TRANSMEDICS GROUP, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onMarch 11, 2021 ("2020 Form 10-K"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Item 1A. Risk Factors" section of this Quarterly Report on Form 10-Q and the "Item 1A. Risk Factors" section of our 2020 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a commercial-stage medical technology company transforming organ transplant therapy for end-stage organ failure patients across multiple disease states. We developed the OCS to replace a decades-old standard of care that we believe is significantly limiting access to life-saving transplant therapy for hundreds of thousands of patients worldwide. Our innovative OCS technology replicates many aspects of the organ's natural living and functioning environment outside of the human body. As such, the OCS represents a paradigm shift that transforms organ preservation for transplantation from a static state to a dynamic environment that enables new capabilities, including organ optimization and assessment. We believe our substantial body of clinical evidence has demonstrated the potential for the OCS to significantly increase the number of organ transplants and improve post-transplant outcomes. We developed the OCS to comprehensively address the major limitations of cold storage. The OCS is a portable organ perfusion, optimization and monitoring system that utilizes our proprietary and customized technology to replicate near-physiologic conditions for donor organs outside of the human body. We designed the OCS technology platform to perfuse donor organs with warm, oxygenated, nutrient-enriched blood, while maintaining the organs in a living, functioning state; the lung is breathing, the heart is beating and the liver is producing bile. Because the OCS significantly reduces injurious ischemic time on donor organs as compared to cold storage and enables the optimization and assessment of donor organs, it has demonstrated improved clinical outcomes relative to cold storage and offers the potential to significantly improve donor organ utilization. We designed the OCS to be a platform that allows us to leverage core technologies across products for multiple organs. To date, we have developed three OCS products, one for each of lung, heart and liver transplantations, making the OCS the only multi-organ technology platform. We have commercialized the OCS Lung and OCS Heart outside ofthe United States . We received our first Pre-Market Approval ("PMA") from theFood and Drug Administration (the "FDA") inMarch 2018 for the use inthe United States of the OCS Lung for donor lungs currently utilized for transplantation and a PMA from the FDA inMay 2019 for the use inthe United States of the OCS Lung for donor lungs currently unutilized for transplantation. InSeptember 2021 , we received a PMA from the FDA for the use inthe United States of the OCS Heart for donors after brain death indication and a PMA from the FDA for the use inthe United States of the OCS Liver for use with organs from donors after brain death and after circulatory death. Since our inception, we have focused substantially all of our resources on designing, developing and building our proprietary OCS technology platform and organ-specific OCS products; obtaining clinical evidence for the safety and effectiveness of our OCS products through clinical trials; securing regulatory approval; organizing and staffing our company; planning our business; raising capital; commercializing our products; developing our market and distribution chain and providing general and administrative support for these operations. To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements, proceeds from the sale of common stock in our initial public offering ("IPO"), the sale of our common stock in follow-on equity offerings, and revenue from clinical trials and commercial sales of our OCS products. Since our inception, we have incurred significant operating losses. Our ability to generate net revenue sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated net revenue of$20.6 million and incurred a net loss of$31.5 million for the nine months endedSeptember 30, 2021 . We generated net revenue of$25.6 million and incurred a net loss of$28.7 million for the year endedDecember 31, 2020 . As ofSeptember 30, 2021 , we had an accumulated deficit of$429.8 million . We expect to continue to incur net losses for the foreseeable future as we focus on growing commercial sales of our products in boththe United States and select non-U.S. markets, including growing our sales and clinical adoption team, which will pursue increasing commercial sales and clinical adoption of our OCS products; scaling our manufacturing operations; building our commercial operations; continuing research, development and clinical trial efforts; seeking regulatory clearance for new products and product enhancements, including new indications, in boththe United States and select non-U.S. markets; and operating as a public company. As a result, we will need substantial additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research, development and clinical trials expenses. 21 -------------------------------------------------------------------------------- Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Until such time, if ever, as we can generate substantial net revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings, debt financings and strategic alliances. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations. We believe that our cash and cash equivalents and marketable securities will be sufficient for us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "-Liquidity and Capital Resources". COVID-19 The impact of the COVID-19 pandemic has been and may continue to be extensive in many aspects of society, which has resulted in and may continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. Impacts to our business as a result of COVID-19 include: the temporary disruption of transplant procedures at many of the organ transplant centers who purchase OCS products; customer delays or reductions in customer capital expenditures and operating budgets and the related impact on our product sales; disruptions to our manufacturing operations and supply chain caused by facility closures, reductions in operating hours, staggered shifts and other social distancing efforts; labor shortages; decreased productivity and unavailability of materials or components; restrictions on or delays of our