What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 148 added, 143 removed, 329 unchanged (47% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 fiscal year ended December 28, 2019, as filed with the SEC on March 17, 2020 (“2019 Form 10-K”).

The following discussion and analysis of our financial condition and results of op erations 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 fiscal year ended December 28, 2019, as filed with the SEC on March 17, 2020 (“2019 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.

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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 $10.9 million and incurred a net loss of $17.3 million for the fiscal six months ended June 30, 2020.

We generated net revenue of $18.0 million and incurred a net loss of $22.4 million for the fiscal nine months ended September 30, 2020.

We generated net revenue of $23.6 million and incurred a net loss of $33.5 million for the fiscal year ended December 28, 2019.

As of June 30, 2020, we had an accumulated deficit of $386.8 million.

As of September 30, 2020, we had an accumulated deficit of $391.9 million.

We expect to continue to incur net losses for the foreseeable future as we focus on growing commercial sales of our products in both the United States and select non-U.S.

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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.

On May 6, 2019, we completed our IPO, pursuant to which we issued and sold 6,543,500 shares of common stock, inclusive of 853,500 shares we sold pursuant to the full exercise of the underwriters’ option to purchase additional shares.

The aggregate net proceeds received by us from the IPO were $91.4 million, after deducting u nderwriting discounts and commissions as well as other offering costs of $6.0 million.

On May 6, 2019, we completed our IPO, pursuant to which we issued and sold 6,543,500 shares of common stock, i nclusive of 853,500 shares we sold pursuant to the full exercise of the underwriters’ option to purchase additional shares.

The aggregate net proceeds received by us from the IPO were $91.4 million, after deducting underwriting discounts and commissions as well as other offering costs of $6.0 million.

On May 6, 2019, immediately prior to the completion of our IPO, we completed a corporate reorganization whereby TransMedics, Inc., the direct parent of TransMedics Group prior to the corporate reorganization, became a direct, wholly-owned subsidiary of TransMedics Group pursuant to the merger of TMDX, Inc., a direct, wholly-owned subsidiary of TransMedics Group prior to the corporate reorganization, merged with and into TransMedics, Inc., with TransMedics, Inc.

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See “—Liquidity and Capital Resources.”

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China.

Less than four months later, in March 2020, the World Health Organization declared COVID-19 a pande mic , and the virus has now spread to many other countries and regions and every state within the United States, including Massachusetts, where our primary offices and manufacturing facility are located.

The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.

The impact of the COVID-19 pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions t o 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;

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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 within the United States .

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.

Our sales and clinical adoption team is also operating at reduced capacity and restricted in visiting many transplant centers in person.

Customer delays or reductions in capital expenditures and operating budg ets also have a negative impact on our product sales.

The COVID-19 pandemic also has impacted operations at the FDA and other health authorities, resulting in delays of reviews and approvals, including with respect to our OCS Heart PMA application, and may affect other potential PMA applications.

For example, although the FDA had scheduled an advisory committee of experts from outside the FDA to review and evaluate our OCS Heart PMA application in the second quarter of 2020, due to the COVID-19 pandemic the advisory committee meeting has been postponed and we currently anticipate that the FDA will convene this advisory committee meeting in the second half of 2020.

In addition, we had temporarily reduced the manufacturing and distribution of our OCS products at our facility in Andover, Massachusetts.

Starting in May 2020, we resumed our manufacturing and distribution operations to pre-COVID levels, allowing us to meet all customer requirements.

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 the se 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.

Our sales and clinical adoption team has been and may continue to be restricted in visiting many transplant centers in person .

Customer delays or reductions in capital expenditures and operating budgets also have a negative impact on our product sales.

We plan to maintain these or similar restrictions until we believe employees can fully resume such activities in accordance with federal, state and local requirements.

The COVID-19 pandemic also has impacted operations at the FDA and other health authoriti es, resulting in delays of reviews and approvals, including with respect to our OCS Heart PMA application, and may affect other potential PMA applications.

For example, although the FDA had scheduled an advisory committee of experts from outside the FDA t o review and evaluate our OCS Heart PMA application in the second quarter of 2020, due to the COVID-19 pandemic the advisory committee meeting was postponed to October 2020.

However, this meeting has been further temporarily postponed to allow the FDA to review additional, already collected, short and longer-term data from the OCS Heart EXPAND Trial and OCS Heart EXPAND Continued Access Protocol (“CAP”).

The FDA has not yet communicated a new date for the advisory committee meeting.

In addition, to minimize health risks to our employees during the COVID-19 peak in the second quarter of 2020, we asked our employees to stay home for several weeks.

This resulted in a temporary reduction in our manufacturing and distribution of our OCS products at our facility in Andover, Massachusetts.

Starting in May 2020, we resumed our manufacturing and distribution operations to pre-COVID levels, allowing us to meet all customer requirements.

