Outset Medical Inc

Previous wording

In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “predict,” “plan,” “expect” or the negative or plural of these words or similar expressions. The forward-looking statements in this report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Such risks and uncertainties include those described throughout this Quarterly Report, including in this discussion as well as in the section titled “Risk Factors” under Part II, Item 1A below and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The forward-looking statements in this Quarterly Report are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and, except as required by law we undertake no obligation to update or revise these statements, whether as a result of any new information, future developments or otherwise. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

Current wording

In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “predict,” “plan,” “expect” or the negative or plural of these words or similar expressions. The forward-looking statements in this report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Such risks and uncertainties include those described throughout this Quarterly Report, including in this discussion as well as in the section titled “Risk Factors” under Part II, Item 1A below and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report. The forward-looking statements in this Quarterly Report are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and, except as required by law we undertake no obligation to update or revise these statements, whether as a result of any new information, future developments or otherwise. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

Previous wording

We generate revenue from the placement of Tablo consoles along with accessories, and shipping and handling charged to customers, which revenue is recognized up-front. We also earn recurring revenue from sales of consumables, including Tablo cartridge, and services, which generates significant total revenue over the life of Tablo console. Our total revenue was $28.2 million and $33.5 million for the three months ended March 31, 2024 and 2023, respectively.

Current wording

We generate revenue from the placement of Tablo consoles along with accessories, and shipping and handling charged to customers, which revenue is recognized up-front. We also earn recurring revenue from sales of consumables, including Tablo cartridges, and services, which generates significant total revenue over the life of Tablo console. Our total revenues were $27.4 million and $36.0 million for the three months ended June 30, 2024 and 2023, respectively, and $55.6 million and $69.5 million for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

We primarily sell our solutions through our direct sales organization, which covers most major metropolitan markets in the United States. Our sales organization is comprised of our capital sales team, responsible for generating new customer demand for Tablo, and our clinical sales team, responsible for driving utilization and fleet expansion of Tablo at existing customer sites. In addition, our field service team provides maintenance services and product support to our customers. Our field sales and service teams represent 49% of our total full-time employees as of March 31, 2024. The same sales organization and field service team drive Tablo penetration in both the acute and home markets. We believe the ability to leverage one team to serve both markets will result in significant productivity and cost optimization as we continue to scale our business.

Current wording

We primarily sell our solutions through our direct sales organization, which covers most major metropolitan markets in the United States. Our sales organization is comprised of our capital sales team, responsible for generating new customer demand for Tablo, and our clinical sales team, responsible for driving utilization and fleet expansion of Tablo at existing customer sites. In addition, our field service team provides maintenance services and product support to our customers. Our field sales and service teams represent 52% of our total full-time employees as of June 30, 2024. The same sales organization and field service team drive Tablo penetration in both the acute and home markets. We believe the ability to leverage one team to serve both markets will result in significant productivity and cost optimization as we continue to scale our business.

Previous wording

We plan to further broaden our installed base by continuing to target national and regional integrated delivery networks and health systems, sub-acute long-term acute care hospitals (LTACHs) and skilled nursing facilities (SNFs). In addition, we focus on driving utilization and fleet expansion with existing customers by providing an exceptional user experience delivered through our commercial team and a steady release of software enhancements that amplify Tablo’s operational reliability and clinical versatility. Our ability to successfully execute on this strategy, and thereby increase our revenue in the acute market, will depend on several factors. These factors include our ability to recover from the adverse impact in the field from the Warning Letter as we resume distribution of TabloCart with Prefiltration, as well as the success of our efforts to further evolve our commercial infrastructure and sales processes to support the growth of our business in the acute care market.

Current wording

We plan to further broaden our installed base by continuing to target national and regional integrated delivery networks and health systems, sub-acute long-term acute care hospitals (LTACHs) and skilled nursing facilities (SNFs). In addition, we focus on driving utilization and fleet expansion with existing customers by providing an exceptional user experience delivered through our commercial team and a steady release of software enhancements that amplify Tablo’s operational reliability and clinical versatility. Our ability to successfully execute on this strategy, and thereby increase our revenue in the acute market, will depend on several factors. These factors include our ability to recover from the adverse impact in the field from the Warning Letter as we resume distribution of TabloCart with Prefiltration, as well as the success of our initiatives to optimize our commercial organization, infrastructure and sales processes to support the growth of our business in the acute care market as we focus more heavily on enterprise selling and transition beyond earlier stage adoption of Tablo.