clinical trials and studies; delays of reviews and approvals by the FDA and other health authorities; limitations on our employees' and customers' ability to travel; and delays in product installations, trainings or shipments to and from affected countries and withinthe United States . In addition, our sales and clinical adoption team was restricted in visiting many transplant centers in person betweenApril 2020 andSeptember 2020 . In response to the pandemic, healthcare providers have, and may need to further, reallocate resources, such as physicians, staff, hospital beds and intensive care unit facilities, and these actions significantly delay the provision of other medical care such as organ transplantation and reduce the number of transplant procedures that are performed, which has a negative impact on our revenue and clinical trial activities. InApril 2020 , we announced several steps to respond to the COVID-19 pandemic intended to protect the health and safety of our employees, to establish a process to support the continuous supply of our OCS products at transplant centers globally and to maintain financial flexibility. These actions included transitioning most employees to a remote work environment, except for those who are deemed essential to product supply, and reducing near-term expenses, such as reducing non-essential discretionary expenses and deferring a portion of executive and employee compensation fromApril 2020 throughAugust 31, 2020 . After seeing recovery in transplant volumes in the second quarter of 2021, the Delta variant of the virus that causes COVID-19 has had a negative impact on overall transplant volumes in the third quarter of 2021 as compared to the previous quarter, with lung transplants impacted more heavily than heart and liver transplants. Therefore, we expect the negative impact on OCS product sales due to the COVID-19 pandemic to continue through 2021 and into 2022. In addition, while the number of transplant procedures performed declined during the COVID-19 pandemic, organ transplantations are non-elective, life-saving procedures and we believe that the need for these procedures has persisted and will continue to persist as demonstrated by procedure recovery. We continue to monitor developments regarding the COVID-19 pandemic and its impact on our business, financial condition, results of operations and prospects. The extent of the future impact on our operations and financial condition is difficult to predict and will depend on the length and severity of the pandemic, its consequences, and containment and vaccination efforts. In particular, the speed of the continued spread of COVID-19 globally, and the magnitude, duration and frequency of interventions to contain the spread of the virus, such as government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, mandatory shutdowns for non-essential businesses, requirements regarding social distancing, and other public health safety measures, will determine the impact of the pandemic on our business. While vaccination efforts are ongoing inthe United States , it is not yet fully known how the availability and administration of vaccines will impact the ongoing COVID-19 pandemic, including with respect to vaccination rates, the duration of the efficacy of the vaccines and their effectiveness against the Delta variant or any other variants as new strains of the virus evolve. . 22
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Recent Developments OnSeptember 3, 2021 we received a PMA from the FDA for the use inthe United States of the OCS Heart for use with organs from donors after brain death. The PMA for the OCS Heart was supported by our clinical evidence from the OCS Heart EXPAND Trial, the associated Continued Access Protocol results, as well as the clinical evidence from our OCS Heart PROCEED II Trial. OnSeptember 28, 2021 we received a PMA from the FDA for the use inthe United States of the OCS Liver for use with organs from donors after brain death and after circulatory death. The PMA for the OCS Liver was supported by our clinical evidence from the OCS Liver PROTECT Trial.
Components of Our Results of Operations
Net Revenue
We generate revenue primarily from sales of our single-use, organ-specific disposable sets (i.e., our organ-specific OCS Perfusion Sets sold together with our organ-specific OCS Solutions) used on our organ-specific OCS Consoles, each being a component of our OCS products. To a lesser extent, we also generate revenue from the sale of OCS Consoles to customers and from the implied rental of OCS Consoles loaned to customers at no charge. For each new transplant procedure, customers purchase an additional OCS disposable set for use on the customer's existing organ-specific OCS Console. All of our revenue has been generated by sales to transplant centers inthe United States ,Europe andAsia-Pacific , or, in some cases, to distributors selling to transplant centers in select countries. Substantially all of our customer contracts have multiple-performance obligations that contain promises consisting of OCS Perfusion Sets and OCS Solutions. In some of those contracts, the promises also include an OCS Console, whether sold or loaned to the customer. Some of our revenue has been generated from products sold in conjunction with the clinical trials conducted for our OCS products, under arrangements referred to as customer clinical trial agreements. Under most of these customer clinical trial agreements, we place an organ-specific OCS Console at the customer site for its use free of charge for the duration of the clinical trial, and the customer separately purchases from us the OCS disposable sets used in each transplant procedure during the clinical trial. When we loan the OCS Console to the customer, we retain title to the console at all times and do not require minimum purchase commitments from the customer related to any OCS products. In such cases, we invoice the customer for OCS disposable sets based on customer orders received for each new transplant procedure and the prices set forth in the customer agreement. Over time, we typically recover the cost of the loaned OCS Console through the customer's continued purchasing and use of additional OCS disposable sets. For these reasons, we have determined that part of the selling price for the disposable set is an implied rental payment for use of the OCS Console. We continue to loan OCS Consoles to some of our customers during commercialization of our OCS