While we maintain an inventory of finished products and raw materials used in our OCS products, a prolonged pandemic could lead to shortages in the raw materials necessary to manufacture our products.

If we experience a prolonged disruption in our manufacturing, supply chains, clinical trial or commercial operations, or if demand for our products is significantly reduced as a result of the COVID-19 pandemic, we would expect to experience a material adverse impact on our business, financial condition, results of operations and prospects.

In April 2020, we announced several steps to respond to the COVID-19 pandemic.

These steps are intended to protect the he alth 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 include transitioning most employees to a remote work environ ment, 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.

While the COVID-19 pandemic did not si gnificantly impact our business or results of operations during the first quarter of 2020, OCS product sales were negatively impacted by the COVID-19 pandemic in the second quarter of 2020 and we anticipate a negative impact to OCS product sales for the remainder of 2020;

however, the length and extent of the pandemic, its consequences, and containment efforts will determine the future impact on our operations and financial condition.

We have observed recovery in the frequency of transplant procedures, but not yet at the same activity level prior to the disruption of business and economic activities resulting from COVID-19.

In April 2020, we announced several steps to respon d to the COVID-19 pandemic.

These steps are 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 include 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 .

We also deferred a portion of ex ecutive and employee compensation from April 2020 through August 31, 2020 .

While the COVID-19 pandemic did not significantly impact our business or results of operations during the first quarter of 2020, OCS product sales have been negatively impacted by the COVID-19 pandemic since the second quarter of 2020 and we anticipate a negative impact to OCS product sales for the remainder of 2020;

however, the length and extent of the pandemic, its consequences, and containment efforts wil l determine the future impact on our operations and financial condition.

We have observed recovery in the frequency of transplant procedures, but not yet at the same activity level as prior to the disruption of business and economic activities resulting from COVID-19.

In addition, while the number of transplant procedures performed has declined during the COVID-19 pandemic, organ transplantations are non-elective, life-saving procedures and we believe that the need for these procedures will persist.

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However, we are unable to predict the extent of the impact with confidence due to the uncertainty of future developments, such as the duration of the pandemic, additional or modified government actions, new information which may emerge concerning the severity and incidence of COVID-19 and actions to contain the virus or treat its impact.

In particular, the speed of the continued spread of COVID-19 globally, and the magnitude 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.

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.

Components of Our Results of Operations

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We intend to continue to loan OCS Consoles to some of our customers during commercialization of our OCS products.

Because all elements of a customer order are delivered and recognized as revenue at the same time and because revenue allocated to elements other than OCS di sposable sets, such as implied rental income and service revenue, is insignificant, all elements of revenue from customer arrangements are classified as a single category of revenue in our consolidated statements of operations.

Because all elements of a customer order are delivered and recognized as revenue at the same time and because revenue allocated to elements other than OCS disposable sets, such as implied rental income and service revenue, is insignificant, all elements of revenue from customer arrangements 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 $0.5 million and $1.2 million, for the fiscal three and six months ended June 30, 2020, respectively, and $0.5 million and $1.2 million for the fiscal three and six months ended June 29, 2019, respectively .

In March 2018, we received our first FDA PMA for the OCS Lung, and we began commercial sales o f this product in the United States during the fourth quarter of 2018.

In May 2019, we received our second FDA PMA approval for the OCS Lung for additional clinical indications.

Therefore, our net revenue in the United States for the OCS Lung is now derive d primarily from commercial sales and consists of sales of OCS disposable sets and, to a much lesser extent, sales of OCS Consoles.

In 2019, we also recorded revenue from clinical trial sales of the OCS Lung for our OCS Lung EXPAND II Trial, which stopped enrollment as of June 24, 2019 since we received FDA PMA approval for the OCS Lung EXPAND indication.

In the United States, we expect to continue to only have clinical trial sales for our OCS Heart and OCS Liver products until we receive similar FDA PMA approvals for those products.

We recorded reimbursable clinical trial costs as a reduction of revenue of $0.9 million and $2.1 million, for the fiscal three and nine months ended September 30, 2020, respectively, and $0.7 million and $1.8 million for the fiscal three and nine months ended September 28, 2019, respectively .

In March 2018, we received our first FDA PMA for the OCS Lung, and we began commercial sales of this product in the United States during the fourth quarter of 2018.

In May 2019, we received our second FDA PMA for the OCS Lung for additional clinical indications.

Therefore, our net revenue in the United States for the OCS Lung is now derived primarily from commercial sales and consists of sales of OCS disposable sets and, to a much le sser extent, sales of OCS Consoles.

In 2019, we also recorded revenue from clinical trial sales of the OCS Lung for our OCS Lung EXPAND II Trial, which stopped enrollment as of June 24, 2019 since we received FDA PMA for the OCS Lung EXPAND indication.

