 months. Our fixed outsourced services payment obligations were $3.1 million as of September 30, 2026, with $1.4 million payable within the next 12 months.

As of September 30, 2026, we had no obligations, assets or liabilities, which would be considered off-balance sheet arrangements.

Cash flows

Comparison of the nine months ended September 30, 2026 and 2025

The following table summarizes our sources and uses of cash for the nine months ended September 30, 2026 and 2025:

(in thousands)

Net cash 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.

Net cash used in operating activities increased by $10.7 million, or 49.2%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. The increase was comprised of a $19.5 million increase in net working capital cash usage, partially offset by an improvement of $8.8 million in net loss adjusted for certain non-cash items. The $19.5 million increase in net working capital cash usage was driven by a $12.1 million increase in cash used for changes in prepaid expenses and other assets, a $10.1 million increase in cash used for changes in deferred revenue, an $8.0 million increase in cash used for changes in accounts receivable, and a $2.8 million reduction in cash provided by changes in inventory and its related vendor advances. These increases in cash usage were partially offset by a $13.5 million increase in cash provided by changes in accounts payable and accrued expenses. The $8.8 million improvement in net loss adjusted for certain non-cash items was driven by a $23.4 million improvement in net loss, partially offset by the non-recurrence of the $17.6 million of adjustments for write-downs of inventories and vendor advances.

Net cash used in investing activities

Net cash used in investing activities increased by $0.8 million, or 35.5%, for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025, primarily driven by increased investment in the development of our internal-use software.

Net cash provided by financing activities

Net cash provided by financing activities decreased by $72.1 million, or 90.8% for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This decrease was primarily due to the $81.0 million provided by the net proceeds from our public share offering during the prior year period, partially offset by a $6.1 million increase in cash provided by exercises and purchases of our shares pursuant to our stock plans.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, contingent assets and liabilities, and related disclosures. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, and these form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

As of September 30, 2026, we concluded that revisions to our estimated liabilities for loss contingencies related to ongoing litigation and a related insurance recovery asset were appropriate. As a result, we recognized an additional $4.3 million estimated loss and a $3.7 million loss recovery in our other operating expenses during the three months ended September 30, 2026. See the "Use of Estimates" subheading in Note 2 "Summary of Significant Accounting Policies" and see Note 12 "Commitments and Contingencies" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q for additional information about our estimated liabilities for loss contingencies and the related insurance recovery asset.

For our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no other material changes to the critical accounting policies and estimates disclosed in our 2025 Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 2 "Summary of Significant Accounting Policies" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q.

Interest Rate Risk

We did not have any floating rate debt as of September 30, 2026. Our cash and cash equivalents consist 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 impacted by general inflationary pressures, including as a result of tariffs, 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 such foreign exchange exposure. This limited foreign currency translation risk is not expected to have a material impact on our condensed consolidated financial statements.

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 Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q.

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 SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, our principal executive officer and principal financial officer, respectively, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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 September 30, 2026.

Changes in Internal Control over Financial Reporting

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 three months ended September 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business, results of operations, and financial condition are subject to various risks and uncertainties including the risk factors described under the caption "Risk Factors" in our 2025 Annual Report on Form 10-K. There have been no material changes to the risk factors described in the 2025 Annual Report on Form 10-K, except as set forth below.

A significant portion of our revenue is derived from a limited number of customers, including our Embedded partners, and the loss of, or a significant reduction in revenue from, any of these customers could adversely affect our business, financial condition, and results of operations.

A limited number of customers account for a significant portion of our revenue. For the three months ended September 30, 2026, two customers each accounted for more than 10% of our total revenue. For the nine months ended September 30, 2026, one customer accounted for more than 10% of our total revenue. By comparison, no customer accounted for more than 10% of our total revenue for the three and nine months ended September 30, 2025. As of September 30, 2026, two customers each accounted for more than 10% of our accounts receivable.

We expect that a limited number of customers will continue to account for a significant portion of our revenue for the foreseeable future. Our agreements with these customers may be terminated in certain circumstances, including for certain breaches and insolvency events. Our ability to receive milestone and other contingent payments under these agreements depends on factors outside our control. If any of these customers terminates or fails to renew its agreement with us, delays or fails to make required payments, or experiences financial difficulties, our revenue, cash flows, and results of operations could be materially adversely affected. Our concentration of accounts receivable also exposes us to increased credit risk.