products. Because all promises of a customer contract are delivered and recognized as revenue at the same time and because revenue allocated to promises other than OCS disposable sets, such as implied rental income and service revenue, is insignificant, all performance obligations from customer contracts are classified as a single category of revenue in our consolidated statements of operations. Under some of our customer clinical trial agreements, we make payments to our customers for reimbursements of clinical trial materials and for specified clinical documentation related to their use of our OCS products. Because some of these payments do not provide us with a separately identifiable benefit, we record such payments as a reduction of revenue from the customer, resulting in our net revenue presentation. We recorded reimbursable clinical trial costs as a reduction of revenue of less than$0.1 million and$1.1 million for the three and nine months endedSeptember 30, 2021 , respectively, and$0.9 million and$2.1 million for the three and nine months endedSeptember 30, 2020 . InMarch 2018 , we received our first FDA PMA for the OCS Lung, and we began commercial sales of this product inthe United States during the fourth quarter of 2018. InMay 2019 , we received a FDA PMA for the OCS Lung for additional clinical indications. Therefore, our net revenue inthe United States for the OCS Lung is now derived from commercial sales and consists of sales of OCS disposable sets and, to a much lesser extent, sales of OCS Lung consoles. For the nine months endedSeptember 30, 2021 , our net revenue inthe United States for the OCS Heart was derived from sales for use in clinical trials. OnSeptember 3, 2021 , we received an FDA PMA for the use inthe United States of the OCS Heart for use with organs from donors after brain death. We expect to begin commercial sales of this product in the fourth quarter of 2021, and that our net revenue inthe United States for the OCS Heart will be derived primarily from commercial sales and will consist of sales of OCS disposable sets and, to a much lesser extent, sales of OCS Heart consoles. For the nine months endedSeptember 30, 2021 , our net revenue for the OCS Liver was derived from sales for use in clinical trials. OnSeptember 28, 2021 , we received an FDA PMA for the use inthe United States of the OCS Liver for use with organs from 23
-------------------------------------------------------------------------------- donors after brain death and after circulatory death. We expect to begin commercial sales of this product in the fourth quarter of 2021, and that our net revenue inthe United States for the OCS Liver will be derived primarily from commercial sales and will consist of sales of OCS disposable sets and, to a much lesser extent, sales of OCS Liver consoles. Our net revenue inthe United States for the OCS Heart and OCS Liver has historically fluctuated from period to period as a result of the timing of patient enrollment in our clinical trials and has been higher due to the sale of OCS disposable sets for use during these clinical trials, as compared to periods during which our clinical trials were not actively enrolling. ThroughSeptember 30, 2021 , all of our sales outside ofthe United States have been commercial sales (unrelated to any clinical trials) and our net revenue has been generated primarily from sales of OCS disposable sets and, to a much lesser extent, sales of OCS Consoles. Commercial sales of OCS disposable sets generally have a higher average selling price than clinical trial sales of OCS disposable sets. We expect that our net revenue will increase over the long term as a result of receiving FDA PMAs for the OCS Lung inthe United States inMarch 2018 andMay 2019 and for the OCS Heart and OCS Liver inthe United States inSeptember 2021 . We also expect that our net revenue will increase over the long term as a result of anticipated growth in non-U.S. sales if national healthcare systems begin to reimburse transplant centers for the use of the OCS, if transplant centers utilize the OCS in more transplant cases, and if more transplant centers adopt the OCS in their programs. We expect that net revenue will continue to be negatively impacted in 2021 a result of the COVID-19 pandemic.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists primarily of costs of components of our OCS Consoles and disposable sets, costs of direct materials, labor and the manufacturing overhead that directly supports production, and costs related to the depreciation of OCS Consoles loaned to customers. When we loan an OCS Console to a customer for its use free of charge, we capitalize as property and equipment the cost of our OCS Console and depreciate these assets over the five-year estimated useful life of the console. Included in the cost of OCS disposable sets are the costs of our OCS Lung, OCS Heart and OCS Liver Solutions. We expect that cost of revenue will increase or decrease in absolute dollars primarily as, and to the extent that, our net revenue increases or decreases. Gross profit is the amount by which our net revenue exceeds our cost of revenue in each reporting period. We calculate gross margin as gross profit divided by net revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of components and direct materials, manufacturing overhead costs, direct labor, the selling price of our OCS products and fluctuations in amounts paid by us to customers related to reimbursements of their clinical trial expenses. We expect that cost of revenue as a percentage of net revenue will decrease and gross margin and gross profit will increase over the long term as our sales and production volumes increase and our cost per unit of our OCS disposable sets decreases due to economies of scale. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and increase our gross margin. As utilization by customers of our OCS products increases, we expect that a greater number of OCS disposable sets will be used per year on the same OCS Console, thereby driving overall gross margin improvement. Because we expect that the number of OCS disposable sets sold over time will be significantly greater than the number of OCS Consoles sold or loaned to customers over that same period, we expect that our gross margin improvement will not be significantly affected by the number of OCS Consoles that we sell or loan to customers. While we expect gross margin to increase over the long term, it will likely fluctuate from quarter to quarter.