In the United States, we expect to continue to only have clinical trial sales for our OCS Heart and OCS Liver products until we receive similar FDA PMA for those products.

Our net revenue in the United States for OCS Heart and OCS Liver products fluctuates from period to period as a result of the timing of patient enrollment in our clinical trials.

Historically, our net revenue during periods of patient enrollment 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 enrolled.

Our OCS Heart EXPAND Trial began patient enrollment in Septem ber 2015 and completed patient enrollment in March 2018.

Our Liver PROTECT Trial began enrollment in January 2016 and completed enrollment in October 2019.

Our OCS Heart EXPAND Continued Access Protocol (CAP) Trial and our OCS Heart DCD Trial began patient enrollment in May 2019 and December 2019, respectively, and are currently enrolling patients.

Our OCS Liver PROTECT CAP Trial began patient enrollment in February 2020 and is currently enrolling patients.

Our OCS Heart EXPAND Trial began patient enrollment in September 2015 and completed patient enrollment in March 2018.

Our OCS Liver PROTECT Trial began enrollment in January 2016 and completed enrollment in October 2019.

Our OCS Heart EXPAND CAP began patient enrollment in May 2019 and is currently enrolling patients.

Our OCS Heart DCD Trial began patient enrollment in December 2019 and has completed enrolling patients.

Our OCS Heart DCD CAP has been approved by the FDA and we anticipate that we will begin enrolling patients by the end of 2020 or early 2021.

Our OCS Liver PROTECT CAP began patient enrollment in February 2020 and is currently enrolling patients.

Our net revenue may continue to fluctuate from period to period as a result of the timing of ongoing clinical trials in which our OCS products are used.

Through June 30, 2020, all of our sales outside of the 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.

Through September 30, 2020, all of our sales outside of the 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 our first two FDA PMA approvals for the OCS Lung in the United States in March 2018 and May 2019 and any potential future FDA approvals in the United States for OCS Heart and OCS Liver.

We expect that our net revenue will increase over the long term as a result of receiving our first two FDA PMAs for the OCS Lung in the United States in March 2018 and May 2019 and any potential future FDA approvals in the United States for OCS Heart and OCS Liver.

We also expect that our net revenue will increase over the long term as a result of anticipated growth in non-U.S.

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While we expect gross margin to increase over the long term, it will likely fluctuate from quarter to quarter.

In addition, we expect gross margin to decrease in the short-term resulting from lower efficiencies of scale due to anticipated lower revenue as a result of the COVID-19 pandemic.

Operating Expenses

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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 incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

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Under this convention, certain fiscal years contained 53 weeks.

Each fiscal year was typically composed of four 13-week fiscal quarters, but in years with 53 weeks, the fourth quarter was a 14-week period.

Each fisc al year was typically composed of four 13-week fiscal quarters, but in years with 53 weeks, the fourth quarter was a 14-week period.

Our fiscal year ended December 28, 2019 included 52 weeks.

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As a result of this change, our current fiscal year will end on December 31, 2020 and our current and each subsequent fiscal quarter will end on March 31, June 30 and September 30.

Comparison of the Fiscal Three Months Ended June 30, 2020 and June 29, 2019

The following table summarizes our results of operations for the fiscal three months ended June 30, 2020 and June 29, 2019

Comparison of the Fiscal Three Months Ended September 30, 2020 and September 28, 2019

The following table summarizes our results of operations for the fiscal three months ended September 30, 2020 and September 28, 2019:

Fiscal Three Months Ended

June 30, 2020

June 29, 2019

September 30, 2020

September 28, 2019

(in thousands)

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Interest expense

Change in fair value of preferred stock warrant liability

Other income (expense), net

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Fiscal Three Months Ended

June 30, 2020

June 29, 2019

September 30, 2020

September 28, 2019

(in thousands)

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Fiscal Three Months Ended

June 30, 2020

June 29, 2019

September 30, 2020

September 28, 2019

(in thousands)

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Total net revenue

Net revenue decreased by $2.3 million in the fiscal three months ended June 30, 2020 compared to the fiscal three months ended June 29, 2019 primarily as a result of a decrease in the number of OCS disposable sets sold to customers globally.

The decrease was primarily driven by a decrease in the number of transplant procedures performed as a result of the adverse impact of COVID-19 on the global economy in general and the healthcare industry in particular.

Net revenue from customers in the United States was $2.4 million in the fiscal three months ended June 30, 2020 and decreased by $1.9 million compared to the fiscal three months ended June 29, 2019, primarily due to lower volume of commercial and clinical trial sales of OCS products.

Net revenue from sales of OCS Lung products in the United States decreased from $2.0 million in the fiscal three months ended June 29, 2019 to $0.4 million in the fiscal three months ended June 30, 2020.