Previous wording

We believe that a significant growth opportunity exists within the home hemodialysis market. We are partnering with innovative dialysis clinic providers, health systems and other adjacent healthcare providers who are motivated to grow their home hemodialysis population, and who share our vision of creating a seamless and supported transition to the home. We are also investing in market development over the longer term to expand the home hemodialysis market itself. The expansion of the home hemodialysis market and our ability to penetrate this market will be an important factor in driving the future growth of our business. In addition, the success of our efforts to expand within the home market, help grow new home programs and increase our revenue generated from home-based dialysis on the timeline that we anticipate will depend on several factors. These factors include our ability to further evolve our commercial infrastructure and sales processes as we scale our business in the home market.

Current wording

We believe that a significant growth opportunity exists within the home hemodialysis market. We are partnering with innovative dialysis clinic providers, health systems and other adjacent healthcare providers who are motivated to grow their home hemodialysis population, and who share our vision of creating a seamless and supported transition to the home. We are also investing in market development over the longer term to expand the home hemodialysis market itself. The expansion of the home hemodialysis market and our ability to penetrate this market will be an important factor in driving the future growth of our business. In addition, the success of our efforts to expand within the home market, help grow new home programs and increase our revenue generated from home-based dialysis on the timeline that we anticipate will depend on several factors. These factors include the success of our initiatives to optimize and further evolve our commercial organization, infrastructure and sales processes as we scale our business in the home market.

Previous wording

Our ability to expand our gross margins depends on: first, our ability to reduce the cost of Tablo consoles; second, our ability to continue to sell Tablo cartridges, services, and accessories for Tablo consoles; and third, our ability to reduce the cost of service. Over the past three years, we have moved the production of Tablo consoles and a majority of Tablo cartridges in-house to our manufacturing facility in Tijuana, Mexico which we operate in collaboration with TACNA as part of our cost reduction activities. This has helped further our long-term gross margin expansion and supply continuity strategies while reducing the costs of Tablo console production and improving the flexibility of our operations. We will continue our cost reduction activities by using our design, engineering, supply chain and manufacturing capabilities to help further advance and improve the efficiency of our manufacturing processes, lowering the cost of parts and components and lowering our costs of production. Further, we will continue to utilize our cloud-based data system, as well as enhanced product performance, to better support our field service team and drive down service costs per console. In addition, our ability to expand gross margins will depend in part on our ability to control the average selling prices of our products and services, including by selling higher-margin accessories, consumables and services. Our ability to expand gross margins depends on our ability to successfully execute these strategies.

Current wording

Our ability to expand our gross margins depends on: first, our ability to reduce the cost of Tablo consoles; second, our ability to continue to sell Tablo cartridges, services, and accessories for Tablo consoles; and third, our ability to reduce the cost of service. Over the past several years, we have moved the production of Tablo consoles and a majority of Tablo cartridges in-house to our manufacturing facility in Tijuana, Mexico which we operate in collaboration with TACNA as part of our cost reduction activities. This has helped further our long-term gross margin expansion and supply continuity strategies while reducing the costs of Tablo console production and improving the flexibility of our operations. We will continue our cost reduction activities by using our design, engineering, supply chain and manufacturing capabilities to help further advance and improve the efficiency of our manufacturing processes, lowering the cost of parts and components and lowering our costs of production. Further, we will continue to utilize our cloud-based data system, as well as enhanced product performance, to better support our field service team and drive down service costs per console. In addition, our ability to expand gross margins will depend in part on our ability to control the average selling prices of our products and services, including by selling higher-margin accessories, consumables and services. Our ability to expand gross margins depends on our ability to successfully execute these strategies.

