TransMedics Group, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through variable rate debt instruments and denominate our transactions in a variety of foreign currencies. Changes in these rates may have an impact on future cash flow and earnings. We manage these risks through normal operating and financing activities. Foreign Currency Exchange Risk Our foreign currency transaction exposure results primarily from intercompany transactions and transactions with customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded by us. Assets and liabilities arising from such transactions are translated into the legal entity’s functional currency using the period-end exchange rates. Foreign currency transaction gains (losses) are included in the consolidated statements of operations as a component of other income (expense). We recognized foreign currency transaction gains of $1.0 million during the fiscal year ended December 31, 2020. Foreign currency translation exposure results from the translation of the financial statements of our subsidiaries whose functional currency is not the U.S. dollar into U.S. dollars for consolidated reporting purposes. Assets and liabilities of these subsidiaries are translated into U.S. dollars using the period-end exchange rates, and income and expense items are translated into U.S. dollars using average exchange rates in effect during each period. The effects of these foreign currency translation adjustments are included in accumulated other comprehensive loss, a separate component of stockholders’ equity (deficit) on our consolidated balance sheets. We recorded a foreign currency translation loss of less than $0.1 million during the fiscal year ended December 31, 2020. For the fiscal year ended December 31, 2020, 18% of our net revenue and 7% of our operating costs and expenses were generated by subsidiaries whose functional currency is not the U.S. dollar and therefore are subject to foreign currency exposure. Currently, our largest foreign currency exposure is that with respect to the euro. We believe that a 10% change in the exchange rate between the U.S. dollar and euro would not materially impact our operating results or financial position. We have experienced and we will continue to experience fluctuations in our net loss as a result of revaluing our assets and liabilities that are not denominated in the functional currency of the entity that recorded the asset or liability. At this time, we do not hedge our foreign currency risk. Interest Rate Sensitivity As of December 31, 2020, we had cash, cash equivalents, and marketable securities of $125.6 million, which consisted of cash, money market funds and short-term investments. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our investment portfolio. In June 2018, we entered into our Credit Agreement with OrbiMed. Borrowings under the Credit Agreement bear interest at a variable rate per annum equal to LIBOR plus 8.5%. As of December 31, 2020 borrowings outstanding under the Credit Agreement totaled $35.0 million and the interest rate applicable to such borrowings was 9.5%. An immediate 10% change in LIBOR would not have a material impact on our debt-related obligations, financial position or results of operations. 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. 88 Item 8. Financial Statement s and Supplementary Data. TRANSMEDICS GROUP, INC. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 90 Consolidated Balance Sheets 91 Consolidated Statements of Operations 92 Consolidated Statements of Comprehensive Loss 93 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 94 Consolidated Statements of Cash Flows 95 Notes to Consolidated Financial Statements 96 89 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of TransMedics Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of TransMedics Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and December 28, 2019, and the related consolidated statements of operations, of comprehensive loss, of convertible preferred stock and stockholders’ equity (deficit) and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and December 28, 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 11, 2021 We have served as the Company's auditor since 2001. 90 TRANSMEDICS GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, December 28, 2020 2019 Assets Current assets: Cash and cash equivalents $ 24,581 $ 20,092 Marketable securities 101,061 60,596 Accounts receivable 6,864 6,559 Inventory 11,934 11,216 Prepaid expenses and other current assets 2,326 1,538 Total current assets 146,766 100,001 Property and equipment, net 4,754 4,792 Restricted cash 500 500 Other long-term assets 6 6 Total assets $ 152,026 $ 105,299 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,206 $ 7,247 Accrued expenses and other current liabilities 10,317 8,332 Deferred revenue 263 166 Current portion of deferred rent 93 370 Total current liabilities 11,879 16,115 Long-term debt, net of discount and current portion 34,657 34,146 Deferred rent, net of current portion 1,599 389 Total liabilities 48,135 50,650 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, no par value; 25,000,000 shares authorized; no shares issued or outstanding — — Common stock, no par value; 150,000,000 shares authorized; 27,175,305 shares and 21,184,524 shares issued and outstanding at December 31, 2020 and December 28, 2019, respectively 502,217 424,134 Accumulated other comprehensive loss (95 ) (2 ) Accumulated deficit (398,231 ) (369,483 ) Total stockholders’ equity 103,891 54,649 Total liabilities and stockholders’ equity $ 152,026 $ 105,299 The accompanying notes are an integral part of these consolidated financial statements. 91 TRANSMEDICS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) Fiscal Year Ended December 31, December 28, 2020 2019 Net revenue $ 25,639 $ 23,604 Cost of revenue 9,004 9,741 Gross profit 16,635 13,863 Operating expenses: Research, development and clinical trials 18,831 19,870 Selling, general and administrative 24,188 23,596 Total operating expenses 43,019 43,466 Loss from operations (26,384 ) (29,603 ) Other income (expense): Interest expense (3,985 ) (4,353 ) Change in fair value of preferred stock warrant liability — (341 ) Other income, net 1,653 790 Total other expense, net (2,332 ) (3,904 ) Loss before income taxes (28,716 ) (33,507 ) Provision for income taxes (32 ) (40 ) Net loss $ (28,748 ) $ (33,547 ) Net loss per share attributable to common stockholders, basic and diluted $ (1.16 ) $ (2.36 ) Weighted average common shares outstanding, basic and diluted 24,702,764 14,204,787 The accompanying notes are an integral part of these consolidated financial statements. 92 TRANSMEDICS GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Fiscal Year Ended December 31, December 28, 2020 2019 Net loss $ (28,748 ) $ (33,547 ) Other comprehensive income (loss): Foreign currency translation adjustment (49 ) 45 Unrealized gains (losses) on marketable securities, net of tax of $0 (44 ) 54 Total other comprehensive income (loss) (93 ) 99 Comprehensive loss $ (28,841 ) $ (33,448 ) The accompanying notes are an integral part of these consolidated financial statements. 93 TRANSMEDICS GROUP, INC. CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share amounts) Convertible Preferred Stock Common Stock Additional Accumulated Other Total Shares Amount Shares Amount Paid-in Capital Comprehen- sive Loss Accumulated Deficit Stockholders’ Equity (Deficit) Balances at December 29, 2018 50,404,140 $ 186,519 1,397,493 $ 1 $ 143,794 $ (101 ) $ (335,936 ) $ (192,242 ) Conversion of convertible preferred stock into common stock upon initial public offering (50,404,140 ) (186,519 ) 13,119,424 186,519 — — — 186,519 Conversion of TransMedics' common stock into TransMedics Group's common stock upon corporate reorganization — — — 143,859 (143,859 ) — — — Conversion of preferred stock warrants into common stock warrants upon initial public offering — — — 1,239 — — — 1,239 Issuance of common stock in initial public offering, net of discounts and issuance costs of $5,966 — — 6,543,500 91,401 — — — 91,401 Issuance of common stock upon the exercise of common stock options — — 124,107 194 8 — — 202 Stock-based compensation expense — — — 797 57 — — 854 Settlement of accrued financing fees — — — 124 — — — 124 Foreign currency translation adjustment — — — — — 45 — 45 Unrealized gains on marketable securities — — — — — 54 — 54 Net loss — — — — — — (33,547 ) (33,547 ) Balances at December 28, 2019 — — 21,184,524 424,134 — (2 ) (369,483 ) 54,649 Issuance of common stock upon the exercise of common stock options — — 218,084 227 — — — 227 Issuance of common stock in connection with employee stock purchase plan — — 22,697 357 — — — 357 Issuance of common stock in public offering, net of discounts and issuance costs of $585 — — 5,750,000 75,085 — — — 75,085 Stock-based compensation expense — — — 2,414 — — — 2,414 Foreign currency translation adjustment — — — — — (49 ) — (49 ) Unrealized losses on marketable securities — — — — — (44 ) — (44 ) Net loss — — — — — — (28,748 ) (28,748 ) Balances at December 31, 2020 — $ — 27,175,305 $ 502,217 $ — $ (95 ) $ (398,231 ) $ 103,891 The accompanying notes are an integral part of these consolidated financial statements. 