Outset Medical, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Outset Medical develops and sells the Tablo Hemodialysis System, an FDA-cleared dialysis platform for hospital, clinic, and home use that integrates water purification, dialysate production, connectivity, and data analytics. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial Performance and Position
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $25.2 million | $11.7 million | $48.1 million | $18.9 million |
| Product revenue | $20.6 million | $9.7 million | $38.8 million | $15.6 million |
| Service and other revenue | $4.6 million | $2.0 million | $9.3 million | $3.3 million |
| Gross profit | $1.1 million | $(4.8) million | $1.3 million | $(8.3) million |
| Gross margin | 4.2% | (40.6)% | 2.8% | (44.0)% |
| Loss from operations | $(29.9) million | $(24.9) million | $(59.6) million | $(45.1) million |
| Net loss | $(30.2) million | $(26.5) million | $(60.2) million | $(47.2) million |
| Net loss per share | $(0.66) | $(4.58) | $(1.36) | $(0.98) |
- Q2 revenue increased 115%, driven by new console customers, fleet expansion, higher average selling prices, increased consumables revenue, and service revenue from the larger installed base. Six-month revenue increased 154%.
- Gross margin improved substantially due primarily to cost-reduction activities, although it remained low at 4.2% for the quarter and 2.8% year to date.
- Operating expenses increased 54% in Q2 and 66% year to date. Six-month research and development, sales and marketing, and general and administrative expenses were $15.6 million, $26.4 million, and $19.0 million, respectively.
- Stock-based compensation was $3.9 million in Q2 and $9.8 million year to date, compared with $0.7 million and $1.3 million in the comparable periods.
- Net cash used in operating activities was $69.5 million for the first six months, compared with $44.1 million in 2020. Cash use reflected net losses and working-capital investments, including increases in inventory and accounts receivable.
- Cash, cash equivalents, and short-term investments totaled $396.2 million at June 30, 2021. Including restricted cash of $33.3 million, total cash, cash equivalents, restricted cash, and short-term investments were $429.5 million.
- The company held $30.0 million of principal under its SVB term loan, presented net of discount at $29.7 million. The loan matures in November 2025, requires interest-only payments through May 2023, and bears interest at 3.75% as of June 30, 2021.
- Shareholders’ equity was $431.2 million and accumulated deficit was $554.3 million at June 30, 2021.
Material Changes Versus the Prior Comparable Period
- Product revenue rose 113% in Q2 and 149% year to date; service and other revenue rose 124% and 181%, respectively.
- Gross profit changed from a loss of $4.8 million in Q2 2020 to profit of $1.1 million in Q2 2021, and from a loss of $8.3 million to profit of $1.3 million year to date.
- Despite improved gross profit, operating and net losses increased because the company expanded research and development, commercial, administrative, and support infrastructure.
- In April 2021, the company completed a follow-on offering of approximately 2.9 million shares, generating approximately $149.1 million of net proceeds. Shares outstanding increased to 46.2 million at June 30, 2021 from 42.7 million at December 31, 2020.
- Investing cash outflows increased primarily because the company purchased $122.4 million of investment securities. Financing inflows of $153.0 million, principally from the follow-on offering, partially offset operating and investing cash use.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide formal quantitative revenue, margin, or earnings guidance. Management expects significant expenses and operating losses to continue while it invests in anticipated growth.
- Management expects existing cash, cash equivalents, short-term investments, and cash generated from product and service revenue to fund anticipated needs for at least the next 12 months from the filing date.
- Management is pursuing gross-margin improvement through its own console manufacturing facility, a second cartridge source, manufacturing scale, and lower service costs through cloud-based systems and product enhancements.
- The company is expanding in acute-care dialysis and preparing its distribution, logistics, and support infrastructure for broader home-dialysis adoption.
- COVID-19 and emerging variants, including Delta, could disrupt suppliers, contract manufacturers, the Tijuana facility, logistics, component availability, lead times, and costs. The company had not experienced material supply-chain disruption through June 30, 2021, but reported increased lead times, higher component costs, and lower allocations for certain components.
- The company remains dependent on continued adoption of Tablo, expansion of its installed base and utilization, manufacturing execution, supply-chain availability, and successful development of the home-dialysis market.
- The SVB loan is secured by substantially all company assets, requires restricted cash at least equal to the outstanding principal, and includes customary covenants and events of default.
- No material litigation was pending, no off-balance-sheet arrangements were reported, and management concluded that disclosure controls were effective as of June 30, 2021.
- After quarter-end, the company disclosed the departure of CFO Rebecca Chambers effective July 16, 2021. Nabeel Ahmed became interim CFO and subsequently assumed the permanent CFO role effective July 30, 2021.
Important Facts for Investors to Verify
- Whether rapid revenue growth converts into sustained positive gross margins and meaningful operating leverage.
- The pace of console placements, consumables utilization, service revenue growth, and home-dialysis adoption.
- Inventory levels, accounts-receivable collections, warranty costs, and the continuing use of operating cash.
- Exposure to COVID-19-related supply-chain disruptions, single-source or critical suppliers, manufacturing transitions, and rising component or logistics costs.
- The company’s liquidity runway after ongoing operating losses and capital expenditures, including the availability and restrictions on restricted cash.
- The effects of continued equity compensation and potential future equity or debt financing on dilution and capital structure.
- Execution of the CFO transition and any subsequent changes to financial reporting, controls, or outlook.