Outset Medical, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Outset Medical is a medical technology company developing and commercializing the Tablo Hemodialysis System for acute-care, chronic-care and home dialysis settings. Tablo integrates water purification, on-demand dialysate production, connectivity and treatment documentation. This unaudited quarterly report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $22.9 million | $7.2 million | Up 219% |
| Product revenue | $18.2 million | $5.9 million | Up 207% |
| Service and other revenue | $4.7 million | $1.3 million | Up 272% |
| Gross profit | $0.3 million | $(3.6) million | Improved $3.9 million |
| Gross margin | 1.3% | (49.6)% | Improved 50.9 percentage points |
| Operating expenses | $30.0 million | $16.6 million | Up 80% |
| Loss from operations | $(29.7) million | $(20.2) million | Loss increased |
| Net loss | $(30.0) million | $(20.7) million | Loss increased $9.4 million |
| Net loss per share | $(0.70) | Q1 2020 reported positive EPS due to preferred-stock accounting effects | Not directly comparable |
| Cash used in operating activities | $(38.6) million | $(24.9) million | Outflow increased |
Revenue growth reflected new Tablo customer adoption, fleet expansion, higher installed-base utilization and increased service activity. Console revenue was $14.8 million and consumables revenue was $3.4 million. Gross-margin improvement was driven by higher-margin product and service sales, partially offset by increased product volume costs and manufacturing overhead.
Operating expenses increased across research and development, sales and marketing, and general and administrative functions. Stock-based compensation was $5.9 million in Q1 2021 versus $0.6 million in Q1 2020, including $4.2 million related to options whose performance condition was satisfied following the 2020 IPO.
Liquidity, cash flow and debt
- At March 31, 2021, cash and cash equivalents were $251.8 million, short-term investments were $25.7 million and restricted cash was $33.3 million. Total cash, cash equivalents, short-term investments and restricted cash were $310.8 million.
- Total assets were $379.8 million and the accumulated deficit was $524.1 million.
- Operating cash use was $38.6 million, driven by the net loss, inventory purchases, higher accounts receivable and payment of annual employee bonuses.
- Investing cash use was $6.8 million, including $25.8 million of short-term investment purchases and $0.9 million of capital expenditures.
- Financing cash inflow was $2.2 million from employee stock option exercises and employee stock purchase plan purchases.
- The company had a $30.0 million SVB term loan, reported net of a $0.3 million debt discount. The loan matures November 1, 2025, bears interest at the greater of 0.50% above the prime rate or 3.75%, and requires interest-only payments until June 2023. The loan is secured by substantially all company assets and requires restricted cash at least equal to the outstanding principal.
Management stated that existing cash, cash equivalents, short-term investments and expected product and service revenue would be sufficient to meet anticipated needs for at least the next 12 months. The company nevertheless expects significant expenses and operating losses in the near term.
Material changes versus the prior comparable period
- Revenue increased $15.7 million, primarily from a $9.7 million increase in console revenue, a $2.6 million increase in consumables revenue and a $3.4 million increase in service and other revenue.
- Gross margin improved from negative 49.6% to positive 1.3%, but remained near breakeven.
- Research and development expense increased 30% to $7.6 million; sales and marketing increased 81% to $13.1 million; and general and administrative expense increased 162% to $9.2 million.
- Net loss increased to $30.0 million from $20.7 million, and operating cash use increased to $38.6 million from $24.9 million.
- Cash and cash equivalents declined from $295.0 million at December 31, 2020 to $251.8 million at March 31, 2021, while short-term investments increased from $19.9 million to $25.7 million.
- Inventory increased to $24.6 million from $18.4 million, partly reflecting advance purchases to support anticipated demand and mitigate potential supply-chain disruptions.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management expects continued investment in commercial expansion, research and development, manufacturing capacity and home-dialysis infrastructure, with operating losses expected in the near term.
Management is pursuing gross-margin expansion through insourcing console manufacturing, qualifying a second cartridge manufacturer and using Tablo’s cloud-based data system and product improvements to reduce service costs. The company reported 33 capital sales team members, 57 clinical sales team members and 82 field-service team members as of March 31, 2021.
Management believes COVID-19 increased Tablo demand during 2020 but does not expect significant future revenue driven solely by the pandemic. COVID-19 remains a risk because supplier disruptions could increase lead times and component costs, reduce allocations or require alternative sourcing. Other key risks include dependence on third-party and single-source suppliers, manufacturing execution, demand forecasting, adoption of home dialysis, regulatory requirements, ongoing losses, cash burn, potential future capital needs and dilution.
On April 13, 2021, after quarter-end, the company completed a follow-on offering of approximately 2.946 million shares at $53.50 per share and received approximately $149.7 million of net proceeds before expenses. The company reported no material legal proceedings, no material changes to previously disclosed contractual obligations and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth and installed-base utilization continue after COVID-19-related demand benefits moderate.
- The pace and sustainability of gross-margin improvement from the company’s manufacturing and sourcing initiatives.
- Operating cash burn, inventory growth and the period over which available liquidity will fund operations.
- Progress in expanding Tablo adoption in acute-care, chronic-care and home settings.
- Exposure to single-source suppliers, contract manufacturers, component costs and supply-chain interruptions.
- The effect of stock-based compensation, equity issuance and the April 2021 offering on future share dilution.
- Compliance with the SVB loan’s restricted-cash requirement, covenants and future principal-payment schedule.