94 TRANSMEDICS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended December 31, December 28, 2020 2019 Cash flows from operating activities: Net loss $ (28,748 ) $ (33,547 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 1,577 1,222 Stock-based compensation expense 2,414 854 Change in fair value of preferred stock warrant liability — 341 Non-cash interest and end of term accretion expense 511 475 Net amortization (accretion) of premiums (discounts) on marketable securities 634 (205 ) Unrealized foreign currency transaction (gains) losses (1,065 ) 200 Changes in operating assets and liabilities: Accounts receivable (218 ) (3,166 ) Inventory (1,740 ) (4,121 ) Prepaid expenses and other current assets (769 ) 250 Accounts payable (5,802 ) 3,443 Accrued expenses and other current liabilities 1,948 2,453 Deferred revenue 60 (136 ) Deferred rent 933 (349 ) Net cash used in operating activities (30,265 ) (32,286 ) Cash flows from investing activities: Purchases of property and equipment (455 ) (165 ) Purchases of marketable securities (121,793 ) (82,371 ) Proceeds from sales and maturities of marketable securities 80,650 22,035 Net cash used in investing activities (41,598 ) (60,501 ) Cash flows from financing activities: Proceeds from issuance of common stock in public offering, net of underwriting discounts and commissions 75,670 97,367 Payments of public offering and other financing costs (705 ) (4,846 ) Proceeds from issuance of common stock upon exercise of stock options 227 202 Proceeds from issuance of common stock in connection with employee stock purchase plan 357 — Proceeds from Paycheck Protection Program loan 2,249 — Repayment of Paycheck Protection Program loan (2,249 ) — Net cash provided by financing activities 75,549 92,723 Effect of exchange rate changes on cash, cash equivalents and restricted cash 803 (85 ) Net increase (decrease) in cash, cash equivalents and restricted cash 4,489 (149 ) Cash, cash equivalents and restricted cash, beginning of period 20,592 20,741 Cash, cash equivalents and restricted cash, end of period $ 25,081 $ 20,592 Supplemental disclosure of cash flow information: Cash paid for interest $ 3,475 $ 3,877 Supplemental disclosure of non-cash investing and financing activities: Conversion of convertible preferred stock to common stock upon initial public offering $ — $ 186,519 Transfers of inventory to property and equipment $ 1,191 $ 2,146 Reclassification of warrant liability to equity upon initial public offering $ — $ 1,239 Purchases of property and equipment included in accounts payable $ — $ 169 Offering costs included in accounts payable and accrued expenses $ — $ 120 Settlement of accrued financing fee $ — $ 124 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 24,581 $ 20,092 Restricted cash 500 500 Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 25,081 $ 20,592 The accompanying notes are an integral part of these consolidated financial statements. 95 TRANSMEDICS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of the Business and Basis of Presentation TransMedics Group, Inc. (“TransMedics Group” and together with its consolidated subsidiaries, the “Company”) was incorporated in the Commonwealth of Massachusetts in October 2018. TransMedics, Inc. (“TransMedics”), an operating company and wholly owned subsidiary of TransMedics Group was incorporated in the State of Delaware in August 1998. The Company is a commercial-stage medical technology company transforming organ transplant therapy for end-stage organ failure patients across multiple disease states. The Company developed the Organ Care System (“OCS”) to replace a decades-old standard of care. 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. The Company’s OCS technology replicates many aspects of the organ’s natural living and functioning environment outside of the human body. On May 6, 2019, the Company completed its initial public offering (the “IPO”), pursuant to which it issued and sold 6,543,500 shares of common stock, inclusive of 853,500 shares sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares. The aggregate net proceeds received by the Company 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 26, 2020, the Company completed an underwritten public offering of 5,750,000 shares of its common stock, inclusive of 750,000 shares sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares. The aggregate net proceeds received by the Company from the offering were approximately $75.1 million, after deducting underwriting discounts and commissions as well as other offering costs of $0.6 million. Prior to 2020, the Company’s fiscal year ended on the last Saturday in December, and the Company reported fiscal years using a 52/53-week convention. 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. The fiscal year ended December 28, 2019 included 52 weeks. In February 2020, the Company changed the end of its fiscal year end from the last Saturday in December to December 31. As a result of this change, the Company’s current fiscal year ended on December 31, 2020 and its fiscal quarters end on March 31, June 30 and September 30. The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has incurred recurring losses since inception, including net losses attributable to the Company of $28.7 million for the fiscal year ended December 31, 2020 and $33.5 million for the fiscal year ended December 28, 2019. As of December 31, 2020, the Company had an accumulated deficit of $398.2 million. The Company expects to continue to generate operating losses in the foreseeable future. The Company believes that its existing cash, cash equivalents, and marketable securities of $125.6 million as of December 31, 2020 will be sufficient to fund operations, capital expenditures, and debt service payments for at least the next twelve months following the filing of this Annual Report on Form 10-K. The Company may need to seek additional funding through equity financings, debt financings or strategic alliances. The Company may not be able to obtain financing on acceptable terms, or at all, and the terms of any financing may adversely affect the holdings or the rights of the Company’s shareholders. If the Company is unable to obtain funding, the Company will be required to delay, reduce or eliminate some or all of its research and development programs, product expansion or commercialization efforts, or the Company may be unable to continue operations. The Company is subject to risks and uncertainties common to companies in the medical device industry and of similar size, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of market acceptance of products, and the need to obtain additional financing to fund operations. Potential risks and uncertainties also include, without limitation, uncertainties regarding the duration and magnitude of the impact of the COVID-19 pandemic on the Company’s business and the economy generally. Products currently under development will require additional research and development efforts, including additional clinical testing and regulatory approval, prior to commercialization. These efforts require additional capital, adequate personnel, infrastructure and extensive compliance-reporting capabilities. The Company’s research and development may not be successfully completed, adequate protection for the Company’s technology may not be obtained, the Company may not obtain necessary government regulatory approval on its expected timeline or at all, and approved products may not prove commercially viable. The Company operates in an environment of rapid change in technology and competition. 96 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 to the global economy , as well as businesses and capital markets around the world. Impacts to the Company’s business as a result of COVID-19 include the temporary disruption of transplant procedures at many of the organ transplant centers that purchase OCS products; disruptions to the Company’s 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 the Company’s clinical trials and studies; delays of reviews and approvals by the Food and Drug Administration (“FDA”) and other health authorities; limitations on its 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 negatively impacts the Company’s revenue and clinical trial activities. The Company’s sales and clinical adoption team has been and may continue to be restricted in visiting many transplant centers in person. The Company plans to maintain these or similar restrictions until it believes employees can fully resume such activities in accordance with federal, state and local requirements. In addition, the Company had temporarily reduced the manufacturing and distribution of its OCS products at its facility in Andover, Massachusetts. Starting in May 2020, the Company resumed manufacturing and distribution operations to pre-COVID levels. While the Company maintains an inventory of finished products and raw materials used in its OCS products, a prolonged pandemic could lead to shortages in the raw materials necessary to manufacture its products. 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 the Company’s OCS Heart Pre-Market Approval (“PMA”) application, and may affect other potential PMA applications. While the COVID-19 pandemic did not significantly impact the Company’s 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 the Company anticipates a negative impact to OCS product sales in 2021. The extent of the future impact on the Company’s operations and financial condition will depend on the length and severity of the pandemic, its consequences, and containment and vaccination efforts. While the FDA approved emergency use authorization of vaccines in December 2020, it is expected to take several months for widespread vaccinations to occur and it is not yet known how vaccination efforts will impact the COVID-19 pandemic . The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the valuation of inventory and the valuation of stock-based awards. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods. As of the date of issuance of these consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities. Actual results may differ from those estimates or assumptions. 97 Risk of Concentrations of Credit, Significant Customers and Significant Suppliers Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company has not experienced any other-than-temporary losses with respect to its cash, cash equivalents and marketable securities and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. Significant customers are those that accounted for 10% or more of the Company’s total revenue or accounts receivable. For the fiscal year ended December 31, 2020, two customers represented 14% and 10% of net revenue, respectively. For the fiscal year ended December 28, 2019, no customer accounted for 10% or more of net revenue. As of December 31, 2020, one customer accounted for 30% of accounts receivable. As of December 28, 2019, no customer accounted for 10% or more of accounts receivable. Certain of the components and subassemblies included in the Company’s products are obtained from a sole source, a single source or a limited group of suppliers. Although the Company seeks to reduce dependence on those limited sources of suppliers and manufacturers, the partial or complete loss of certain of these sources could have a material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships. Deferred Financing Costs Deferred financing costs related to a recognized debt liability are recorded as a reduction of the carrying amount of the debt liability and amortized to interest expense using the effective interest method over the repayment term of the debt. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Restricted Cash As of December 31, 2020 and December 28, 2019, the Company maintained two letters of credit totaling $0.5 million for the benefit of the landlord of its leased property. The Company was required to maintain a separate cash balance of $0.5 million to secure the letters of credit. Related to this separate cash balance, the Company classified $0.5 million as restricted cash (non-current) on its consolidated balance sheets as of December 31, 2020 and December 28, 2019. The Company’s cash, cash equivalents and restricted cash was $25.1 million and $20.6 million for the years ended December 31, 2020 and December 28, 2019, respectively. Accounts Receivable Accounts receivable are presented net of a provision for doubtful accounts, which is an estimate of amounts that may not be collectible. The Company performs ongoing credit evaluations of its customers and, if necessary, provides an allowance for doubtful accounts and expected losses. The Company writes off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. As of December 31, 2020 and December 28, 2019, the Company had no allowance for doubtful accounts. During the fiscal years ended December 31, 2020 and December 28, 2019, the Company did not record any provisions for doubtful accounts and did not write off any accounts receivable balances. 98 Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset as follows: Estimated Useful Life Manufacturing equipment 5 years OCS Consoles loaned to customers 5 years Computer equipment and software 3 years Laboratory equipment 3 years Office and trade show equipment 5 years Leasehold improvements Shorter of term of lease or 15 years Costs incurred for OCS Consoles are recorded as inventory unless and until the Company determines that an OCS Console will be loaned to a customer for its use. When an OCS Console is loaned to a customer, the Company reclassifies the cost of the OCS Console from inventory to property and equipment and begins to depreciate the loaned OCS Console over its estimated life. Related depreciation expense for the loaned OCS Console is classified as a cost of revenue. If an OCS Console is returned to the Company, it will continue to be classified as property and equipment and depreciated over its remaining useful life. The Company retains title to all OCS Consoles loaned to customers. Other than for OCS Consoles loaned to customers, costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged to expense as incurred. Impairment of Long-Lived Assets Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in loss from operations when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value. The Company did not record any impairment losses on long-lived assets during the fiscal years ended December 31, 2020 and December 28, 2019. Software Development Costs The Company incurs costs to develop computer software that is embedded in the hardware components of the Company’s OCS Console and OCS Perfusion Sets. Research and development costs related to this software are expensed as incurred, except for costs of internally developed or externally purchased software that qualify for capitalization. Software development costs incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and, upon general release, are amortized based upon the pattern in which economic benefits related to such assets are realized. Due to the short time period between achieving technological feasibility and product release and the insignificant amount of costs incurred during such periods, the Company did not capitalize any software development costs during the fiscal years ended December 31, 2020 and December 28, 2019. Inventory Inventory is valued at the lower of cost or net realizable value. Cost is computed using the first-in, first-out method. The Company regularly reviews inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, records charges to write down inventories to their estimated net realizable value, after evaluating historical sales, future demand, market conditions and expected product life cycles. Such charges are classified as cost of revenue in the consolidated statements of operations. Any write-down of inventory to net realizable value creates a new cost basis. 99 At the end of each reporting period, the Company assesses whether losses should be accrued on long-term manufacturing purchase commitments in accordance with Accounting Standards Codification (“ASC”) 330, Inventory , which requires that losses that are expected to arise from firm, noncancelable and unhedged commitments for the future purchase of inventory, measured in the same way as inventory losses, should be recognized in the current period in the statement s of operations unless they are deemed recoverable through firm sales contacts or when there are other circumstances that reasonably assure continuing sales without price decline. As of the end of each reporting period presented in the accompanying consolidated financial statements, the Company did not identify any potential losses arising from remaining future purchase commitments as compared to estimated future customer sales through the remainder of the term of the manufacturing purchase commitment and, as a result, did no t recognize any loss provision for future-period remaining purchase commitments for the fiscal year ended December 31, 2020 . Deferred Rent The Company’s lease agreements include payment escalations, rent holidays and other lease incentives, which are accrued or deferred as appropriate such that rent expense for each lease is recognized on a straight-line basis over the respective lease term. Adjustments for such items, consisting primarily of payment escalations, are recorded as deferred rent and amortized over the respective lease terms. Fair Value Measurements Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. The carrying value of the Company’s long-term debt approximates its fair value (a level 2 measurement) at each balance sheet date due to its variable interest rate, which approximates a market interest rate. Marketable Securities The Company’s marketable securities (non-equity instruments) are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity (deficit). Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations. The Company evaluates its marketable securities with unrealized losses for other-than-temporary impairment. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary,” the Company reduces the investment to fair value through a charge recorded in the consolidated statements of operations. No such adjustments were necessary during the periods presented. 100 Segment Information The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company is developing and commercializing a proprietary system to preserve human organs for transplant in a near-physiologic condition to address the limitations of cold storage organ preservation. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the Company’s chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. The Company has determined that its chief operating decision maker is its Chief Executive Officer. The Company’s chief operating decision maker reviews the Company’s financial information on a consolidated basis for purposes of allocating resources and assessing financial performance. Product Warranties The Company provides a one-year warranty on its OCS Consoles and disposable sets and replaces or repairs any OCS Console or disposable set that does not function in accordance with the product specifications. OCS Consoles returned to the Company may be refurbished and redeployed. Estimated warranty costs are recorded at the time of shipment of the OCS Console or disposable set. Warranty costs are estimated based on the current expected product replacement or repair cost and expected replacement or repair rates based on historical experience. The Company evaluates its warranty accrual at the end of each reporting period and makes adjustments as necessary. As of December 31, 2020 and December 28, 2019, the warranty accrual was less than $0.1 million. Revenue Recognition The Company generates revenue primarily from sales of its single-use, organ-specific disposable sets (i.e., its organ-specific OCS Perfusion Sets sold together with its organ-specific OCS Solutions) used on its organ-specific OCS Consoles, each being a component of the Company’s OCS products. To a lesser extent, the Company also generates 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. The Company recognizes revenue from sales to customers applying the following five steps: (1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, performance obligations are satisfied. Because all performance obligations of a customer order are delivered and recognized as revenue at the same time and because revenue allocated to performance obligations other than OCS disposable sets, such as implied rental income and service revenue, is insignificant, all components of revenue from customer arrangements are classified as a single category of revenue in the Company’s consolidated statements of operations. Substantially all of the Company’s customer contracts have multiple-performance obligations that contain deliverables consisting of OCS Perfusion Sets and OCS Solutions. In some of those customer contracts, the deliverables also include an OCS Console, whether sold or loaned to the customer. The Company evaluates each promise within a multiple-performance obligation arrangement to determine whether it represents a distinct performance obligation. A performance obligation is distinct if (1) the product or service is separately identifiable from other promises in the contract and (2) the customer can benefit from the product or service on its own or with other resources that are readily available to the customer. When a customer order includes an OCS Console, whether sold or loaned, the Company has determined that customer training and the equipment set-up of the OCS Console, each performed by the Company, are not distinct because they are not sold on a standalone basis and can only be performed by the Company in conjunction with a sale or loan of its OCS Console. In addition, the Company has determined that the OCS Console itself is not distinct because the customer cannot benefit from the OCS Console without the training and equipment set-up having been completed. As a result, when the order includes an OCS Console, the Company has concluded that training, OCS Console equipment set-up, and the OCS Console itself are highly interdependent and represent a single, combined performance obligation. Consequently, the Company does not recognize any revenue from any component of a customer order that includes an OCS Console, whether sold or loaned, until the OCS Console has arrived at the customer site and the training and equipment set-up have been completed by the Company. The Company has concluded that “transfer of control” of an OCS Console occurs only after the console has arrived at the customer site and the training and equipment set-up have been completed by the Company. 