Net revenue from OCS Heart disposable sets and OCS Liver disposable sets sold to customers for use in our ongoing clinical trials in the United States also decreased by $0.2 million and $0.1 million, respectively.

The lower sales volume of OCS disposable sets was primarily a result of the adverse impact of the COVID-19 pandemic on the U.S.

economy in general and the healthcare industry in particular.

Net revenue from customers outside the United States was $1.0 million in the fiscal three months ended June 30, 2020 compared to $1.4 million in the fiscal three months ended June 29, 2019.

The decrease in net revenue from customers outside the United States was primarily due to the adverse impact of COVID-19 on the global economy in general and healthcare industry in particular .

Net revenue from sales of OCS Lung and OCS Heart products outside the United States decreased by $0.2 million and $0.2 million, respectively, from the fiscal three months ended June 29, 2019 to the fiscal three months ended June 30, 2020.

Net revenue was relatively flat between the fiscal three months ended September 30, 2020 and September 28, 2019.

The decrease in the number of disposable sets was primarily driven by a decrease in the number of OCS transplant procedures performed in Europe, partially offset by the increase in number of procedures performed in the United States and rest of the world.

Net revenue from customers in the United States was $5.9 million in the fiscal three months ended September 30, 2020 and increased by $1.6 million compared to the fiscal three months ended September 28, 2019, primarily due to higher volume of clinical trial sales of OCS products.

Net revenue from sales of OCS Lung products in the United States decreased from $1.9 million in the fiscal three months ended September 28, 2019 to $0.6 million in the fiscal three months ended September 30, 2020.

The decrease was due primarily to lower sales of OCS disposable sets from the adverse impact of COVID-19.

COVID-19 impacted lung transplants more than other organs due to the nature of the disease, new protocols required for safe lung transplants and the use of ventilators post-transplant.

Net revenue from OCS Heart disposable sets sold to customers for use in our ongoing clinical trials in the United States increased by $3.2 million, while net revenue from OCS Liver disposable sets decreased by $0.3 million.

The increase in net revenue from OCS Heart disposable sets is attributed to a combination of higher volume of OCS Heart disposable sets sold in the OCS Heart EXPAND CAP and OCS Heart DCD Trial, which accounted for $2.7 million of the increase, and an increase in average selling price, which accounted for $0.5 million of the increase.

The OCS Heart DCD trial completed patient enrollment in September 2020.

The lower sales volume of OCS Liver disposable sets was primarily a result of the adverse impact of the COVID-19 pandemic on transplant procedures in the U.S.

Net revenue from customers outside the United States was $1.2 million in the fiscal three months ended September 30, 2020 compared to $2.9 million in the fiscal three months ended September 28, 2019.

The decrease in net revenue from customers outside the United States was primarily due to the adverse impact of COVID-19 on transplant procedures in Europe .

Net revenue from sales of OCS Lung and OCS Heart products outside the United States decreased by $0.1 million and $1.5 million, respectively, from the fiscal three months ended September 28, 2019 to the fiscal three months ended September 30, 2020

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue decreased by $0.9 million in the fiscal three months ended June 30, 2020 compared to the fiscal three months ended June 29, 2019.

Gross profit decreased by $1.4 million in the fiscal three months ended June 30, 2020 compared to the fiscal three months ended June 29, 2019.

Gross profit decreased primarily as a result of a lower sales volume of OCS disposable sets sold in the second quarter of 2020.

Gross margin was 56% and 59% for the fiscal three months ended June 30, 2020 and June 29, 2019, respectively.

Gross margin decreased primarily as a result of idle facility charges of $0.1 million incurred during the fiscal three months ended June 30, 2020.

Cost of revenue decreased by $0.9 million in the fiscal three months ended September 30, 2020 compared to the fiscal three months ended September 28, 2019.

Gross profit increased by $0.8 million in the fiscal three months ended September 30, 2020 compared to the fiscal three months ended September 28, 2019.

Gross profit increased primarily as a result of a higher average selling price and a higher sales volume of OCS Heart disposable sets sold in the United States in the third quarter of 2020.

Gross margin was 71% and 59% for the fiscal three months ended September 30, 2020 and September 28, 2019, respectively.

Gross margin increased primarily as a result of a higher average selling price and lower allocation of overhead charges.

Overhead charges were lower from cost containment measures and savings related to COVID-19 restrictions.

Operating Expenses

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Fiscal Three Months Ended

June 30, 2020

June 29, 2019

September 30, 2020

September 28, 2019

(in thousands)

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Total research, development and clinical trials expenses

Total research, development and clinical trials expenses decreased by $0.9 million from $4.8 million in the fiscal three months ended June 29, 2019 to $3.9 million in the fiscal three months ended June 30, 2020.