Operating Expenses
Research, Development and Clinical Trials Expenses
Research, development and clinical trials expenses consist primarily of costs incurred for our research activities, product development, hardware and software engineering, clinical trials to develop clinical evidence of our products' safety and effectiveness, regulatory expenses, testing, consultant services and other costs associated with our OCS technology platform and OCS products, which include:
• employee-related expenses, including salaries, related benefits and
stock-based compensation expense for employees engaged in research,
hardware and software development, regulatory and clinical trial functions;
• expenses incurred in connection with the clinical trials of our products,
including under agreements with third parties, such as consultants,
contractors and data management organizations;
• the cost of maintaining and improving our product designs, including the
testing of materials and parts used in our products;
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• laboratory supplies and research materials; and
• facilities, depreciation and other expenses, which include direct and
allocated expenses for rent and maintenance of facilities and insurance.
We expense research, development and clinical trials costs as incurred. In the future, we expect that research, development and clinical trials expenses will increase over the long term due to ongoing product development and approval efforts. We expect to continue to perform activities related to obtaining additional regulatory approvals for expanded indications inthe United States and other served geographies, as well as developing the next generation of our OCS technology platform.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in our sales and clinical adoption team and personnel in executive, marketing, finance and administrative functions. Selling, general and administrative expenses also include direct and allocated facility-related costs, promotional activities, marketing, conferences and trade shows as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We expect to continue to increase headcount in our sales and clinical adoption team and increase marketing efforts as we continue to grow commercial sales of our OCS products in bothU.S. and select non-U.S. markets. We expect that our selling, general and administrative expenses will increase over the long term as we increase our headcount to support the expected continued sales growth of our OCS products. We also anticipate that we will continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with our continued operation as a public company.
Other Income (Expense)
Interest Expense
Interest expense consists of interest expense associated with outstanding borrowings under our loan agreement as well as the amortization of debt discount associated with such agreement.
Other Income (Expense), Net
Other income (expense), net includes interest income, realized and unrealized foreign currency transaction gains and losses and other non-operating income and expense items unrelated to our core operations. Interest income consists of interest earned on our invested cash balances. Foreign currency transaction gains and losses result from intercompany transactions as well as transactions with customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded.
Provision for Income Taxes
Since our inception, we have not recorded anyU.S. federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated inthe United States , as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. In reporting periods subsequent to 2016, we have recorded provisions for foreign income taxes of an insignificant amount related to the operations of one of our foreign subsidiaries. As ofDecember 31, 2020 , we hadU.S. federal and state net operating loss carryforwards of$322.0 million and$252.7 million , respectively, which may be available to offset future taxable income and begin to expire in 2021 and 2030, respectively. Our federal net operating losses include$108.0 million , which can be carried forward indefinitely. As ofDecember 31, 2020 , we also hadU.S. federal and state research and development tax credit carryforwards of$7.6 million and$5.0 million , respectively, which may be available to offset future tax liabilities and begin to expire in 2021 and 2024, respectively. As ofDecember 31, 2020 , we had no foreign net operating loss carryforwards. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. 25
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Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Net revenue $ 5,370 $ 7,091 $ (1,721 )
Cost of revenue 1,597 2,053 (456 )
Gross profit 3,773 5,038 (1,265 )
Operating expenses:
Research, development and clinical trials 5,163 4,155 1,008
Selling, general and administrative 10,335 5,493 4,842
Total operating expenses 15,498 9,648 5,850
Loss from operations (11,725 ) (4,610 ) (7,115 )
Other income (expense):
Interest expense (979 ) (971 ) (8 )
Other income (expense), net (249 ) 499 (748 )
Total other expense, net (1,228 ) (472 ) (756 )
Loss before income taxes (12,953 ) (5,082 ) (7,871 )
Provision for income taxes (9 ) (6 ) (3 )
Net loss $ (12,962 ) $ (5,088 ) $ (7,874 )
Net Revenue
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Net revenue by geography:
United States $ 3,112 $ 5,920 $ (2,808 )
Outside the U.S. 2,258 1,171 1,087
Total net revenue $ 5,370 $ 7,091 $ (1,721 )
Net revenue by OCS product:
OCS Lung net revenue $ 2,522 $ 659 $ 1,863
OCS Heart net revenue 2,848 5,427 (2,579 )
OCS Liver net revenue - 1,005 (1,005 )
Total net revenue $ 5,370 $ 7,091 $ (1,721 )
Net revenue from customers in the United States was $3.1 million in the three
months ended September 30, 2021 and decreased by $2.8 million compared to the
three months ended September 30, 2020 , primarily due to lower sales volumes of
our OCS Heart and OCS Liver disposable sets, partially offset by increased sales
of our OCS Lung disposable sets. Net revenue from sales of OCS Lung disposable
sets in the United States increased from $0.6 million in the three months ended
September 30, 2020 to $2.3 million in the three months ended September 30, 2021 .
