Outset Medical Inc

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 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.

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 consoles. Our total revenues were $28.7 million and $30.4 million for the three months ended September 30, 2024 and 2023, respectively, and $84.2 million and $99.9 million for the nine months ended September 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 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.

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 50% of our total full-time employees as of September 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

In July 2023, we received a warning letter (the Warning Letter) from the FDA that raised two observations. The first observation asserted that certain content reviewed by the FDA and found on our website promoted CRRT, a modality outside of the current indications for Tablo. The second observation asserted that TabloCart with Prefiltration requires prior 510(k) clearance for marketing authorization. TabloCart with Prefiltration is an accessory to Tablo launched in the third quarter of 2022. We believe the concern raised by the first observation regarding CRRT promotion has been effectively addressed through a thorough review of existing promotional materials and practices. We believe the concern raised by the second observation regarding TabloCart with Prefiltration has also been effectively addressed. Although we evaluated TabloCart with Prefiltration prior to marketing and distributing the product and concluded that no marketing authorization was necessary, we paused distribution of TabloCart with Prefiltration pending the FDA’s review and clearance of a 510(k) application that we submitted in September 2023. In early May 2024, we received 510(k) clearance from the FDA for TabloCart with Prefiltration, and we have resumed distribution of TabloCart with Prefiltration. We believe we have now taken appropriate measures to fully address the matters raised in the Warning Letter.

Current wording

In July 2023, we received a warning letter (the Warning Letter) from the FDA that raised two observations. The first observation asserted that certain content reviewed by the FDA and found on our website promoted continuous renal replacement therapy (CRRT), a modality outside of the current indications for Tablo. The second observation asserted that TabloCart with Prefiltration requires prior 510(k) clearance for marketing authorization. TabloCart with Prefiltration is an accessory to Tablo launched in the third quarter of 2022. We believe the concern raised by the first observation regarding CRRT promotion has been effectively addressed through a thorough review of existing promotional materials and practices. We believe the concern raised by the second observation regarding TabloCart with Prefiltration has also been effectively addressed. Although we evaluated TabloCart with Prefiltration prior to marketing and distributing the product and concluded that no marketing authorization was necessary, we paused distribution of TabloCart with Prefiltration pending the FDA’s review and clearance of a 510(k) application that we submitted in September 2023. In early May 2024, we received 510(k) clearance from the FDA for TabloCart with Prefiltration, and we have resumed distribution of TabloCart with Prefiltration. We believe we have now taken appropriate measures to fully address the matters raised in the Warning Letter.

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 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.

Current wording

Our ability to expand our gross margins depends on: first, our ability to continue to sell Tablo cartridges, services, and accessories for Tablo consoles; second, our ability to reduce the cost of service and third, our ability to reduce the cost of Tablo consoles. Our ability to expand gross margins will also 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. 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, 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. Our ability to expand gross margins depends on our ability to successfully execute these strategies.

Previous wording

Our ability to achieve and sustain profitability depends on several key factors: first, our ability to grow our revenue while expanding gross margins, as discussed above; second, our ability to optimize operating expenses; and third, our ability to optimize working capital. We have undertaken various initiatives designed to improve operational efficiencies, reduce operating expenses to align with anticipated levels of revenue growth and streamline our overall cost structure, including two organizational restructurings implemented in the fourth quarter of 2023 and second quarter of 2024. In connection with steps we are taking to help optimize our commercial organization, in August 2024, we initiated an additional restructuring plan primarily impacting our commercial organization. We are also taking steps to improve our ability to efficiently manage working capital, including inventory. Our ability to transition to profitability will depend on the success of our efforts to optimize spending and working capital, including inventory.

Current wording

Our ability to achieve and sustain profitability depends on several key factors: first, our ability to grow our revenue while expanding gross margins, as discussed above; second, our ability to optimize operating expenses; and third, our ability to optimize working capital. We have undertaken various initiatives designed to improve operational efficiencies, reduce operating expenses to align with anticipated levels of revenue growth and streamline our overall cost structure, including two organizational restructurings implemented in the fourth quarter of 2023 and second quarter of 2024. In connection with steps we are taking to help optimize our commercial organization, in the third quarter of 2024, we completed an additional restructuring primarily impacting our commercial organization. We are also taking steps to improve our ability to efficiently manage working capital, including inventory. Our ability to transition to profitability will depend on the success of our efforts to optimize spending and working capital, including inventory.

Previous wording

In 2022, we launched a pilot clinical and administrative services program designed to help bridge our healthcare provider customers, particularly those challenged by staffing shortages, as they transition from using an outsourced inpatient dialysis provider to offering on-site inpatient dialysis services on their own. In return for a fair market value service fee, we assign members of our own employed nurses on a temporary basis to support participating providers to launch and manage an inpatient dialysis program using Tablo and, as full-time staff is hired, to help train and onboard those nurses. However, our pilot clinical and administrative services program may not be successful in achieving the objectives we intend and anticipate, may fail to meet our customers’ expectations, may not generate sufficient returns to justify our investment, or may result in unanticipated costs, which could harm our reputation and customer relationships, and adversely impact our operating margins and results of operations.