Personnel related costs increased $0.8 million primarily due to expanded headcount to support clinical trials and new product development.

Clinical trials costs, consulting and third-party testing costs and laboratory supplies and research material costs decreased due primarily to decreased activities as a result of the impact of the COVID-19 pandemic.

Total research, development and clinical trials expenses decreased by $0.8 million from $4.9 million in the fiscal three months ended September 28 , 2019 to $4.2 million in the fiscal three months ended September 30, 2020.

Consulting and third-party testing costs and other costs decreased by $0.8 million and $0.2 million, respectively, due primarily to decreased activities as a result of the impact of the COVID-19 pandemic.

Laboratory supplies and research material costs increased by $0.2 million due to timing of material purchases.

Selling, General and Administrative Expenses

Fiscal Three Months Ended

June 30, 2020

June 29, 2019

September 30, 2020

September 28, 2019

(in thousands)

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Total selling, general and administrative expenses

Total selling, general and administrative expenses decreased by $0.4 million from $6.3 million in the fiscal three months ended June 29, 2019 to $5.9 million in the fiscal three months ended June 30, 2020 due to decreases in professional and consultant fees, trade shows and conferences and other costs.

The decrease in other costs was primarily a result of cost management and cost containment strategies implemented by our management during the fiscal quarter ended June 30, 2020 to address the challenges of the operating environment caused by the COVID-19 pandemic.

These decreases were offset by a $0.5 million increase in personnel related costs from expanding our commercial team to support commercial sales of our OCS Lung product in the United States.

Total selling, general and administrative expenses decreased by $1.0 million from $6.5 million in the fiscal three months ended September 28 , 2019 to $5.5 million in the fiscal three months ended September 30, 2020 due to decreases in professional and consultant fees, tradeshows and conferences and other costs.

The decrease in professional and consultant fees was due to cost management and cost containment strategies implemented by our management.

The decrease in tradeshows and conferences expense was due to tradeshow and conference cancellations due to the COVID-19 pandemic.

The decrease in other costs was primarily a result of cost management and cost containment strategies implemented by our management during the fiscal quarter ended September 30, 2020 to address the challenges of the operating environment caused by the COVID-19 pandemic.

These decreases were partially offset by a $0.5 million increase in personnel related costs from expanding our commercial team to support commercial sales of our OCS Lung product in the United States.

Stock-based compensation expense also increased by $0.3 million due primarily to additional grants to existing employees.

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Interest Expense

Interest expense was $1.0 million and $1.1 million for the fiscal three months ended June 30, 2020 and June 29, 2019, respectively.

Change in Fair Value of Preferred Stock Warrant Liability

The change in the fair value of our preferred stock warrant liability in the fiscal three months ended June 29, 2019 was due primarily to the changes in the fair value of our preferred stock during that period.

On May 6, 2019, immediately prior to the closing of our IPO, the warrants to purchase preferred stock were converted into warrants to purchase common stock, and the fair value of the warrant liability at that time was reclassified to common stock.

As a result, subsequent to the closing of our IPO, we no longer remeasure the fair value of the warrant liability at each reporting date.

Interest expense was $1.0 million and $1.1 million for the fiscal three months ended September 30, 2020 and September 28, 2019, respectively.

Other Income (Expense), Net

Other income (expense), net for the fiscal three months ended June 30, 2020 and June 29, 2019 included interest income of $0.2 million and $0.1 million, respectively, resulting from interest earned on invested cash balances, and $0.2 million and $0.1 million, respectively, of foreign currency transaction gains.

Comparison of the Fiscal Six Months Ended June 30, 2020 and June 29, 2019

The following table summarizes our results of operations for the fiscal six months ended June 30, 2020 and June 29, 2019

Fiscal Six Months Ended

June 30, 2020

June 29, 2019

Other income (expense), net for the fiscal three months ended September 30, 2020 and September 28, 2019 included interest income of $0.1 million and $0.4 million, respectively, resulting from interest earned on invested cash balances, and $0.4 million of foreign currency transaction gains and $0.4 million of foreign currency transaction losses, respectively.

Comparison of the Fiscal Nine Months Ended September 30, 2020 and September 28, 2019

The following table summarizes our results of operations for the fiscal nine months ended September 30, 2020 and September 28, 2019:

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

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Net Revenue, Cost of Revenue and Gross Profit

Fiscal Six Months Ended

June 30, 2020

June 29, 2019

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Cost of revenue

Fiscal Six Months Ended

June 30, 2020

June 29, 2019

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

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Total net revenue

Net revenue increased by $0.6 million in the fiscal six months ended June 30, 2020 compared to the fiscal six months ended June 29, 2019 primarily as a result of an increase in the number of OCS disposable sets sold to customers globally.