Previous wording

Beginning in the third quarter of 2023, we began to observe an increasing number of our existing and prospective customers deferring their decisions to purchase Tablo in an environment of rising interest rates and more cautious capital spending. These deferrals served to elongate our sales cycle and the timing of delivery and installations, which, in turn, contributed to an adverse impact on our bookings and revenues starting in the second half of 2023, and we expect these negative impacts to continue into 2024. Beginning in 2022, our existing and prospective customers faced shortages of skilled nurses and other clinical personnel as well as increased labor costs, combined with economic pressures resulting from general economic and financial market conditions, primarily escalating inflation, tightening hospital operating budgets and increased scrutiny of capital purchase decisions, all of which generally have the effect of lengthening the average sales cycle and elongating the timing of installations. These factors negatively impacted our customer base on pipeline development and installation schedules, which, in turn, negatively impacted our bookings, delayed our shipments and adversely impacted our revenues for 2022 and, to a lesser extent, 2023. We have generally seen some stabilization in these challenging labor market dynamics for healthcare providers during 2023 and thereafter as compared to 2022. Moreover, we believe Tablo offers automation and ease-of-use benefits over traditional machines that can enhance our existing and potential customers’ ability to support their patient populations despite staffing shortages. However, if our customers continue to face prolonged periods of rising interest rates, capital budget constraints, volatility, uncertainty, staffing shortages, rising costs and other financial pressures, whether due to general macroeconomic conditions or otherwise, it could ultimately adversely impact our ability to expand existing customer relationships or attract new customers of Tablo, timely collect amounts due, effectively manage our inventory levels, and have a material adverse effect on our bookings, revenues, results of operations, financial condition, and, ultimately, our future growth and profitability.

Current wording

Beginning in the third quarter of 2023, we began to observe an increasing number of our existing and prospective customers deferring their decisions to purchase Tablo in an environment of rising interest rates and more cautious capital spending. These deferrals served to elongate our sales cycle and the timing of delivery and installations, which, in turn, contributed to an adverse impact on our bookings and revenues starting in the second half of 2023, and we expect these negative impacts to continue through at least the remainder of 2024. Beginning in 2022, our existing and prospective customers faced shortages of skilled nurses and other clinical personnel as well as increased labor costs, combined with economic pressures resulting from general economic and financial market conditions, primarily escalating inflation, tightening hospital operating budgets and increased scrutiny of capital purchase decisions, all of which generally have the effect of lengthening the average sales cycle and elongating the timing of installations. These factors negatively impacted our customer base on pipeline development and installation schedules, which, in turn, negatively impacted our bookings, delayed our shipments and adversely impacted our revenues for 2022 and, to a lesser extent, 2023. We have generally seen some stabilization in these challenging labor market dynamics for healthcare providers during 2023 and thereafter as compared to 2022. Moreover, we believe Tablo offers automation and ease-of-use benefits over traditional machines that can enhance our existing and potential customers’ ability to support their patient populations despite staffing shortages. However, if our customers continue to face prolonged periods of rising interest rates, capital budget constraints, volatility, uncertainty, staffing shortages, cash flow challenges, rising costs and other financial pressures, whether due to general macroeconomic conditions, cybersecurity events or otherwise, it could ultimately adversely impact our ability to expand existing customer relationships or attract new customers of Tablo, timely collect amounts due, effectively manage our inventory levels, and have a material adverse effect on our bookings, revenues, results of operations, financial condition, and, ultimately, our future growth and profitability.

Previous wording

The following table summarizes our results of operations for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table summarizes our results of operations for the three and six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

Comparison of the Three Months Ended March 31, 2024 and 2023

Current wording

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

Previous wording

Product revenue decreased by $7.4 million or 26% for the three months ended March 31, 2024 as compared to the same period in the prior year. This decrease was driven by a $9.7 million decrease in console revenue which was partially offset by a $2.3 million increase in consumable revenue due to the growth in our console installed base.

Current wording

Product revenue decreased by $10.1 million or 34% for the three months ended June 30, 2024 as compared to the same period in the prior year. This decrease was driven by a $12.5 million decrease in console revenue due to fewer consoles being sold in in the current year, which was partially offset by a $2.4 million increase in consumable revenue due to growth in our console installed base.

Previous wording

Service and other revenue increased by $2.1 million or 36% for the three months ended March 31, 2024 as compared to the same period in the prior year. This increase was primarily due to services associated with the growth in our console installed base.

Current wording

Service and other revenue increased for the three and six months ended June 30, 2024 as compared to the same periods in the prior year. The increase was primarily due to services associated with the growth in our console installed base.