The increase was due primarily to higher sales volume of OCS Lung disposable
sets as the comparable three months ended September 30, 2020 were highly
impacted by the COVID-19 pandemic. Net revenue from OCS Heart disposable sets in
the United States decreased by $3.5 million . The decrease in net revenue from
OCS Heart disposable sets is attributed to lower sales volumes of OCS Heart
disposable sets arising from the conclusion of enrollment in our OCS Heart DCD
CAP Trial in the United States in the second quarter of 2021. We did not have
revenue from OCS Liver disposable sets during the three months ended September
30, 2021 as we had completed enrollment in our OCS Liver PROTECT CAP Trial in
the first quarter of 2021. The FDA approved the OCS Heart and OCS Liver products
for commercial sale in September 2021 and, as a result, revenue from OCS Heart
and OCS Liver in the future will be earned from commercial sales.
Net revenue from customers outside the United States was $2.3 million in the
three months ended September 30, 2021 compared to $1.2 million in the three
months ended September 30, 2020 . The increase in net revenue from customers
outside the United States was primarily due to higher sales volumes of OCS Heart
and OCS Lung disposable sets. Net revenue from sales of OCS Lung disposable sets
outside the United States increased by $0.2 million from the three months ended
September 30, 2020 compared
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to the three months ended
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue decreased by$0.5 million in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Gross profit decreased by$1.3 million in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The declines in cost of revenue and gross profit were primarily attributable to lower revenue. Gross margin was 70% and 71% for the three months endedSeptember 30, 2021 and 2020, respectively. Operating Expenses
Research, Development and Clinical Trials Expenses
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Personnel related (including stock-based
compensation
expense) $ 2,141 $ 1,913 $ 228
Clinical trials costs 738 866 (128 )
Consulting and third-party testing 720 239 481
Laboratory supplies and research materials 593 665 (72 )
Other 971 472 499
Total research, development and clinical
trials expenses $ 5,163 $
4,155
Total research, development and clinical trials expenses increased by$1.0 million from$4.2 million in the three months endedSeptember 30, 2020 to$5.2 million in the three months endedSeptember 30, 2021 . Personnel related costs, consulting and third-party testing and other costs increased by$0.2 million ,$0.5 million and$0.5 million respectively, due primarily to new product development activity and stock compensation. Clinical trial costs and laboratory supplies and research materials costs each decreased by$0.1 million due to a reduction in activity in our OCS Heart DCD CAP Trial and our OCS Liver PROTECT CAP Trial.
Selling, General and Administrative Expenses
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Personnel related (including stock-based
compensation
expense) $ 5,607 $ 3,253 $ 2,354
Professional and consultant fees 1,638 947 691
Tradeshows and conferences 246 79 167
Other 2,844 1,214 1,630
Total selling, general and administrative
expenses $ 10,335 $
5,493
Total selling, general and administrative expenses increased by$4.8 million from$5.5 million in the three months endedSeptember 30, 2020 to$10.3 million in the three months endedSeptember 30, 2021 due to an increase in personnel related costs, professional and consultant fees, tradeshows and conferences and other costs. Personnel related costs increased primarily due to the continued expansion of our commercial team to support commercial sales of our OCS Lung, OCS Heart and OCS Liver products inthe United States . Stock-based compensation expense also increased by$1.1 million due primarily to additional grants to new and existing employees and an increase in the respective grant date fair values due to the increased market price of our stock. The increase in professional and consultant fees and other costs is a result of additional public company compliance costs associated with becoming a Large Accelerated Filer. The increase in tradeshows and conferences is a result of an increase in activities as restrictions implemented in response to the COVID-19 pandemic were eased. Other Income (Expense) Interest Expense
Interest expense was
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--------------------------------------------------------------------------------Other Income (Expense), Net
Other income (expense), net for the three months endedSeptember 30, 2021 and 2020 included interest income of less than$0.1 million and$0.1 million , respectively, resulting from interest earned on invested cash balances, and$0.3 million of realized and unrealized foreign currency transactions losses and$0.4 million of realized and unrealized foreign currency transaction gains, respectively.
Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Net revenue $ 20,594 $ 18,012 $ 2,582
Cost of revenue 6,421 6,205 216
Gross profit 14,173 11,807 2,366
Operating expenses:
Research, development and clinical trials 15,990 14,283 1,707
Selling, general and administrative 26,283 18,012 8,271
Total operating expenses 42,273 32,295 9,978
Loss from operations (28,100 ) (20,488 ) (7,612 )
Other income (expense):
Interest expense (2,896 ) (3,014 ) 118
Other income (expense), net (532 ) 1,087 (1,619 )
Total other expense, net (3,428 ) (1,927 ) (1,501 )
Loss before income taxes (31,528 ) (22,415 ) (9,113 )
Provision for income taxes (19 ) (22 ) 3
Net loss $ (31,547 ) $ (22,437 ) $ (9,110 )
Net Revenue
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Net revenue by geography:
United States $ 14,627 $ 13,568 $ 1,059
Outside the U.S. 5,967 4,444 1,523
Total net revenue $ 20,594 $ 18,012 $ 2,582
Net revenue by OCS product:
OCS Lung net revenue $ 8,524 $ 3,102 $ 5,422
OCS Heart net revenue 11,628 11,778 (150 )
OCS Liver net revenue 442 3,132 (2,690 )
Total net revenue $ 20,594 $ 18,012 $ 2,582
Net revenue from customers in the United States was $14.6 million in the nine
months ended September 30, 2021 and increased by $1.1 million compared to the
nine months ended September 30, 2020 , primarily due to higher sales volumes of
our OCS Lung disposable sets, partially offset by lower sales volumes of the OCS
Heart and OCS Liver disposable sets. Net revenue from sales of OCS Lung
disposable sets in the United States increased from $2.9 million in the nine
months ended September 30, 2020 to $8.1 million in the nine months ended
September 30, 2021 . The increase was due primarily to higher sales volume of OCS
Lung disposable sets as the comparable nine months ended September 30, 2020 were
highly impacted by the COVID-19 pandemic. Net revenue from OCS Heart disposable
sets sold to customers for use in our ongoing clinical trials in the United
States decreased by $1.4 million , while net revenue from OCS Liver disposable
sets sold in the United States decreased by $2.7 million . The decrease in net
revenue from OCS Heart disposable sets is attributed to lower sales volumes of
OCS Heart disposable sets sold in the OCS Heart DCD CAP Trial which completed
enrollment during the second quarter of 2021. The lower sales volume of OCS
Liver disposable sets was primarily a result of the completion of enrollment of
approved patients in our OCS Liver PROTECT CAP Trial early in the first quarter
of 2021.
Net revenue from customers outside the United States was $6.0 million in the
nine months ended September 30, 2021 compared to $4.4 million in the nine months
ended September 30, 2020 . The increase in net revenue from customers outside the
United States
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-------------------------------------------------------------------------------- was primarily due to higher sales volumes of OCS Lung and OCS Heart disposable sets. Net revenue from sales of OCS Lung disposable sets outsidethe United States increased by$0.3 million and net revenue from OCS Heart disposable sets increased by$1.3 million from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 .
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue increased by$0.2 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Gross profit increased by$2.4 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Gross margin was 69% and 66% for the nine months endedSeptember 30, 2021 and 2020, respectively. Gross margin increased primarily as a result of increased sales volume, higher margin OCS disposable sets sold and improvements in the efficiency of the production process.
Operating Expenses
Research, Development and Clinical Trials Expenses
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Personnel related (including
stock-based compensation
expense) $ 6,357 $ 6,097 $ 260
Clinical trials costs 2,786 3,580 (794 )
Consulting and third-party testing 2,091 1,177 914
Laboratory supplies and research
materials 2,091 1,510 581
Other 2,665 1,919 746
Total research, development and
clinical trials expenses $ 15,990 $
14,283
Total research, development and clinical trials expenses increased by$1.7 million from$14.3 million in the nine months endedSeptember 30, 2020 to$16.0 million in the nine months endedSeptember 30, 2021 . Clinical trials costs decreased by$0.8 million due to the completion of enrollment in the OCS Heart DCD CAP Trial and completion of our OCS Liver PROTECT Trial. Consulting and third-party testing costs increased by$0.9 million due primarily to increased regulatory activity, including costs related to preparation for both FDA advisory committee panels in April andJuly 2021 for the OCS Heart and OCS Liver, respectively. The increase in laboratory supplies and research materials costs of$0.6 million and other costs of$0.7 million is due primarily to increased product development activities.
Selling, General and Administrative Expenses
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Personnel related (including
stock-based compensation
expense) $ 14,379 $ 9,382 $ 4,997
Professional and consultant fees 4,908 4,145 763
Tradeshows and conferences 1,051 566 485
Other 5,945 3,919 2,026
Total selling, general and
administrative expenses $ 26,283 $ 18,012 $ 8,271
Total selling, general and administrative expenses increased by $8.3 million
from $18.0 million in the nine months ended September 30, 2020 to $26.3 million
in the nine months ended September 30, 2021 due to increases in personnel
related costs, professional and consultant fees, tradeshows and conferences and
other expenses. Personnel related costs increased by $5.0 million as a result of
the continued expansion of our commercial team to support commercial sales of
our OCS Lung, OCS Heart and OCS Liver products in the United States . Stock-based
compensation expense also increased by $2.6 million due primarily to additional
grants to new and existing employees and an increase in the respective grant
date fair values from the increased price of our stock. Professional and
consultant fees increased by $0.8 million as a result of additional public
company compliance costs associated with becoming a Large Accelerated Filer.
