Outset Medical, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed March 22, 2021. The filing includes unaudited fourth-quarter data for the quarter ended December 31, 2020. Outset is a medical technology company focused on Tablo, an FDA-cleared hemodialysis system designed for hospital, clinic and home use. The company completed its IPO in September 2020 and trades on Nasdaq under “OM.”
Business context and reporting period
- Tablo integrates water purification, on-demand dialysate production, touchscreen operation and cloud connectivity.
- Commercial strategy remained focused on acute-care adoption, utilization and fleet expansion, while expanding into home hemodialysis.
- Tablo received FDA clearance for home use in March 2020. The FDA also required a Section 522 post-market surveillance program addressing home-use human factors and adverse events.
- Outset had 313 full-time employees at December 31, 2020 and operated a new console manufacturing facility in Tijuana, Mexico, with production beginning in the first quarter of 2021.
Financial results and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $49.9 million | $15.1 million | Up 231% |
| Product revenue | $39.6 million | $13.8 million | Up 188% |
| Service and other revenue | $10.3 million | $1.3 million | Up 677% |
| Gross profit | $(13.0) million | $(17.8) million | Improved $4.8 million |
| Gross margin | (26)% | (118)% | Improved 92 percentage points |
| Operating loss | $(117.5) million | $(70.3) million | Loss increased $47.2 million |
| Net loss | $(121.5) million | $(68.3) million | Loss increased $53.2 million |
| Operating cash flow | $(99.0) million | $(70.3) million | Cash use increased $28.7 million |
| Research and development | $28.9 million | $23.3 million | Up 24% |
| Sales and marketing | $45.1 million | $20.3 million | Up 122% |
| General and administrative | $30.5 million | $8.9 million | Up 242% |
Fourth-quarter 2020 revenue was $17.2 million, compared with $7.1 million in the fourth quarter of 2019. Fourth-quarter gross profit was $0.4 million, the first quarterly positive gross profit reported in the provided quarterly data. Fourth-quarter net loss was $32.0 million.
Liquidity, debt and capital resources
- Cash, cash equivalents and short-term investments were $314.9 million at December 31, 2020. Including restricted cash of $33.3 million, total cash, cash equivalents, restricted cash and short-term investments were $348.2 million.
- Working capital was $309.2 million, compared with $54.7 million at December 31, 2019.
- Outset raised approximately $254.8 million in net IPO proceeds and $126.8 million in net proceeds from Series E preferred stock during 2020.
- Net cash provided by financing activities was $385.7 million, offsetting operating cash use and supporting the year-end liquidity position.
- Term debt was $30.0 million principal, or $29.7 million net of debt discount, at year-end. The SVB term loan matures November 1, 2025, bears interest at the greater of Prime plus 0.50% or 3.75%, and requires interest-only payments through May 2023.
- The SVB facility is secured by substantially all company assets and requires restricted cash at least equal to the outstanding principal balance. The agreement includes operational covenants and restrictions on additional debt, liens, acquisitions, dividends and other activities.
- Contractual obligations totaled $94.4 million, including $46.5 million of non-cancellable purchase commitments due within one year.
Material changes versus the prior comparable period
- Revenue grew substantially, driven by new customer adoption, fleet expansion, higher consumables sales and demand that management attributed partly to COVID-19.
- Product cost increased 110%, but product cost reductions and greater service revenue improved gross margin materially, although consolidated gross margin remained negative.
- Operating expenses nearly doubled as Outset expanded sales, service, research and development and public-company infrastructure.
- Stock-based compensation increased to $21.4 million from $0.9 million, primarily because IPO completion satisfied performance vesting conditions for certain awards.
- Outset repaid the Perceptive term loan and replaced it with the SVB facility, recording a $1.6 million loss on debt extinguishment.
- Inventory increased to $18.4 million from $4.6 million, partly reflecting advance purchases and anticipated demand.
- Preferred stock converted into common stock upon the IPO; year-end stockholders’ equity was $328.6 million versus a deficit of $372.2 million in 2019.
Guidance, outlook, commentary and risks
- Management expects continued operating losses and significant expenses in the near term. It believes available liquidity and expected product sales will fund operations for at least 12 months from the filing date, although this depends on assumptions that may not prove accurate.
- Management intends to improve gross margins through Tijuana console manufacturing, a second cartridge manufacturing source and lower service costs enabled by the cloud platform and product reliability improvements.
- Management expects sales and marketing and general and administrative expenses to increase in absolute dollars, while declining as a percentage of revenue over the longer term if revenue growth continues.
- COVID-19 increased demand during the second and third quarters of 2020, but management cautioned that pandemic-related demand may not recur and that supply-chain, manufacturing and customer disruptions remain possible.
- The FDA’s Section 522 surveillance order is a material contingency. The FDA approved Outset’s study protocol in March 2021; unfavorable home-use findings could require product, labeling or training changes, additional clearance, recall or withdrawal.
- Outset’s business is concentrated in one principal product and a limited customer base. Three customers accounted for 22%, 19% and 16% of 2020 revenue.
- Key risks include continued losses, inability to achieve sustainable positive gross margins, market acceptance of Tablo, expansion into home dialysis, reimbursement changes, competition from larger manufacturers, supply-chain dependence, product liability, cybersecurity and regulatory compliance.
- The company faces significant customer and supplier concentration, including critical and single-source components. Manufacturing transitions to Mexico may create near-term quality, capacity, labor, currency and regulatory risks.
- Outset submitted a February 2021 application for CMS transitional add-on payment adjustment support for the Tablo system; the filing does not provide a final CMS decision.
Most important facts for investors to verify
- Whether gross margin can become sustainably positive after the Mexico manufacturing transition and planned cartridge second sourcing.
- Whether revenue growth reflects durable Tablo adoption and utilization rather than temporary COVID-19-related demand.
- Progress and outcomes of the FDA Section 522 home-use surveillance study.
- Customer concentration, renewal and expansion trends, including the three customers representing 57% of 2020 revenue.
- Cash burn, restricted cash requirements and the timing of potential additional financing.
- Compliance with SVB loan covenants and the impact of the $46.5 million purchase commitments due within one year.
- CMS reimbursement developments, including the pending TPNIES application and policies affecting home dialysis treatment frequency.
- Supply-chain resilience, product quality and capacity at the Tijuana facilities and other contract manufacturers.
- The impact of $21.4 million of 2020 stock-based compensation and the remaining unrecognized equity compensation expense.
- The filing text does not provide a clear value for the number of Tablo consoles installed or the company’s standalone 2020 EBITDA.