Previous wording

Gross profit increased by $1.8 million or 28% for the three months ended March 31, 2024 as compared to the same period in the prior year. Gross margin improved by 10.0 percentage points for the three months ended March 31, 2024, as compared to the same period in the prior year. This improvement in gross profit and gross margin was primarily driven by a higher mix of consumable and service and other revenue, both of which had improved gross margin year over year. The higher consumable gross margin resulted from lower cost per unit and a higher average selling price for consumables. Such improvement was partially offset by a lower average selling price for consoles.

Current wording

Gross profit increased for the three and six months ended June 30, 2024 as compared to the same periods in the prior year. Gross margin improved by 14.3 percentage points for the three months ended June 30, 2024 and 12.1 percentage points for the six months ended June 30, 2024 as compared to the same periods in the prior year. These improvements in gross profit and gross margin were primarily driven by a higher mix of consumable and service and other revenue than consoles in the current year as compared to the prior year. Consumables had a higher gross margin than consoles and had improved gross margin year over year. The higher consumable gross margin resulted from lower cost per unit and a higher average selling price for consumables.

Previous wording

Research and development expenses decreased by $1.2 million or 8% for the three months ended March 31, 2024, as compared to the same period in the prior year. This decrease was primarily due to an overall decrease in compensation-related and stock-based compensation expense, consulting expense, and infrastructure costs resulting from our cost reduction efforts implemented in the fourth quarter of 2023. These decreases were partially offset by the severance and related charges recorded in the current year.

Current wording

Research and development expenses decreased for the three and six months ended June 30, 2024 as compared to the same periods in the prior year. The decrease was primarily due to an overall decrease in compensation-related and stock-based compensation expense, consulting expense, and infrastructure costs resulting from our cost reduction efforts implemented in the fourth quarter of 2023 and the second quarter of 2024.

Previous wording

Sales and marketing expenses decreased by $3.3 million or 14% for the three months ended March 31, 2024 as compared to the same period in the prior year. The decrease was primarily driven by an overall decrease in compensation-related and stock-based compensation expense, travel, consulting and marketing expenses resulting from our cost reduction efforts implemented in the fourth quarter of 2023. These decreases were partially offset by the severance and related charges recorded in the current year and higher freight expenses due to higher volume in consumable sales.

Current wording

Sales and marketing expenses decreased for the three and six months ended June 30, 2024 as compared to the same periods in the prior year. The decrease was primarily driven by an overall decrease in compensation-related and stock-based compensation expense, travel, and consulting expenses resulting from our cost reduction efforts implemented in the fourth quarter of 2023 and the second quarter of 2024. These decreases were partially offset by higher freight expenses due to higher volume in consumable sales.

Previous wording

General and administrative expenses decreased by $0.3 million or 3% for the three months ended March 31, 2024 as compared to the same period in the prior year. This decrease was primarily due to an overall decrease in consulting expenses, infrastructure costs, and compensation-related expense resulting from our cost reduction efforts implemented in the fourth quarter of 2023. Our insurance costs also decreased as compared to the prior year. These decreases were partially offset by an increase in stock-based compensation expense and the severance and related charges recorded in the current year.

Current wording

General and administrative expenses increased for the three and six months ended June 30, 2024 as compared to the same periods in the prior year. The increase was primarily due to $1.8 million of allowance for credit losses recorded in the second quarter of 2024 and an increase in stock-based compensation expense. These increases were partially offset by an overall decrease in consulting expenses and compensation-related expense resulting from our cost reduction efforts implemented in the fourth quarter of 2023 and the second quarter of 2024. Our insurance costs also decreased as compared to the prior year periods.

Previous wording

The increase in interest income and other income, net for the three months ended March 31, 2024 as compared to the same period in the prior year was driven by higher interest rates.

Current wording

The changes in interest income and other income, net for the three and six months ended June 30, 2024 as compared to the same periods in the prior year were driven by the changes in interest rates.

Previous wording

The increase in interest expense for the three months ended March 31, 2024 as compared to the same period in the prior year was due to the increase in interest rate and a higher outstanding balance under the SLR Term Loan Facility in 2024.

Current wording

The increases in interest expense for the three and six months ended June 30, 2024 were primarily due to a higher outstanding balance under the SLR Term Loan Facility in 2024.

Previous wording

As of March 31, 2024, we had cash, cash equivalents, restricted cash and short-term investments of $230.2 million.