Tradeshows and conferences costs increased by $0.5 million due to a return of
some activity as restrictions implemented in response to the COVID-19 pandemic
were eased, which resulted in higher activity levels for the nine months ended
29
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September 30, 2021 as compared to the nine months ended September 30, 2020 and a
resulting increase in related expenses. Other costs increased by $2.0 million as
a result of the increase in our commercial activity.
Other Income (Expense)
Interest Expense
Interest expense was
Other Income (Expense), Net
Other income (expense), net for the nine months endedSeptember 30, 2021 and 2020 included interest income of$0.1 million and$0.6 million , respectively, resulting from interest earned on invested cash balances, and$0.6 million of realized and unrealized foreign currency transaction losses and$0.5 million of realized and unrealized foreign currency transaction gains, respectively.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements, proceeds from the sale of common stock in our public offerings and revenue from clinical trials and commercial sales of our OCS products.
Since
As of
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Nine Months Ended September 30,
2021 2020
(in thousands)
Cash used in operating activities $ (22,216 ) $ (23,127 )
Cash provided by (used in) investing activities 19,275 (51,482 )
Cash provided by financing activities 1,348 75,516
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (493 ) 398
Net increase (decrease) in cash, cash equivalents and
restricted cash $ (2,086 ) $ 1,305
Operating Activities
During the nine months ended September 30, 2021 , operating activities used $22.2
million of cash, primarily resulting from our net loss of $31.5 million ,
partially offset by net cash provided by changes in our operating assets and
liabilities of $1.0 million and net non-cash charges of $8.3 million . Net cash
provided by changes in our operating assets and liabilities for the nine months
ended September 30, 2021 consisted primarily of a decrease in accounts
receivable of $2.7 million and an increase in accounts payable and accrued
expenses and other current liabilities of $3.6 million , partially offset by an
increase in inventory of $4.0 million and an increase in prepaid expenses and
other current assets of $1.4 million .
During the nine months ended September 30, 2020 , operating activities used $23.1
million of cash, primarily resulting from our net loss of $22.4 million and net
cash used by changes in our operating assets and liabilities of $3.7 million ,
partially offset by net non-cash charges of $3.0 million . Net cash used by
changes in our operating assets and liabilities for the fiscal nine months ended
September 30, 2020 consisted primarily of a $3.1 million decrease in accounts
payable and accrued expenses, a $2.4 million increase in inventory and a $0.7
million increase in prepaid expenses and other current assets, partially offset
by a $1.2 million increase in deferred revenue and a $0.5 million decrease in
accounts receivable.
Changes in accounts receivable, inventory, accounts payable, and accrued expenses and other current liabilities in each reporting period are generally due to growth in our business and timing of invoices and payments.
30
--------------------------------------------------------------------------------Investing Activities During the nine months endedSeptember 30, 2021 , net cash provided by investing activities of$19.3 million consisted of proceeds from sales and maturities of marketable securities of$86.3 million , partially offset by purchases of marketable securities of$66.7 million and purchases of property and equipment of$0.3 million . During the nine months endedSeptember 30, 2020 , net cash used in investing activities of$51.5 million consisted of$101.5 million in purchases of marketable securities and$0.5 million in purchases of property and equipment, partially offset by proceeds from sales and maturities of marketable securities of$50.5 million . Financing Activities During the nine months endedSeptember 30, 2021 , net cash provided by financing activities of$1.3 million consisted of proceeds from the issuance of common stock upon exercise of stock options of$0.9 million and proceeds from the issuance of common stock in connection with the employee stock purchase plan of$0.4 million . During the nine months endedSeptember 30, 2020 , net cash provided by financing activities of$75.5 million consisted primarily of proceeds from the issuance of common stock in ourMay 2020 public offering and employee share ownership plans of$76.2 million , partially offset by payments of offering costs of$0.7 million .