Net revenue from customers in the United States was $7.6 million in the fiscal six months ended June 30, 2020 and increased by $0.4 million compared to the fiscal six months ended June 29, 2019 primarily due to sales of OCS Heart disposable sets for use in our ongoing clinical trials, partially offset by a decrease in commercial sales of OCS Lung products as a result of the adverse impact of the COVID-19 pandemic.

Net revenue from sales of OCS Lung products in the United States decreased from $3.4 million in the fiscal six months ended June 29, 2019 to $2.3 million in the fiscal six months ended June 30, 2020.

Net revenue from OCS Heart disposable sets sold to customers for use in our clinical trials increased from $1.7 million in the fiscal six months ended June 29, 2019 to $3.2 million in the fiscal six months ended June 30, 2020.

Net revenue increased by $0 .5 million in the fiscal nine months ended September 30, 2020 compared to the fiscal nine months ended September 28, 2019 primarily as a result of an increase in the number of OCS disposable sets sold to customers globally.

Net revenue from customers in the United States was $13.6 million in the fiscal nine months ended September 30, 2020 and increased by $2.0 million compared to the fiscal nine months ended September 28, 2019 primarily due to sales of OCS Heart disposable sets for use in our ongoing clinical trials, partially offset by a decrease in commercial sales of OCS Lung and OCS Liver products as a result of the adverse impact of the COVID-19 pandemic.

COVID-19 impacted lung transplants more than other organs due to the nature of the disease, new protocols required for safe lung transplants and the use of ventilators post-transplant.

Net revenue from sales of OCS Lung products in the United States decreased from $5.3 million in the fiscal nine months ended September 28, 2019 to $2.9 million in the fiscal nine months ended September 30, 2020.

Net revenue from OCS Heart disposable sets sold to customers in the United States for use in our clinical trials increased from $2.8 million in the fiscal nine months ended September 28, 2019 to $7.5 million in the fiscal nine months ended September 30, 2020.

In addition, the U.S.

selling price of OCS disposable sets sold in the fiscal six months ended June 30, 2020 was approximately 16% higher than the U.S.

selling price of OCS disposable sets sold in the fiscal nine months ended September 30, 2020 was approximately 22% higher than the U.S.

selling prices of OCS disposable sets sold in the same period in fiscal 2019.

This accounted for a $0.8 million increase in net revenue in the United States from the fiscal six months ended June 30, 2020 compared to the fiscal six months ended June 29, 2019, offset by a $0.4 million volume decrease compared to the same period in fiscal 2019.

This accounted for a $1.7 million increase in net revenue in the United States during the fiscal nine months ended September 30, 2020 compared to the fiscal nine months ended September 28, 2019.

Net revenue from customers outside the U.S.

was $3.3 million in the fiscal six months ended June 30, 2020 compared to $3.1 million in the fiscal three months ended June 29, 2019.

The increase in net revenue from customers outside the United States was primarily due to sales of OCS disposable sets to existing customers.

was $4.4 million in the fiscal nine months ended September 30, 2020 compared to $6.0 million in the fiscal nine months ended September 28, 2019.

The decrease in net revenue from customers outside the United States was primarily due to the adverse impact of COVID-19 on transplant procedures in Europe.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue decreased by $0.3 million in the fiscal six months ended June 30, 2020 compared to the fiscal six months ended June 29, 2019.

Gross profit increased by $0.9 million in the fiscal six months ended June 30, 2020 compared to the fiscal six months ended June 29, 2019.

Gross margin was 62% and 57% for the fiscal six months ended June 30, 2020 and June 29, 2019, respectively.

Gross profit and gross margin increased primarily as a result of a higher average selling price of OCS disposable sets sold in the United States in the fiscal six months ended June 30, 2020 relative to the average selling price of OCS disposable sets in the comparable period of fiscal 2019 and overall higher sales, which resulted in a reduction of the impact of fixed costs in our manufacturing operation.

Cost of revenue decreased by $1.2 million in the fiscal nine months ended September 30, 2020 compared to the fiscal nine months ended September 28, 2019.

Gross profit increased by $1.7 million in the fiscal nine months ended September 30, 2020 compared to the fiscal nine months ended September 28, 2019.

Gross margin was 66% and 58% for the fiscal nine months ended September 30, 2020 and September 28, 2019, respectively.

Gross profit and gross margin increased primarily as a result of a higher average selling price of OCS disposable sets sold in the United States in the fiscal nine months ended September 30, 2020 relative to the average selling price of OCS disposable sets in the comparable period of fiscal 2019 and overall higher sales, which resulted in a reduction of the impact of fixed costs in our manufacturing operation.

Operating Expenses

Research, Development and Clinical Trials Expenses

Fiscal Six Months Ended

June 30, 2020

June 29, 2019

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

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Total research, development and clinical trials expenses

Total research, development and clinical trials expenses increased by $1.5 million from $8.7 million in the fiscal six months ended June 29, 2019 to $10.1 million in the fiscal six months ended June 30, 2020.

