Outset Medical, Inc. — 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Outset Medical develops and commercializes the Tablo Hemodialysis System, an FDA-cleared dialysis platform for hospital, clinic, and home use. Tablo integrates water purification, on-demand dialysate production, wireless connectivity, and data analytics. The filing covers the three and nine months ended September 30, 2021; comparative periods are the three and nine months ended September 30, 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $26.3 million | $13.8 million | $74.5 million | $32.7 million |
| Product revenue | $21.8 million | $10.8 million | $60.7 million | $26.4 million |
| Service and other revenue | $4.5 million | $2.9 million | $13.8 million | $6.3 million |
| Gross profit | $2.9 million | $(5.1) million | $4.3 million | $(13.5) million |
| Gross margin | 11.2% | (37.3)% | 5.8% | (41.2)% |
| Loss from operations | $(30.1) million | $(40.7) million | $(89.7) million | $(85.9) million |
| Net loss | $(30.5) million | $(42.3) million | $(90.7) million | $(89.4) million |
| Net loss per share | $(0.65) | $(3.44) | $(1.96) | $(6.30) |
Revenue increased 91% year over year in Q3 and 128% for the first nine months. Q3 console revenue was $15.4 million and consumables revenue was $6.4 million. For the nine-month period, console revenue was $47.0 million and consumables revenue was $13.6 million.
Cash flow from operations was $(97.6) million for the nine months, compared with $(73.2) million in the prior-year period. Investing cash flow was $(126.1) million, primarily reflecting purchases of investment securities, while financing cash flow was $159.2 million, principally from the April 2021 follow-on offering.
As of September 30, 2021, cash and cash equivalents were $230.5 million, short-term investments were $142.5 million, and restricted cash was $33.3 million. Cash, cash equivalents, and short-term investments available for operations totaled $373.0 million; including restricted cash, total liquidity was $406.4 million. Accounts receivable was $19.3 million and inventory was $34.3 million.
Total debt consisted principally of a $30.0 million SVB term loan, presented net of a $0.3 million discount. The loan matures in November 2025, bears interest at 3.75% as of September 30, 2021, requires interest-only payments through May 2023, and requires the company to maintain restricted cash at least equal to the outstanding principal.
Material Changes Versus the Prior Comparable Period
- Product revenue increased 102% in Q3 and 129% for the first nine months, driven by new customer adoption, existing-customer fleet expansion, higher average selling prices, leasing revenue, and a larger installed base supporting consumables demand.
- Gross margin improved substantially to 11.2% in Q3 and 5.8% for the nine-month period, compared with negative margins in the prior-year periods. Management attributed the improvement primarily to cost-reduction activities and higher average selling prices.
- Operating expenses declined 7% in Q3 because of lower general and administrative expense, including the absence of significant one-time stock-based compensation recognized in 2020. For the nine months, operating expenses increased 30%, led by higher sales and marketing, research and development, and general and administrative spending.
- The Q3 net loss narrowed by $11.8 million, although the nine-month net loss increased modestly by $1.3 million.
- Inventory increased to $34.3 million from $18.4 million at year-end 2020, and accounts receivable increased to $19.3 million from $6.5 million. Management cited advance inventory purchases, anticipated demand, timing of collections, and efforts to mitigate supply-chain disruptions.
- The company raised approximately $149.1 million net from its April 2021 follow-on public offering. Common shares outstanding increased to approximately 47.0 million at September 30, 2021, from 42.7 million at December 31, 2020.
Guidance, Outlook, Commentary, and Risks
The filing does not provide specific numerical revenue, margin, earnings, or cash-flow guidance. Management expects significant expenses and operating losses to continue while investing in growth, but believes existing cash, investments, and product and service revenue will fund anticipated needs for at least the next 12 months from the filing date.
Management is focused on expanding the acute-care installed base, increasing utilization and fleet expansion, scaling home dialysis distribution and support, and improving gross margins through internal console manufacturing, a second cartridge source, manufacturing scale, and lower service costs.
- Supply-chain and freight pressures intensified in the fourth quarter of 2021, particularly for Tablo cartridges transported from Southeast Asia. Higher freight costs, component shortages, longer lead times, and supplier or contract-manufacturer disruptions could constrain sales and reduce margins.
- The company relies on third-party suppliers, contract manufacturers, and certain single-source providers. Approximately 9% of more than 250 console-production suppliers are considered critical providers of components such as pumps, motors, valves, and circuit boards.
- Customer concentration is significant. For the nine months ended September 30, 2021, one customer represented 31% of revenue and a federal health department customer represented 18%.
- COVID-19 remains an operational risk through potential supplier, manufacturing, logistics, staffing, and customer disruptions. Management stated that it had not experienced material supply-chain disruption to date, but could not predict the ultimate impact.
- The company continues to incur large operating losses and negative operating cash flow, with an accumulated deficit of $584.8 million at September 30, 2021.
- No material legal proceedings, off-balance-sheet arrangements, or material changes to previously disclosed contractual obligations were reported.
Important Facts for Investors to Verify
- Whether revenue growth, particularly console placements, converts into recurring consumables and service revenue and sustained gross-margin improvement.
- The impact of freight costs, cartridge availability, component shortages, and other supply-chain constraints on delivery volumes and margins.
- Customer concentration, including the sustainability of demand from the customers representing 31% and 18% of nine-month revenue.
- Operating cash burn, inventory and receivables growth, and the timing of progress toward profitability or additional capital needs.
- Compliance with the SVB loan’s restricted-cash requirement and the effect of variable interest rates, although management stated that a 100-basis-point rate change would not be material.
- The execution and economics of the home-dialysis strategy, including distribution, training, support, reimbursement, and patient adoption.
- The filing’s forward-looking statements and risk disclosures, particularly those concerning supply dependencies, customer concentration, COVID-19, logistics, and continued operating losses.