Current wording

In 2022, we launched a pilot clinical and administrative services program designed to help bridge our healthcare provider customers, particularly those challenged by staffing shortages, as they transition from using an outsourced inpatient dialysis provider to offering on-site inpatient dialysis services on their own. In return for a fair market value service fee, we assign members of our own employed nurses on a temporary basis to support participating providers to launch and manage an inpatient dialysis program using

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

Previous 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.

Current wording

Product revenue decreased by $3.2 million or 14% for the three months ended September 30, 2024 as compared to the same period in the prior year. This decrease was driven by a $4.8 million decrease in console revenue due to fewer consoles being sold in the current year, which was partially offset by a $1.6 million increase in consumable revenue due to growth in our console installed base.

Previous wording

Product revenue decreased by $17.4 million, or 31% for the six months ended June 30, 2024 as compared to the same period in the prior year. This decrease was driven by a $22.2 million decrease in console revenue due to fewer consoles being sold in the current year, which was offset by a $4.7 million increase in consumable revenue attributable to growth in our console installed base.

Current wording

Product revenue decreased by $20.7 million, or 26% for the nine months ended September 30, 2024 as compared to the same period in the prior year. This decrease was driven by a $27.0 million decrease in console revenue due to fewer consoles being sold in the current year, which was offset by a $6.3 million increase in consumable revenue attributable to growth in our console installed base.

Previous 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.

Current wording

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

Previous 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.

Current wording

Gross profit increased for the three and nine months ended September 30, 2024 as compared to the same periods in the prior year. Gross margin improved by 10.7 percentage points for the three months ended September 30, 2024 and 11.7 percentage points for the nine months ended September 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 mainly resulted from lower cost per unit as well as a higher average selling price for consumables.

Previous 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.

Current wording

Research and development expenses decreased for the three and nine months ended September 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 in 2024.

Previous 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.

Current wording

Sales and marketing expenses decreased for the three and nine months ended September 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 in 2024. The decreases for the nine months ended September 30, 2024 were partially offset by higher freight expenses due to higher consumable unit sales.

Previous 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.

Current wording

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

Previous 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.

Current wording

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

Previous 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.

Current wording

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

Previous wording

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

Current wording

As of September 30, 2024, we had cash, cash equivalents, restricted cash, and short-term investments of $179.0 million. We are required to comply with certain covenants under the SLR Credit Facility Agreements, including ones relating to financial reporting and the delivery of an unqualified audit opinion, the maintenance of minimum cash or revenue, the incurrence of additional debt, and our ability to make capital expenditures or declare dividends. If we fail to comply with any covenants, payments or other terms of either SLR Credit Facility Agreement, our agent or lender, as applicable, could declare an event of default, which would give it the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. For further details, see Note 7 of the accompanying condensed financial statements above, as well as the section entitled “Risk Factors” under Part II, Item 1A below.

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, 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.

Current wording

While we have taken actions to reduce operating expenses and working capital to align with anticipated revenue growth including implementing restructuring plans to streamline our overall organizational structure and renegotiating commitments with suppliers to reduce inventory, 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 may be subject to an increase in our interest expense which may negatively affect our cash flow.

Previous 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.

Current wording

The net cash used in operating activities of $99.8 million for the nine months ended September 30, 2024 was due to a net loss of $102.3 million, the amortization of premiums on investments of $3.9 million and a net cash outflow from the change in our operating assets and liabilities of $27.8 million, which were adjusted by stock-based compensation expense of $24.4 million, depreciation and amortization of $4.3 million, non-cash interest expense of $1.9 million, allowance for credit losses of $1.8 million, non-cash lease expense of $1.1 million, and provision for inventories of $0.6 million. The net cash outflow from operating assets and liabilities was primarily driven by an increase in inventories, decreases in accrued expenses and other current liabilities and accounts payable due to timing of vendor payments, a decrease in accrued compensation and related benefit, an increase in accounts receivable resulting from the timing of collection and decreases in accrued warranty liability and operating lease liabilities. The net cash outflow from operating assets and liabilities was partially offset by a decrease in prepaid expenses and other assets and an increase in deferred revenue due to growth in our business.

Previous 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.

Current wording

The net cash used in investing activities of $4.2 million for the nine months ended September 30, 2024 was due to the purchases of short-term investment securities of $150.5 million and the purchases of property and equipment of $0.9 million, which was partially offset by the maturities of short-term investment securities of $147.1 million.

Previous 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.

Current wording

The net cash provided by financing activities of $68.8 million for the nine months ended September 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.