Personnel related costs increased $1.5 million due primarily to additional resources supporting clinical trials and new product development.

Clinical trials costs increased by $0.6 million, due primarily to clinical trial activity in our active clinical trials.

Consulting and third-party testing and laboratory supplies and research materials costs decreased by $0.2 million and $0.4 million, respectively, due primarily to our cost management and cost containment strategies implemented by our management during the fiscal quarter ended June 30, 2020 to address the challenges of the operating environment caused by the COVID-19 pandemic.

Total research, development and clinical trials expenses increased by $0.7 million from $13.6 million in the fiscal nine months ended September 28, 2019 to $14.3 million in the fiscal nine months ended September 30, 2020.

Personnel related costs and clinical trial costs increased by $1.7 million and $0.5 million, respectively, due primarily to additional resources supporting clinical trials and new product development.

Consulting and third-party testing, laboratory supplies and research materials costs and other costs decreased by $1.0 million, $0.2 million and $0.3 million, respectively, due primarily to our cost management and cost containment strategies implemented by our management during the fiscal quarter ended June 30, 2020 to address the challenges of the operating environment caused by the COVID-19 pandemic.

Selling, General and Administrative Expenses

Fiscal Six Months Ended

June 30, 2020

June 29, 2019

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

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Total selling, general and administrative expenses

Total selling, general and administrative expenses increased by $1.6 million from $10.9 million in the fiscal six months ended June 29, 2019 to $12.5 million in the fiscal six months ended June 30, 2020 due primarily to increases in personnel related costs, professional and consultant fees and other costs as we hired additional resources and engaged consultants to support commercial sales of our OCS Lung product in the United States and to support our operation as a public company.

Total selling, general and administrative expenses increased by $0.6 million from $17.4 million in the fiscal nine months ended September 28, 2019 to $18.0 million in the fiscal nine months ended September 30, 2020 due primarily to increases in personnel related costs, as we hired additional resources and engaged consultants to support commercial sales of our OCS Lung product in the United States and to support our operation as a public company.

Stock-based compensation expense also increased by $0.9 million due primarily to additional grants to existing employees.

Tradeshows & conferences expenses decreased by $0.7 million primarily as a result of tradeshows and conferences being canceled or delayed due to the COVID-19 pandemic.

Professional and consultant fees and tradeshows and conferences decreased by $0.7 million and $0.9 million, respectively, primarily as a result of tradeshows and conferences being canceled or delayed due to the COVID-19 pandemic and cost management and cost containment strategies implemented by our management.

Other Income (Expense)

Interest Expense

Interest expense was $2.0 million and $2.2 million for the fiscal six months ended June 30, 2020 and June 29, 2019, respectively.

Interest expense was $3.0 million and $3.3 million for the fiscal nine months ended September 30, 2020 and September 28, 2019, respectively.

Change in Fair Value of Preferred Stock Warrant Liability

The change in the fair value of our preferred stock warrant liability in the fiscal six months ended June 29, 2019 was due primarily to the changes in the fair value of our preferred stock during that period.

The change in the fair value of our preferred stock warrant liability in the fiscal nine months ended September 28, 2019 was due primarily to the changes in the fair value of our preferred stock during that period.

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Other Income (Expense), Net

Other income (expense), net for the fiscal six months ended June 30, 2020 and June 29, 2019 included interest income of $0.5 million and $0.1 million, respectively, resulting from interest earned on invested cash balances, and $0.1 million of foreign currency transaction gains in each period, respectively.

Other income (expense), net for the fiscal nine months ended September 30, 2020 and September 28, 2019 included interest income of $0.6 million in each period resulting from interest earned on invested cash balances, and $0.5 million of foreign currency transaction gains and $0.4 million of foreign currency transaction losses, 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 IPO and revenue from clinical trials and commercial sales of our OCS products.

As of June 30, 2020, we had cash, cash equivalents, and marketable securities of $139.4 million.

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.

As of September 30, 2020, we had cash, cash equivalents, and marketable securities of $132.7 million.

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The following table summarizes our sources and uses of cash for each of the fiscal periods presented:

Fiscal Six Months Ended

June 30, 2020

June 29, 2019

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

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Operating Activities

During the fiscal six months ended June 30, 2020, operating activities used $16.7 million of cash, primarily resulting from our net loss of $17.3 million and net cash used by changes in our operating assets and liabilities of $1.3 million, partially offset by net non-cash charges of $1.9 million.