101 Some of the Company’s revenue has been generated from products sold in conjunction with the clinical trials conducted for the Company’s OCS products, under arrangements referred to as customer clinical trial agreements. Under most of these customer clinical trial agreements, the Company places 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 the Company the OCS disposable sets used in each transplant procedure during the clinical trial. When the Company loans the OCS Console to the customer, it retains title to the console at all times and does not require minimum purchase commitments from the customer related to any OCS products. In such cases, the Company invoices 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, the Company typically recovers the cost of the loaned OCS Console through the customer’s continued purchasing and use of additional OCS disposable sets. For these reasons, the Company has determined that part of the arrangement consideration for the disposable set is an implied rental payment for use of the OCS Console. When the Company’s customer arrangements have multiple-performance obligations that contain a loan of an OCS Console for the customer’s use at its customer site as well as OCS disposable sets that are delivered simultaneously, the Company allocates the arrangement consideration between the lease deliverables (i.e., the OCS Console) and non-lease deliverables (i.e., the OCS disposable sets) based on the relative estimated standalone selling price (“SSP”) of each distinct performance obligation. To date, the amounts allocated to lease deliverables have been insignificant. In determining SSP, the Company maximizes observable inputs and consider a number of data points, including: (1) the pricing of standalone sales (in instances where available), (2) the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis, (3) contractually stated prices for deliverables that are intended to be sold on a standalone basis, and (4) other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type. Revenue is recognized when control of the OCS product or products is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for the product or products. Performance Obligations The primary performance obligations in the Company’s customer arrangements from which it derives revenue are as follows: • OCS Console — The OCS Console is a medical device that houses and controls the function of the OCS. The performance obligation of the OCS Console includes customer training and equipment set-up. Revenue for each OCS Console is recognized at the point in time at which control is transferred to the customer, which is typically only after the console has arrived at the customer site and the training and equipment set-up have been completed by the Company because the customer cannot benefit from the OCS Console without the training and equipment set-up having been completed. At that time, the Company believes that the customer has the significant risks and rewards of ownership. • OCS Perfusion Set — The OCS Perfusion Set is a single-use disposable set that stores the organ and circulates blood. Revenue for each OCS Perfusion Set is recognized at the point in time at which control is transferred to the customer, which is when title transfers to the customer in connection with delivery. In most of the Company’s customer arrangements, title to the OCS Perfusion Set transfers when the OCS Perfusion Set arrives at the customer site. In limited instances, title transfers upon shipment to the customer by the Company. • OCS Solutions — The OCS Solutions are a set of nutrient-enriched solutions to optimize the organ’s condition outside the human body. Revenue for each OCS Solution is recognized at the point in time at which control is transferred to the customer, which is when title transfers to the customer in connection with delivery. In most of the Company’s customer arrangements, title to the OCS Solutions transfers when the OCS Solutions arrive at the customer site. In limited instances, title transfers upon shipment to the customer by the Company. Payments Made to Customers Under the Company’s customer arrangements that include a customer clinical trial agreement, the Company receives payments from sales to the customer of its OCS products and also makes payments to that customer for reimbursements of clinical trial costs, materials, and for specified clinical documentation related to the customer’s use of its OCS products. The Company also makes payments to customers involved in post-approval studies for information related to the transplant procedures performed. The Company determines the appropriate accounting treatments for these payments depending on the nature of the payment and whether they are for distinct goods or services. 102 The Company has determined that the payments made to the customer for reimbursement of clinical trial materials and customer’s costs incurred to execute specific clinical trial protocols related to the Company’s OCS products do not provide the Company with a distinct good or service transferred by the customer, and therefore such payments are recorded as a reduction of revenue from the customer in the Company’s consolidated statements of operations. Reductions of revenue related to such payments made to customers for reimbursements are recognized when the Company recognizes the revenue for the sale of its OCS disposable sets. The Company recorded the reimbursable clinical costs as a reduction of revenue of $ 2.7 million and $ 2.2 million for the fiscal years ended December 31, 2020 and December 28, 2019 , respectively, as presented below in disaggregated revenue. The Company has also determined that payments made to customers to obtain information related to post-approval studies or existing standard-of-care protocols (i.e., unrelated to the Company’s OCS products) do meet the criteria to be classified as a cost because the Company receives a distinct good or service transferred by the customer separate from the customer’s purchase of the Company’s OCS products and the consideration paid represents the fair value of the distinct good or service received by the Company. As a result, these payments made to the customers for information related to post-approval studies or standard-of-care protocols are recorded as operating expenses. The Company recorded payments made to customers related to post-approval studies and for documentation related to existing standard-of-care protocols of $1.6 million and $1.2 million for the fiscal years ended December 31, 2020 and December 28, 2019 , respectively, as operating expenses. Variable Consideration Revenue is reported net of any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (e.g., sales, use, and value added taxes). The Company only includes estimated variable amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Revenue from reimbursements of out-of-pocket expenses, including travel, lodging, and meals, is accounted for as variable consideration and is insignificant. The Company does not consider shipping to be a contract performance obligation. The Company records shipping costs billed to customers as revenue and records the associated costs incurred by the Company for those items as cost of revenue. Contract Assets and Liabilities The Company recognizes a receivable at the point in time at which it has an unconditional right to payment. Such receivables are not contract assets. Payment terms for customer orders, including for each of the Company’s primary performance obligations, are typically 30 days for customers in the United States and 30 to 90 days for customers in non-U.S. markets, and such payments do not include payments that are variable, dependent on specified factors or events. Contract assets arise from unbilled amounts in customer arrangements when revenue recognized exceeds the amount billed to the customer and the Company’s right to payment is not just subject to the passage of time. The Company had no contract assets as of December 31, 2020 and December 28, 2019 . Contract liabilities represent the Company’s obligation to transfer goods or services to a customer for which it has received consideration (or the amount is due) from the customer. The Company has determined that its only contract liabilities are deferred revenue, which consists of amounts that have been invoiced but that have not been recognized as revenue. The Company generally satisfies performance obligations within one year of the contract inception date. As of December 31, 2020 , the Company’s wholly- or partially unsatisfied performance obligations totaled $0.8 million and are expected to be completed within the next year. 103 Disaggregated Revenue In determining total net revenue under the revenue recognition guidance applicable to both periods presented, the Company reduces revenue by the amount of certain payments made to customers (see “Payments Made to Customers” above). The reconciliation of gross revenue to net revenue for these certain payments is shown below (in thousands): Fiscal Year Ended December 31, December 28, 2020 2019 Gross revenue from sales to customers $ 28,356 $ 25,844 Less: Clinical trial payments reducing revenue 2,717 2,240 Total net revenue $ 25,639 $ 23,604 The Company disaggregates revenue from contracts with customers by product type and geographical area as it believes this presentation best depicts how the nature, amount, timing and uncertainty of the Company’s revenue and cash flows are affected by economic factors, as shown below (in thousands): Fiscal Year Ended December 31, December 28, 2020 2019 Net revenue by OCS product: OCS Lung net revenue $ 6,194 $ 8,664 OCS Heart net revenue 14,196 11,442 OCS Liver net revenue 5,249 3,498 Total net revenue $ 25,639 $ 23,604 Fiscal Year Ended December 31, December 28, 2020 2019 Net revenue by country (1): United States $ 19,239 $ 16,253 All other countries 6,400 7,351 Total net revenue $ 25,639 $ 23,604 (1) Net revenue by country is categorized based on the location of the end customer. Other Revenue Considerations The Company does not assess whether promised goods or services are performance obligations if they are deemed immaterial in the context of the contract with the customer. Additionally, the Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. Distributors The Company markets and sells its products primarily through its direct sales force, which sells its products to end customers globally. A small portion of the Company’s revenue is generated by sales to a limited number of distributors in Europe and Asia-Pacific. When the Company transacts with a distributor, its contractual arrangement is with the distributor and not with the end customer. Whether the Company transacts business with and receives the order from a distributor or directly from an end customer, its revenue recognition policy and resulting pattern of revenue recognition for the order are the same. 104 In its business with distributors, the Company enters into a distributor agreement under which the distributor places orders to the Company for its products in connection with the distributor’s own sales to identified end customers, and the Company confirms the identification of the end customer prior to accepting each order. The Company’s distributors do not stock OCS Consoles purchased from the Company and stock only minimal quantities of OCS disposable sets. Under these contractual arrangements, the Company invoices the distributor for the selling price (which reflects a distributor discount relative to typical end customer pricing) and payment to the Company from the distributor is not contingent upon the distributor’s collection from the end customer. The Company records revenue based on the amount of the discounted selling price. When a sale to a distributor includes an OCS Console, the Company performs the training and OCS Console equipment set-up for the end customer. The Company recognizes no revenue from a distributor order that includes an OCS Console until the OCS Console has arrived at the customer site and the training and equipment set-up have been completed by the Company. Research, Development and Clinical Trials Costs Research, development and clinical trials expenses consist of costs incurred for research activities, product development, hardware and software engineering and clinical trial activities, including salaries and bonuses, stock-based compensation, employee benefits, facilities costs, laboratory supplies, depreciation, testing, regulatory, data management and consulting costs. Research, development and clinical trials costs are expensed as incurred. Advance payments for goods or services to be received in the future for use in research, development and clinical trials activities are recorded as prepaid expenses. Such prepaid expenses are recognized as an expense when the related goods have been delivered or the related services have been performed, or when it is no longer expected that the goods will be delivered or the services rendered. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses. Foreign Currency Translation The functional currency of each of the Company’s foreign subsidiaries is the currency of the local country. Assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the period-end exchange rates, and income and expense items are translated into U.S. dollars using average exchange rates in effect during each period. The effects of these foreign currency translation adjustments are included in accumulated other comprehensive loss, a separate component of stockholders’ equity (deficit). The Company also incurs transaction gains and losses resulting 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. Realized and unrealized foreign currency transaction gains (losses) are included in the consolidated statements of operations as a component of other income (expense) and totaled $1.0 million and $(0.2) million for the fiscal years ended December 31, 2020 and December 28, 2019, respectively. Stock-Based Compensation The Company measures stock-based option awards granted to employees, non-employees and directors based on their fair value on the date of grant using the Black-Scholes option-pricing model. Generally, the company issues awards with only service-based vesting conditions. Compensation expense for those awards is recognized over the vesting period of the respective award using the straight-line method. The Company accounts for forfeitures as they occur and records compensation cost assuming all option holders will complete the requisite service period. When the unvested portion of an award is forfeited, the Company reverses compensation expense previously recognized in the period of the forfeiture. The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. 105 Comprehensive Loss and Accumulated Other Comprehensive Loss Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. The Company’s only elements of other comprehensive loss are foreign currency translation adjustments and unrealized gains (losses) on marketable securities. Accumulated other comprehensive gains (losses) on the consolidated balance sheets consists primarily of foreign currency translation adjustments. Accumulated other comprehensive loss attributable to unrealized losses on marketable securities has not been significant. Net Income (Loss) per Share Prior to closing of the IPO, the Company followed the two-class method when computing net income (loss) per share, as TransMedics had issued shares that met the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The outstanding convertible preferred stock contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reported a net loss, such losses were not allocated to such participating securities, and as a result, basic and diluted net loss per share were the same. Subsequent to the closing of its IPO, the Company only has one class of shares outstanding and basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock awards. For periods in which the Company reports a net loss, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for each of the fiscal years ended December 31, 2020 and December 28, 2019. The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated above because including them would have had an anti-dilutive effect: As of December 31, 2020 December 28, 2019 Warrants to purchase common stock 64,440 64,440 Options to purchase common stock 2,261,234 1,952,300 Employee stock purchase plan 14,951 — 2,340,625 2,016,740 Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company's tax returns. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by analyzing carryback capacity in periods with taxable income, reversal of existing taxable temporary differences and estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. 106 The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. Recently Issued Accounting Pronouncements The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” of the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today. For public entities, the guidance has been effective for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years. ASU 2016-02 initially required adoption using a modified retrospective approach, under which all years presented in the financial statements would be prepared under the revised guidance. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) , which added an optional transition method under which financial statements may be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings in the period of adoption. In November 2019, the FASB issued ASU No. 2019-10, which deferred the effective date for nonpublic entities to annual reporting periods beginning after December 15, 2020 , and interim periods within fiscal years beginning after December 15, 2021. In June 2020, the FASB issued ASU No. 2020-05, which grants a one-year effective-date delay for nonpublic entities to annual reporting periods beginning after December 15, 2021 and to interim periods within fiscal years beginning after December 15, 2022. The Company is currently planning to adopt this guidance on January 1, 2022 in accordance with the nonpublic company requirements and is evaluating the method of adoption and the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) . The new standard adjusts the accounting for assets held at amortized costs basis, including marketable securities accounted for as available for sale, and trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For public entities except smaller reporting companies, the guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. For non-public entities and smaller reporting companies , the guidance was effective for annual reporting periods beginning after December 15, 2021. Early adoption is permitted for all entities. In November 2019, the FASB issued ASU No. 2019-10, which deferred the effective date for non-public entities to annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early application continues to be allowed . The Company is currently assessing the date of adoption and the impact of the adoption of this guidance on its consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12 , Income Taxes – Simplifying the Accounting for Income Taxes (Topic 740) . The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2020 and for interim periods within those fiscal years. For nonpublic entities, the guidance is effective for annual reporting periods beginning after December 15, 2021 and to interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for all entities. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently assessing the date of adoption and the impact of the adoption of this guidance on its consolidated financial statements. 107 3. Marketable Securities and Fair Value Measurements Marketable securities by security type consisted of the following (in thousands): December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury securities (due within one year) $ 74,066 $ 10 $ (3 ) $ 74,073 U.S. government agency bonds (due within one year) 26,984 4 — 26,988 $ 101,050 $ 14 $ (3 ) $ 101,061 December 28, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury securities (due within one year) $ 23,318 $ 17 $ — $ 23,335 U.S. government agency bonds (due within one year) 37,224 39 (2 ) 37,261 $ 60,542 $ 56 $ (2 ) $ 60,596 The following tables present the Company’s fair value hierarchy for its assets and liabilities that are measured at fair value on a recurring basis (in thousands): Fair Value Measurements at December 31, 2020 Using: Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 13,829 $ — $ — $ 13,829 Marketable securities: U.S. Treasury securities — 74,073 — 74,073 U.S. government agency bonds — 26,988 — 26,988 $ 13,829 $ 101,061 $ — $ 114,890 Fair Value Measurements at December 28, 2019 Using: Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 11,760 $ — $ — $ 11,760 Marketable securities: U.S. Treasury securities — 23,335 — 23,335 U.S. government agency bonds — 37,261 — 37,261 $ 11,760 $ 60,596 $ — $ 72,356 Money market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. U.S. Treasury securities and U.S. government agency bonds were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy. During the fiscal years ended December 31, 2020 and December 28, 2019, there were no transfers between Level 1, Level 2 and Level 3. 108 4. Inventory Inventory consisted of the following (in thousands): December 31, 2020 December 28, 2019 Raw materials $ 6,770 $ 4,881 Work-in-process 1,102 903 Finished goods 4,062 5,432 $ 11,934 $ 11,216 During the fiscal years ended December 31, 2020 and December 28, 2019, the Company made non-cash transfers of OCS Consoles from inventory to property and equipment (OCS Consoles loaned to customers) of $1.2 million and $2.1 million, respectively. 5. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2020 December 28, 2019 Manufacturing equipment $ 1,725 $ 1,408 OCS Consoles loaned to customers 7,196 6,005 Computer equipment and software 1,338 1,273 Laboratory equipment 617 524 Office and trade show equipment 177 177 Leasehold improvements 1,319 1,319 Construction-in-progress 409 433 12,781 11,139 Less: Accumulated depreciation and amortization (8,027 ) (6,347 ) $ 4,754 $ 4,792 During the fiscal years ended December 31, 2020 and December 28, 2019, total depreciation and amortization expense was $1.6 million and $1.2 million, respectively. Of those amounts, $1.3 million and $1.0 million, respectively, was recorded as expense in cost of revenue related to the depreciation of OCS Consoles loaned to customers. The Company retains title to OCS Consoles loaned to customers. Construction-in-progress recorded as of December 31, 2020 and December 28, 2019 was primarily related to the in-process construction of manufacturing equipment. 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2020 December 28, 2019 Accrued research, development and clinical trial expenses $ 4,426 $ 3,144 Accrued payroll and related expenses 4,030 3,604 Accrued financing fees — 120 Accrued professional fees 344 537 Accrued other 1,517 927 $ 10,317 $ 8,332 109 7. Long-Term Debt As of December 31, 2020 and December 28, 2019, long-term debt consisted of the following (in thousands): December 31, 2020 December 28, 2019 Principal amount of long-term debt $ 35,000 $ 35,000 Less: Current portion of long-term debt — — Long-term debt, net of current portion 35,000 35,000 Debt discount, net of accretion (834 ) (1,139 ) Accrued end-of-term payments 491 285 Long-term debt, net of discount and current portion $ 34,657 $ 34,146 In June 2018, the Company entered into a credit agreement (the “Credit Agreement”) with OrbiMed Royalty Opportunities II, LP (“OrbiMed”) pursuant to which OrbiMed made certain term loans available to the Company. The Credit Agreement provides for aggregate maximum borrowings of up to $65.0 million, consisting of (i) $35.0 million upon entering into the Credit Agreement, which was borrowed by the Company in June 2018, and (ii) potential additional borrowings of up to $30.0 million that could have become available upon the Company’s achievement of specified revenue thresholds and a regulatory milestone by determinable dates. The Company did not achieve these revenue thresholds and regulatory milestones by such dates, and therefore OrbiMed’s commitment to fund any additional borrowing was terminated. Borrowings under the Credit Agreement bear interest at an annual rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a minimum of 1.0% and a maximum of 4.0%, plus 8.5% (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 (“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 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 its option, the Company may prepay outstanding borrowings under the Credit Agreement, subject to a prepayment premium that decreases annually. The current prepayment premium is 4.5% and will decrease to zero in June 2021. The Company is also required to make a final payment in an amount equal to 3.0% of the principal amount of any prepayment or repayment. The final payment and debt discount amounts are being accreted to interest expense over the term of the Credit Agreement using the effective interest method. In connection with entering into the Credit Agreement, the Company paid OrbiMed an upfront fee of $0.9 million and paid other costs to OrbiMed and third parties of $0.7 million, both of which were recorded by the Company as a debt discount. The debt discount is reflected as a reduction of the carrying value of long-term debt on the Company’s consolidated balance sheet and is being accreted to interest expense over the term of the Credit Agreement using the effective interest method. All obligations under the Credit Agreement are guaranteed by the Company and each of its material subsidiaries. All obligations of the Company and each guarantor are secured by substantially all of the Company’s 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 the Company and each guarantor. Under the Credit Agreement, the Company has agreed to certain affirmative and negative covenants to which it 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 the Company’s independent registered public accounting firm; and restrictions on the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions. As of December 31, 2020, the Company was in compliance with the financial 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 other material debt, certain events with respect to governmental approvals (if such events could cause a material adverse change in the Company’s business), failure to comply with certain covenants, including the minimum liquidity and unqualified audit opinion covenants, and a material adverse change in the Company’s business, operations or other financial condition. 110 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, the Company 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. The Company assessed all terms and features of the Credit Agreement in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the debt. The Company determined that all features of the Credit Agreement are either clearly and closely associated with a debt host or have a de minimis fair value and, as such, do not require separate accounting as a derivative liability. As of December 31, 2020 and December 28, 2019, the interest rate applicable to borrowings under the Credit Agreement was 9.5% and 10.6%, respectively. During the fiscal years ended December 31, 2020 and December 28, 2019, the weighted average effective interest rate on outstanding borrowings under the Credit Agreement was approximately 11.2% and 12.4%, respectively. Paycheck Protection Program Loan On April 20, 2020, TransMedics issued a Promissory Note to Bank of America, NA, pursuant to which it received loan proceeds of $2.2 million (the “Loan”) provided under the Paycheck Protection Program established under the Coronavirus Aid, Relief, and Economic Security Act and guaranteed by the U.S. Small Business Administration (the “Paycheck Protection Program”). However, based on updated guidance related to this program, the Company decided to repay the full amount of the Loan, and repaid the Loan on May 1, 2020. The Loan was unsecured, was scheduled to mature on April 20, 2022, had a fixed interest rate of 1.0% per annum and was subject to the standard terms and conditions applicable to loans administered under the Paycheck Protection Program. 8. Convertible Preferred Stock and Warrants Convertible Preferred Stock TransMedics, Inc. issued Series A-1 convertible preferred stock (the “Series A-1 Preferred Stock”), Series B convertible preferred stock (the “Series B Preferred Stock”), Series B-1 convertible preferred stock (the “Series B-1 Preferred Stock”), Series C convertible preferred stock (the “Series C Preferred Stock”), Series D convertible preferred stock (the “Series D Preferred Stock”), Series E convertible preferred stock (the “Series E Preferred Stock”) and Series F convertible preferred stock (the “Series F Preferred Stock”). The Series A-1 Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock are collectively referred to as the “Preferred Stock”. Immediately prior to the closing of the IPO on May 6, 2019, all of the outstanding shares of convertible preferred stock of TransMedics were converted into an aggregate of 13,119,424 shares of common stock of TransMedics Group. Warrants TransMedics had outstanding warrants to purchase shares of Series D Preferred Stock and Series F Preferred Stock as of December 29, 2018. The Company classified all of its preferred stock warrants as a liability on its consolidated balance sheets because the warrants were freestanding financial instruments that could require TransMedics to transfer assets upon exercise. The liability associated with each of these warrants was initially recorded at fair value upon the issuance date of each warrant and subsequently remeasured to fair value at each reporting date. Immediately prior to the closing of the IPO on May 6, 2019, all of the outstanding preferred stock warrants of TransMedics were converted into warrants to purchase an aggregate of 64,440 shares of which warrants to purchase 50,000 shares of common stock at an exercise price of $8.75 per share expire on November 7, 2022 and warrants to purchase 14,440 shares of common stock at an exercise price of $17.47 per share have an expiration date of May 6, 2024. Upon conversion, the fair value of the warrant liability at that time was reclassified to common stock. As a result, subsequent to the closing of the Company’s IPO, the Company no longer remeasures the fair value of the warrant liability at each reporting date. 111 9 . Equity On May 6, 2019, the Company filed a restated certificate of incorporation in the State of Massachusetts, which, among other things, restated the number of shares of all classes of stock that the Company has authority to issue to 175,000,000 shares, consisting of (i) 25,000,000 shares of preferred stock, no par value per share, and (ii) 150,000,000 shares of common stock, no par value per share. The preferred stock will have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Company’s boards of directors upon issuance. The shares of preferred stock currently undesignated. Each share of common stock is entitled to one vote on all matters submitted to a vote of the Company’s stockholders. The holders of common stock, voting exclusively and as a separate class, are entitled to elect two directors of the Company. The holders of common stock are entitled to receive dividends, if any, as may be declared by the board of directors, as described above. Through December 31, 2020, no dividends had been declared or paid. 1 0 . Stock-Based Compensation 2019 Stock Incentive Plan and Option Grants On April 15, 2019, TransMedics Group’s board of directors adopted and its sole stockholder approved the 2019 Stock Incentive Plan (the “2019 Plan”), which became effective on that same date. The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, unrestricted stock units, and other stock-based awards to employees, directors, and consultants of the Company and its subsidiaries. The number of shares of common stock of TransMedics Group initially available for issuance under the 2019 Plan was 3,428,571 shares, plus the number of shares underlying awards under the previously outstanding 2014 Stock Incentive Plan (the “2014 Plan”), not to exceed 1,595,189 shares, that expire or are terminated, surrendered, or cancelled without the delivery of shares, are forfeited to or repurchased by TransMedics Group or otherwise become available again for grant. Since the effectiveness of the Company’s 2019 Plan in April 2019, no future awards will be made under the 2014 Plan. Shares withheld in payment of the exercise or purchase price of an award or in satisfaction of tax withholding requirements, and the shares covered by a stock appreciation right for which any portion is settled in stock, will reduce the number of shares available for issuance under the 2019 Plan. In addition, the number of shares available for issuance under the 2019 Plan (i) will not be increased by any shares delivered under the 2019 Plan that are subsequently repurchased using proceeds directly attributable to stock option exercises and (ii) will not be reduced by any awards that are settled in cash or that expire, become unexercisable, terminate or are forfeited to or repurchased by TransMedics Group without the issuance of stock under the 2019 Plan. As of December 31, 2020, 2,447,687 shares of common stock were available for issuance under the 2019 Plan. During the fiscal year ended December 31, 2020, the Company granted options to its employees and a director with service-based vesting for the purchase of an aggregate of 603,336 shares of common stock with a weighted average grant-date fair value of $7.91 per share. 2019 Employee Stock Purchase Plan On April 15, 2019, TransMedics Group’s board of directors adopted and its sole stockholder approved the 2019 Employee Stock Purchase Plan (the “2019 ESPP”), which became effective that same date. A total of 371,142 shares of common stock of TransMedics Group are reserved for issuance under the 2019 ESPP as of December 31, 2020. As of December 31, 2020, 22,697 shares have been issued under the 2019 ESPP and 348,445 shares remained available for issuance. Stock Option Valuation The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. Prior to the IPO, the Company was a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. 112 The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted to employees and directors: Fiscal Year Ended December 31, 2020 December 28, 2019 Risk-free interest rate 0.91 % 2.29 % Expected term (in years) 5.97 6.02 Expected volatility 54 % 52 % Expected dividend yield 0 % 0 % The following table summarizes the Company’s option activity since December 28, 2019: Number of Shares Weighted Average Exercise Price Weighted Average Contractual Term Aggregate Intrinsic Value (in years) (in thousands) Outstanding as of December 28, 2019 1,952,300 $ 5.31 5.87 $ 26,415 Granted 603,336 15.69 Exercised (217,965 ) 1.04 Forfeited (65,566 ) 10.01 Expired (10,871 ) 43.96 Outstanding as of December 31, 2020 2,261,234 $ 8.17 6.22 $ 26,671 Vested and expected to vest as of December 31, 2020 2,261,234 $ 8.17 6.22 $ 26,671 Options exercisable as of December 31, 2020 1,425,910 $ 4.26 4.73 $ 22,363 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the fiscal years ended December 31, 2020 and December 28, 2019, was $2.9 million and $2.3 million, respectively. The weighted average grant-date fair value of stock options granted during the fiscal years ended December 31, 2020 and December 28, 2019 was $7.91 per share and $8.55 per share, respectively. The Company has not granted to employees any stock-based awards with performance-based vesting conditions. Stock-Based Compensation The Company recorded stock-based compensation expense in the following expense categories of its consolidated statements of operations (in thousands): Fiscal Year Ended December 31, 2020 December 28, 2019 Cost of revenue $ 27 $ 17 Research, development and clinical trials expenses 396 104 Selling, general and administrative expenses 1,991 733 $ 2,414 $ 854 As of December 31, 2020, total unrecognized compensation cost related to unvested share-based awards was $5.9 million, which is expected to be recognized over a weighted average period of 2.5 years. 113 1 1 . Income Taxes Tax Provision Components During the fiscal years ended December 31, 2020 and December 28, 2019, the Company recorded no income tax benefits for the net operating losses incurred or for the research and development tax credits generated in each year in the United States, due to the uncertainty regarding the realizability of these respective deferred tax assets. The Company generated income in the Netherlands for the fiscal years ended December 31, 2020 and December 28, 2019 and, accordingly, recorded a foreign income tax provision of less than $ 0.1 million for each of the fiscal years ended December 31, 2020 and December 28, 2019. Income Before Taxes The domestic and foreign components of (loss) profit before income taxes were as follows (in thousands): Fiscal Year Ended December 31, 2020 December 28, 2019 United States $ (28,803 ) $ (33,668 ) Foreign 87 161 $ (28,716 ) $ (33,507 ) A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Fiscal Year Ended December 31, 2020 December 28, 2019 Federal statutory income tax rate (21.0 )% (21.0 )% State taxes, net of federal benefit (5.7 )% (6.2 )% Federal and state research and development tax credits (3.6 )% (2.8 )% Nondeductible items (0.2 )% 0.2 % Deferred tax effect of change in state blended rate 7.8 % 0.0 % Return to provision 1.7 % 0.0 % Other 0.0 % 0.9 % Change in deferred tax asset valuation allowance 20.9 % 29.0 % Effective income tax rate (0.1 )% 0.1 % 114 Net deferred tax assets consisted of the following (in thousands): December 31, 2020 December 28, 2019 Deferred tax assets: Net operating loss carryforwards $ 81,390 $ 74,206 Capitalized research and development expense 6,136 8,505 Research and development tax credit carryforwards 11,541 10,745 Accrued expenses 1,390 1,309 Stock-based compensation expense 791 243 Deferred rent 79 157 Other 132 — Total deferred tax assets 101,459 95,165 Deferred tax liabilities: Other (218 ) (141 ) Unrealized gain (loss) (212 ) — Total deferred tax liabilities (430 ) (141 ) Valuation allowance (101,029 ) (95,024 ) Net deferred tax assets $ — $ — As of December 31, 2020, the Company had U.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. The Company’s federal net operating losses include $108.0 million, which can be carried forward indefinitely. As of December 31, 2020, the Company also had U.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 of December 31, 2020, the Company had no foreign net operating loss carryforwards. Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income or tax liabilities. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position. As required by Accounting Standard Codification 740, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards. Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a valuation allowance of approximately $101.0 million has been recorded. During 2020, the Company recorded a net increase to its valuation allowance in the amount of $6.0 million primarily attributable to the current year operating loss and research credit generation for which the Company cannot provide a tax benefit. The Company had no unrecognized tax benefits or related interest and penalties accrued for the fiscal years ended December 31, 2020 and December 28, 2019. The Company's policy is to record any interest or penalties related to income taxes as part of the income tax provision. 115 The Company generated research credits for the tax years ending after December 31, 2001, but has not conducted a study to document qualified activities. This study may result in an adjustment to the Company's research and development carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an unrecognized tax benefit for the year ended December 31, 2020. A full valuation allowance has been provided against the Company's research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research credit carryforward and the valuation allowance. The Company files income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending federal or state tax examinations. The Company has open tax years subject to examination from fiscal year 2017 to present. To the extent that the Company has carryforward attributes, the tax years in which the attribute was generated may still be adjusted upon examination by federal, state or local tax authorities if they either have been or will be used in the future. Changes in the valuation allowance for deferred tax assets during the fiscal years ended December 31, 2020 and December 28, 2019 related primarily to the increase in net operating loss carryforwards and research and development tax credit carryforwards in 2020 and 2019, and were as follows (in thousands): Fiscal Year Ended December 31, 2020 December 28, 2019 Valuation allowance as of beginning of year $ (95,024 ) $ (85,316 ) Decreases recorded as benefit to income tax provision — — Increases recorded to income tax provision (6,005 ) (9,708 ) Valuation allowance as of end of year $ (101,029 ) $ (95,024 ) As of December 31, 2020 and December 28, 2019, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the Company’s consolidated statements of operations. 