Current wording

As of June 30, 2024, we had cash, cash equivalents, restricted cash, and short-term investments of $198.2 million.

Previous wording

We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term while we make investments to support our anticipated growth. We may raise additional capital through the issuance of additional equity financing, debt financings, including through refinancing our existing debt, or other sources. If this financing is not available to us at adequate levels or on acceptable terms, we may need to reevaluate our operating plans. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing (including through our existing debt), we will be subject to an increase in our interest expense which may negatively affect our cash flow. We also are subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. We believe that our existing cash, cash equivalents and short-term investments, cash generated from sales, and proceeds received from the debt financing described in Note 7 of the accompanying condensed financial statements above, will be sufficient to meet our anticipated needs for at least the next 12 months from the issuance date of this Quarterly Report.

Current wording

We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term while we make investments to support our anticipated growth. We may raise additional capital through the issuance of additional equity financing, debt financings, which may require refinancing or amending the terms of our existing debt, or other sources. If this financing is not available to us at adequate levels or on acceptable terms, we may need to further evaluate our operating plans. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing (including through our existing debt), we will be subject to an increase in our interest expense which may negatively affect our cash flow. We also are subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. We believe that our existing cash, cash equivalents and short-term investments, cash generated from sales, and proceeds received from the debt financing described in Note 7 of the accompanying condensed financial statements above, will be sufficient to meet our anticipated needs for at least the next 12 months from the issuance date of this Quarterly Report.

Previous wording

The net cash used in operating activities of $45.9 million for the three months ended March 31, 2024 was due to a net loss of $39.9 million, the amortization of premiums on investments of $1.6 million and a net cash outflow from the change in our operating assets and liabilities of $15.5 million, which were adjusted by stock-based compensation expense of $8.2 million, depreciation and amortization of $1.5 million, non-cash interest expense of $0.6 million, provision for inventories of $0.5 million, and non-cash lease expense of $0.3 million. The net cash outflow from operating assets and liabilities was primarily driven by an increase in inventory, a decrease in accrued compensation and related benefits primarily due to annual cash bonus payouts for 2023, an increase in accounts receivable resulting from the timing of collection, and a decrease in accrued expenses and other current liabilities. The net cash outflow from operating assets and liabilities was partially offset by an increase in deferred revenue and accounts payable.

Current wording

The net cash used in operating activities of $79.2 million for the six months ended June 30, 2024 was due to a net loss of $74.4 million, the amortization of premiums on investments of $2.9 million and a net cash outflow from the change in our operating assets and liabilities of $27.4 million, which were adjusted by stock-based compensation expense of $18.0 million, depreciation and amortization of $2.9 million, allowance for credit losses of $1.8 million, non-cash interest expense of $1.2 million, non-cash lease expense of $0.7 million, and provision for inventories of $0.7 million. The net cash outflow from operating assets and liabilities was primarily driven by an increase in inventories, a decrease in accrued compensation and related benefit, a decrease in accrued expenses and other current liabilities due to timing of vendor payments, an increase in accounts receivable resulting from the timing of collection and a decrease in accrued warranty liability. The net cash outflow from operating assets and liabilities was partially offset by an increase in deferred revenue due to growth in our business and a decrease in prepaid expenses and other assets.

Previous wording

The net cash used in investing activities of $59.0 million for the three months ended March 31, 2024 was due to the purchases of short-term investment securities of $98.7 million and the purchases of property and equipment of $0.4 million, which was partially offset by the maturities of short-term investment securities of $40.0 million.

Current wording

The net cash used in investing activities of $20.1 million for the six months ended June 30, 2024 was due to the purchases of short-term investment securities of $128.4 million and the purchases of property and equipment of $0.5 million, which was partially offset by the maturities of short-term investment securities of $108.8 million.

Previous wording

The net cash provided by financing activities of $68.6 million for the three months ended March 31, 2024 was due to the net proceeds of $66.5 million from borrowings under the SLR Term Loan Facility and the proceeds from employee exercises of stock options and ESPP purchases.

Current wording

The net cash provided by financing activities of $68.7 million for the six months ended June 30, 2024 was due to the net proceeds of $66.5 million from borrowings under the SLR Term Loan Facility and the proceeds from employee exercises of stock options and ESPP purchases.