Long-Term Debt
We have a Credit Agreement with OrbiMed, pursuant to which we borrowed
Borrowings under the Credit Agreement bear interest at an annual rate equal to the LIBOR subject to a minimum of 1.0% and a maximum of 4.0%, plus 8.5%, or the Applicable Margin, subject in the aggregate to a maximum interest rate of 11.5%. In addition, borrowings under the Credit Agreement bear paid-in-kind, or PIK interest, at an annual rate equal to the amount by which LIBOR plus the Applicable Margin exceeds 11.5%, but not to exceed 12.5%. The PIK interest is added to the principal amount of the borrowings outstanding at the end of each quarter until the maturity date of the Credit Agreement inJune 2023 . Borrowings under the Credit Agreement are repayable in quarterly interest-only payments until the maturity date, at which time all principal and accrued interest is due and payable. At our option, we may prepay outstanding borrowings under the Credit Agreement, subject to a prepayment premium that decreased to zero inJune 2021 . Our current prepayment premium is zero. We are also required to make a final payment in an amount equal to 3.0% of the principal amount of any prepayment or repayment, which we are accreting to interest expense over the term of the Credit Agreement using the effective interest method. All obligations under the Credit Agreement are guaranteed by us and each of our material subsidiaries. All obligations of us and each guarantor are secured by substantially all of our and each guarantor's assets, including their intellectual property, subject to certain exceptions, including a perfected security interest in substantially all tangible and intangible assets of us and each guarantor. Under the Credit Agreement, we have agreed to certain affirmative and negative covenants to which we will remain subject until maturity. The financial covenants include maintaining a minimum liquidity amount of$3.0 million ; the requirement, on an annual basis, to deliver to OrbiMed annual audited financial statements with an unqualified audit opinion from our independent registered public accounting firm; and restrictions on our activities, including limitations on dispositions, mergers or acquisitions; encumbering our intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions. The obligations under the Credit Agreement are subject to acceleration upon the occurrence of specified events of default, including payment default, change in control, bankruptcy, insolvency, certain defaults under other material debt, certain events with respect to governmental approvals (if such events could cause a material adverse change in our business), failure to comply with certain covenants, including the minimum liquidity and unqualified audit opinion covenants, and a material adverse change in our business, operations or other financial condition. As ofSeptember 30, 2021 , we were in compliance with all of the covenants under the Credit Agreement. Upon the occurrence of an event of default and until such event of default is no longer continuing, the Applicable Margin will increase by 4.0% per annum. If an event of default (other than certain events of bankruptcy or insolvency) occurs and is continuing, OrbiMed may declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be due and payable. Upon the occurrence of certain events of bankruptcy or insolvency, all of the outstanding principal amount of the borrowings plus accrued and unpaid interest will automatically become due and payable. In addition, we may be required to prepay outstanding borrowings, subject to certain exceptions, with portions of net cash proceeds of certain asset sales and certain casualty and condemnation events. While we do not expect that the transition from LIBOR, including any legal or regulatory changes made in response to its future phase out, or the risks related to its discontinuance will have a material effect on our financing costs, the impact is uncertain at this time. 31 --------------------------------------------------------------------------------
Funding Requirements
As we continue to pursue and increase commercial sales of our OCS products, we expect our costs and expenses to increase in the future, particularly as we expand our sales and clinical adoption team, scale our manufacturing operation, continue research, development and clinical trial efforts, and seek regulatory approval for new products and product enhancements, including new indications, both inthe United States and in select non-U.S. markets. In addition, following the closing of our IPO, we have incurred and expect to continue to incur additional costs associated with operating as a public company. The timing and amount of our operating and capital expenditures will depend on many factors, including:
• the amount of net revenue generated by sales of our OCS Consoles, OCS
disposable sets and other products that may be approved in the United
States and select non-
• the costs and expenses of expanding our
marketing infrastructure and our manufacturing operations;
• the extent to which our OCS products are adopted by the transplant community;
• the ability of our customers to obtain adequate reimbursement from
third-party payors for procedures performed using the OCS products;
• the degree of success we experience in commercializing our OCS products for
additional indications;
• the costs, timing and outcomes of post-approval studies or any future
clinical studies and regulatory reviews, including to seek and obtain
approvals for new indications for our OCS products;
• the emergence of competing or complementary technologies;
• the number and types of future products we develop and commercialize;
• the costs associated with building our commercial operations;
• the costs of preparing, filing and prosecuting patent applications and
maintaining, enforcing and defending intellectual property-related claims;
and
• the level of our selling, general and administrative expenses.
We believe that our existing cash, cash equivalents, and marketable securities
will enable us to fund our operating expenses, capital expenditure requirements,
and debt service payments for at least 12 months following the filing of this
Quarterly Report on Form 10-Q.
We may need to raise additional funding, which might not be available on
favorable terms or at all. See "Item 1A. Risk Factors-Risks Related to Our
Financial Position and Need for
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments from those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2020 Form 10-K.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition or results of operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates from those disclosed in our consolidated financial statements and the related notes and other financial information included in our 2020 Form 10-K.
32
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. As ofJune 30, 2021 , the market value of our common stock held by non-affiliates exceeded$700 million . As a result, we will become a large accelerated filer beginningJanuary 1, 2022 and will no longer be an emerging growth company.
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