1 2 . Commitments and Contingencies Operating Leases The Company leases its office, laboratory and manufacturing space under two noncancelable operating leases that expire in December 2027. On January 9, 2020, the Company amended each of the lease agreements for its corporate headquarters (the “Amendment”) to lease an additional 39,744 square feet for general office use and an additional 11,735 square feet for operational use (the “Extension Premises”). The Amendment also extended each of the existing lease terms from December 2021 to December 2026, with an option to extend for one additional period of five years. Under the Amendment, the landlord will contribute up to $3.4 million towards the Company’s leasehold improvements. The Amendment provides for annual base rent for the premises of approximately $1.9 million for the first year of the lease. Thereafter, the annual base rent will increase at an average of 2.5% each year until the end of the term. The Company is also obligated to pay the landlord certain costs, taxes, and operating expenses, subject to certain exclusions. On June 2, 2020, the Company further amended each of the lease agreements (the “Second Amendment”). The changes provided by the Second Amendment include (i) extending each of the existing lease terms for an additional year through December 31, 2027, (ii) delaying to October 23, 2020 the commencement of the Company’s occupation of the Extension Premises, and (iii) extending to December 23, 2021 the Company’s ability to utilize the contribution from the landlord toward the Company’s work on improvements of the premises. The Second Amendment provides for annual base rent of approximately $2.0 million for the additional lease year and postponed the Company’s obligation to pay rent for the Extension Premises until October 23, 2020. The Company’s lease agreements, as amended, include payment escalations, rent holidays and other lease incentives, which are accrued or deferred as appropriate such that rent expense for each lease is recognized on a straight-line basis over the respective lease terms, recording deferred rent for rent expense incurred but not yet paid. The Company recorded rent expense of $1.8 million and $1.2 million in the fiscal years ended December 31, 2020 and December 28, 2019, respectively. Costs incurred by the Company for tenant improvements but not yet reimbursed by the landlord are presented on the accompanying consolidated balance sheets as a tenant receivable within prepaid expenses and other current assets. As of December 31, 2020, the Company did not have a tenant receivable. 116 Future minimum lease payments under operating leases as of December 31, 2020 are as follows (in thousands): Year Ending: December 31, 2021 $ 1,900 December 31, 2022 1,948 December 31, 2023 1,997 December 31, 2024 2,047 December 31, 2025 2,098 Thereafter 4,354 $ 14,344 License Agreement with the Department of Veterans Affairs In 2002, the Company entered into a license agreement with the Department of Veterans Affairs (the “VA”), under which the Company was granted an exclusive, worldwide license under specified patents to make, use, sell and import certain technology used in the Company’s products and a non-exclusive, worldwide license to make, use, sell and import solutions for use in or with those products. The rights under the license agreement continue until the expiration of the last to expire of the licensed patents. The majority of the licensed U.S. patents expired in 2017, and the foreign patents expired in September 2018. However, the Company has requested a patent term extension for one U.S. patent covered by the VA license agreement, U.S. Patent No. 6100082. The Company has been granted an interim patent term extension for this patent until September 23, 2021. The Company has not received final approval of the patent extension beyond the interim patent term extension already granted. The maximum extension granted would be through May 2022; however, the length of the patent term extension will be determined by the United States Patent and Trademark Office (“USPTO”) based on input from the FDA. On February 8, 2021, the FDA provided to the USPTO a determined regulatory review period for the OCS Lung. Under the FDA’s analysis, the patent term extension of the ’082 patent would be until November 6, 2021 . The license includes the right to grant sublicenses, subject to approval by the VA and other restrictions, and is subject to the U.S. government’s right to practice the licensed patents on its own behalf without payment of a royalty and obligation to grant certain sublicenses as necessary to fulfill public health, welfare and safety needs. The license agreement also requires the Company to make its products covered by the licensed patents available to the public on reasonable terms and to provide the U.S. government such products at the lowest price. As consideration for the licenses granted by the VA, the Company is obligated to pay tiered royalties ranging from a low single-digit to a mid single-digit percentage on net sales of each product covered by a licensed patent (subject to a minimum aggregate royalty payment of less than $0.1 million per year during each of the first five years after the first commercial sale, after which no minimum is required). Royalties will be paid by the Company on a licensed product-by-licensed product and country-by-country basis, beginning on the first commercial sale of such licensed product in such country until expiration of the last valid patent claim covering such licensed product in such country. The Company is also responsible for all costs related to the amendment, prosecution and maintenance of the licensed patent rights. The Company paid the VA royalties of $0.3 million during each of the fiscal years ended December 31, 2020 and December 28, 2019. The Company also accrued VA royalties of $0.1 million as of December 31, 2020. The VA license agreement can be terminated by the Company or the VA only if the other party fails to cure its material breach within a specified period after receiving notice of such breach. 401(k) Savings Plan The Company has a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the board of directors. For the fiscal years ended December 31, 2020 and December 28, 2019, the Company had not made any contributions to the plan. 117 Indemnification Agreements In the ordinary course of business, the Company has agreed to defend and indemnify its customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets. The Company’s exposure under these indemnification provisions is generally limited to the total amount paid by the end-customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or services as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not currently aware of any indemnification claims and had not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2020 and December 28, 2019. Unconditional Purchase Commitment In January 2021, the Company entered into an unconditional $9.5 million purchase commitment, in the ordinary course of business, for goods with specified annual minimum quantities to be purchased through December 2029. The contract is not cancellable without penalty. Legal Proceedings The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings. 1 3 . Segment Reporting and Geographic Data The Company has determined that it operates in one segment (see Note 2). Net revenue by OCS product is summarized as follows (in thousands): Fiscal Year Ended December 31, December 28, 2020 2019 Net revenue by OCS product: OCS Lung net revenue $ 6,194 $ 8,664 OCS Heart net revenue 14,196 11,442 OCS Liver net revenue 5,249 3,498 Total net revenue $ 25,639 $ 23,604 Financial data by geographical area is summarized as follows (in thousands): Fiscal Year Ended December 31, December 28, 2020 2019 Net revenue by country (1): United States $ 19,239 $ 16,253 All other countries 6,400 7,351 Total net revenue $ 25,639 $ 23,604 118 December 31, 2020 December 28, 2019 Long-lived assets by country (2) : United States $ 4,114 $ 4,007 All other countries 640 785 Total long-lived assets $ 4,754 $ 4,792 (1) Net revenue by country is categorized based on the location of the end customer. (2) The Company’s only long-lived assets consist of property and equipment, net of depreciation, which are categorized based on their location of domicile. 1 4 . Related Party Transactions Employment of Dr. Amira Hassanein Dr. Amira Hassanein, who serves as Product Director for the Company’s OCS Lung program, is the sister of Dr. Waleed Hassanein, the Company’s President, Chief Executive Officer and a member of the Company’s board of directors. The Company paid Dr. Amira Hassanein $0.3 million and $0.2 million in total compensation in the fiscal years ended December 31, 2020 and December 28, 2019, respectively, for her services as an employee. 1 5 . Selected Quarterly Results of Operations Data (Unaudited) The selected quarterly statements of operations data have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary to present fairly, in all material respects, the information set forth therein on a consistent basis. The Company’s operating results may fluctuate due to a variety of factors. Because the timing of organ transplant procedures is generally unpredictable, the Company has not experienced seasonality in its business from quarter to quarter and does not expect to do so in the foreseeable future. The results of historical periods are not necessarily indicative of the results to be expected for a full year or any future period. The following table sets forth the selected quarterly statements of operations data for each of the eight most recent fiscal quarters in the period ended December 31, 2020 (in thousands, except per share amounts): Fiscal Three Months Ended Dec. 31 Sept. 30, June 30, March 31, Dec. 28, Sept. 28, June 29, Mar. 30, 2020 2020 2020 2020 2019 2019 2019 2019 Net revenue $ 7,627 $ 7,091 $ 3,391 $ 7,530 $ 6,057 $ 7,205 $ 5,666 $ 4,676 Gross profit 4,828 5,038 1,909 4,860 3,741 4,216 3,333 2,573 Loss from operations (5,896 ) (4,610 ) (7,861 ) (8,017 ) (8,694 ) (7,242 ) (7,705 ) (5,962 ) Net loss $ (6,311 ) $ (5,088 ) $ (8,497 ) $ (8,852 ) $ (9,177 ) $ (8,280 ) $ (9,195 ) $ (6,895 ) Net loss per share (basic and diluted) $ (0.23 ) $ (0.19 ) $ (0.36 ) $ (0.42 ) $ (0.43 ) $ (0.39 ) $ (0.70 ) $ (4.86 ) 119 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None