Net cash used by changes in our operating assets and liabilities for the fiscal six months ended June 30, 2020 consisted primarily of a $3.2 million decrease in accounts payable and accrued expenses and other current liabilities, a $1.4 million increase in inventory and a $0.3 million increase in prepaid expenses and other current assets, partially offset by a $2.1 million decrease in accounts receivable, a $0.8 million increase in deferred revenue and a $0.6 million increase in deferred rent.

During the fiscal six months ended June 29, 2019, operating activities used $19.4 million of cash, primarily resulting from our net loss of $16.1 million and net cash used by changes in our operating assets and liabilities of $4.7 million, partially offset by net non-cash charges of $1.4 million.

Net cash used by changes in our operating assets and liabilities for the fiscal six months ended June 29, 2019 consisted primarily of a $3.7 million increase in accounts receivable and $3.2 million increase in inventory, both partially offset by a $2.2 million increase in accounts payable and accrued expenses and other current liabilities.

During the fiscal 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.

During the fiscal nine months ended September 28, 2019, operating activities used $25.0 million of cash, primarily resulting from our net loss of $24.4 million and net cash used by changes in our operating assets and liabilities of $3.0 million, partially offset by net non-cash charges of $2.4 million.

Net cash used by changes in our operating assets and liabilities for the fiscal nine months ended September 28, 2019 consisted primarily of a $3.1 million increase in accounts receivable and $3.2 million increase in inventory, both partially offset by a $4.0 million increase in accounts payable and accrued expenses and other current liabilities.

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.

Investing Activities

During the fiscal six months ended June 30, 2020, net cash used in investing activities of $28.0 million consisted of $63.6 million in purchases of marketable securities and $0.4 million in purchases of property and equipment, partially offset by proceeds from sales and maturities of marketable securities of $36.0 million.

During the fiscal six months ended June 29, 2019, net cash used in investing activities of $49.1 million consisted of purchases of marketable securities.

During the fiscal nine months ended September 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.

During the fiscal nine months ended September 28, 2019, net cash used in investing activities of $67.9 million consisted of purchases of marketable securities.

Financing Activities

During the fiscal six months ended June 30, 2020, net cash provided by financing activities of $75.7 million consisted primarily of proceeds from the issuance of common stock in our public offering and employee share ownership plans of $76.0 million, partially offset by payments of offering costs of $0.3 million.

We also received proceeds from the Paycheck Protection Loan of $2.2 million, which we then fully repaid in the same period.

During the fiscal six months ended June 29, 2019, net cash provided by financing activities of $95.4 million consisted primarily of the proceeds from issuance of common stock in our IPO that closed in May 2019, partially offset by payment of offering costs related to our IPO.

During the fiscal nine months ended September 30, 2020, net cash provided by financing activities of $75.5 million consisted primarily of proceeds from the issuance of common stock in our May 2020 public offering and employee share ownership plans of $76.2 million, partially offset by payments of offering costs of $0.7 million.

During the fiscal nine months ended September 28, 2019, net cash provided by financing activities of $93.0 million consisted of the proceeds from issuance of common stock in our IPO that closed in May 2019, partially offset by payment of offering costs related to our IPO.

Long-Term Debt

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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 App licable 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 in June 2023.

Borrowings under the Credit Agre ement 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 pr emium of 9.0% of the principal amount of any prepayment within the first three years, which percentage decreases annually until it reaches zero at the end of three years.

We are also required to make a final payment in an amount equal to 3.0% of the princi pal 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.

In addition, bor rowings 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 borrowin gs outstanding at the end of each quarter until the maturity date of the Credit Agreement in June 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 decreases annually.

Our current prepayment premium is 4.0% and will decrease to zero in June 2021 .

We are als o 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.

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Under the Credit Agreement, we have agreed to certain affirmative and negative covenants to which we will remain subject until maturity.

The covenants include maintaining a minimum liquidity amount of $3.0 million;

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;

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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 eve nts 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 of June 30, 2020, we were in compliance with all of the covenants under the Credit Agreement.

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 ot her 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 of September 30, 2020, 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.

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the level of our selling, general and administrative expenses.

We believe that ou r 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 m ay need to raise additional funding, which might not be available on favorable terms or at all.

We believe that our existing cash, cash e quivalents, 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 additi onal funding, which might not be available on favorable terms or at all.

See “Item 1.A.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

The following table summarizes our contractual obligations as of September 30, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

Payments Due by Period

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Amounts in table reflect the contractually required principal and interest payments payable under the Credit Agreement, under which borrowings bear interest at a variable rate.

For purposes of this table, the interest due under the Credit Agreement was calculated using an assumed interest rate of 10.0% per annum, which was the interest rate in effect as of June 30, 2020.

For purposes of this table, the interest due under the Credit Agreement was calculated using an assumed interest rate of 9.5% per annum, which was the interest rate in effect as of September 30, 2020.

Because such interest rate is below the PIK interest threshold of 11.5%, we did not include PIK in our calculated payments.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis