Outset Medical, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Outset Medical filed its Form 10-K for the fiscal year ended December 31, 2021. The company develops and sells the FDA-cleared Tablo Hemodialysis System, an integrated dialysis console designed for use in hospitals, clinics and the home. Tablo combines water purification, on-demand dialysate production, consumables, cloud connectivity and remote monitoring.
Acute-care adoption remained the primary commercial focus, while management continued investing in home dialysis distribution, logistics, training and support capabilities. The company operated a console manufacturing facility in Tijuana, Mexico and transitioned a majority of cartridge production to a second Mexican source during 2021.
Financial performance and key metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $102.6 million | $49.9 million | +105% |
| Product revenue | $84.3 million | $39.6 million | +113% |
| Service and other revenue | $18.3 million | $10.3 million | +77% |
| Gross profit | $7.6 million | $(13.0) million | +$20.6 million |
| Gross margin | 7.4% | (26.1%) | +33.5 percentage points |
| Operating loss | $(130.5) million | $(117.5) million | Loss increased |
| Net loss | $(131.9) million | $(121.5) million | Loss increased |
| Operating cash flow | $(130.3) million | $(99.0) million | Cash use increased |
| Capital expenditures | $3.1 million | $9.1 million | Decreased |
| Cash, cash equivalents and short-term investments | $339.5 million | $314.9 million | Increased |
| Restricted cash | $33.3 million | $33.3 million | Unchanged |
| Term loan, net of discount | $29.8 million | $29.7 million | Substantially unchanged |
Console revenue was $65.1 million, consumables revenue was $19.2 million and service and other revenue was $18.3 million. Console revenue represented approximately 63% of total revenue, consumables 19% and services and other 18%.
Operating expenses were $138.1 million, including $36.7 million of research and development, $65.1 million of sales and marketing, and $36.3 million of general and administrative expense. Stock-based compensation expense was $17.4 million. The company reported a basic and diluted net loss of $2.89 per share.
Material changes versus the prior comparable period
- Revenue more than doubled, driven by new customer adoption, fleet expansion at existing sites, higher average selling prices, increased console leasing revenue and growth in the installed base supporting consumables and services.
- Gross margin improved from negative 26.1% to positive 7.4%, primarily due to manufacturing cost-reduction initiatives and higher average selling prices.
- Operating expenses increased 32% to support commercial expansion, research and development and corporate infrastructure. Sales and marketing expense increased 44%, research and development 27% and general and administrative expense 19%.
- Net loss increased to $131.9 million from $121.5 million, and operating cash use increased to $130.3 million from $99.0 million, despite substantially higher revenue.
- Inventories increased to $39.2 million from $18.4 million, and accounts receivable increased to $25.6 million from $6.5 million, contributing to operating cash use.
- Outset raised approximately $149.1 million in net proceeds from a follow-on public offering in April 2021. It also received $11.1 million from employee stock option exercises and employee stock purchases.
- Supply-chain and freight disruptions intensified in the fourth quarter, particularly for cartridges shipped from Southeast Asia. Management qualified a Mexican second source intended to reduce freight costs and improve supply capacity.
Liquidity, debt and capital resources
At December 31, 2021, the company had $339.5 million of cash, cash equivalents and short-term investments, plus $33.3 million of restricted cash. Management stated that available liquidity and expected cash generated from product and service revenue should fund anticipated needs for at least the next 12 months from the filing date.
The company had a $30.0 million senior secured Silicon Valley Bank term loan, with a net carrying value of $29.8 million. The loan bears interest at the greater of 0.50% above the Prime Rate or 3.75%, requires interest-only payments through May 2023, matures in November 2025 and includes an approximately $2.0 million final payment. Restricted cash must generally equal or exceed the outstanding principal balance. The loan is secured by substantially all company assets and includes restrictive covenants.
Open purchase orders and other ordinary-course contractual commitments totaled an estimated $68.6 million at year-end, although many purchase orders could be canceled, rescheduled or adjusted under their terms.
Guidance, outlook, commentary and risks
- Management expects continued operating losses and significant expenses for the foreseeable future; the filing does not provide a specific revenue, margin or earnings forecast.
- Management expects long-term gross-margin improvement from Mexican console manufacturing, the second cartridge source, manufacturing scale and lower service costs enabled by Tablo’s connected data platform. Near-term margins may remain volatile.
- The company intends to expand its acute-care installed base, increase utilization and fleet expansion among existing customers, and scale home dialysis through provider partnerships and transitional care units.
- COVID-19 did not generate significant incremental demand during 2021, according to management. However, the pandemic continued to affect component availability, lead times, labor, freight costs and healthcare-provider staffing.
- Tablo is subject to an FDA Section 522 post-market surveillance order requiring a human-factors study and analysis of adverse events and complaints from home users. A related “catch-up” 510(k) application covering certain design and software changes was pending at year-end; the filing does not provide a final clearance outcome.
- Home use remains subject to regulatory, training, patient-retention, reimbursement and support risks. Tablo is not FDA-cleared for continuous renal replacement therapy.
- CMS approved a capital-related transitional add-on payment adjustment for Tablo home use, under which Medicare will pay 65% of the Medicare Administrative Contractor-determined pre-adjusted per-treatment amount for two calendar years beginning in 2022. The filing cautions that the benefit is temporary and its financial impact is uncertain.
- Major risks include continued losses and cash burn, dependence on a single product, customer concentration, reliance on suppliers and contract manufacturers, global freight disruption, reimbursement changes, FDA compliance, product liability, cybersecurity and privacy risks, competition from larger dialysis companies, and the need to achieve further manufacturing cost reductions.
- Two customers accounted for 30% and 15% of FY2021 revenue, respectively. The company operates as a single reporting segment.
Most important facts an investor should verify
- Whether revenue growth and installed-base expansion continue without disproportionate increases in sales, marketing and support costs.
- Whether gross-margin improvements from Mexico manufacturing and cartridge sourcing are sustained after freight, component and labor costs.
- The status and outcome of the FDA Section 522 human-factors study and pending catch-up 510(k) application.
- Actual operating cash burn, inventory growth, accounts-receivable collections and the duration of available liquidity.
- Customer concentration, renewal and expansion activity among the largest customers.
- Adoption, reimbursement economics and patient retention in the home dialysis market after the temporary TPNIES benefit expires.
- Compliance with the SVB loan’s collateral and restrictive-covenant requirements, including the $30.0 million restricted-cash requirement.
- Exposure to supply interruptions, single-source components, cartridge availability and freight-cost inflation.