What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 97 added, 244 removed, 233 unchanged (59% of the section changed)

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

The following discussion and analysis of our financial condition and results of op erations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, as filed with the SEC on March 17, 2020 (“2019 Form 10-K”).

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020 , as filed with the SEC on March 11, 2021 (“2020 Form 10-K”).

Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

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Our OCS products have been used for over 1,800 human organ transplants.

During our clinical trials, we established relationships with over 55 leading transplant programs worldwide.

We have commercialized the OCS Lung and OCS Heart outside of the United States and received our first Pre-Market Approval, or PMA, from the FDA in March 2018 for the use in the United States of the OCS Lung for donor lungs currently utilized for transplantation and since May 2019, for donor lungs currently unutilized for transplantation.

We have commercialized the OCS Lung and OCS Heart outside of the United States and received our first PMA from the FDA in March 2018 for the use in the United States of the OCS Lung for donor lungs currently utilized for transplantation and since May 2019, for donor lungs currently unutilized for transplantation.

Since our inception, we have focused substantially all of our resources on designing, developing and building our proprietary OCS technology platform and organ-specific OCS products;

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raising capital;

and providing general and administrative support for these operations.

To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements, proceeds from the sale of common stock in our IPO, the sale of our common stock in equity offerings, and revenue from clinical trials and commercial sales of our OCS products.

commercializing our products;

developing our market and distribution chain and providing general and administrative support for these operations.

To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements, proceeds from the sale of common stock in our initial public offering, or IPO, the sale of our common stock in equity offerings, and revenue from clinical trials and commercial sales of our OCS products.

Since our inception, we have incurred significant operating losses.

Our ability to generate net revenue sufficient to achieve profitability will depend on the successful further development and commercialization of our products.

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

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

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

We generated net revenue of $7.1 million and incurred a net loss of $7.9 million for the three months ended March 31, 2021.

We generated net revenue of $25.6 million and incurred a net loss of $28.7 million for the year ended December 31, 2020.

As of March 31, 2021, we had an accumulated deficit of $406.1 million.

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

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continuing research, development and clinical trial efforts;

and seeking regulatory clearance for new products and product enhancements, including new indications, in both the United States and select non-U.S.

Further, following the closing of our IPO we have incurred and expect to continue to incur additional costs associated with operating as a public company.

seeking regulatory clearance for new products and product enhancements, including new indications, in both the United States and select non-U.S.

and operating as a public company.

As a result, we will need substantial additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research, development and clinical trials expenses.

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

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

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

as the surviving corporation.

As part of the transactions, each outstanding share of capital stock of TransMedics, Inc.

was converted into shares of common stock of TransMedics Group, each outstanding option to purchase shares of common stock of TransMedics, Inc.

was converted into an outstanding option to purchase shares of common stock of TransMedics Group and each outstanding warrant to purchase shares of preferred stock of TransMedics, Inc.

was converted into a warrant to purchase shares of common stock of TransMedics Group.

On May 26, 2020, we completed an underwritten public offering of our common stock, which resulted in the sale of 5,750,000 shares of common stock, inclusive of 750,000 shares we sold pursuant to the full exercise of the underwriters’ option to purchase additional shares.

The aggregate net proceeds received by us from the offering were approximately $75.0 million, after deducting underwriting discounts and commissions as well as other offering costs of $0.6 million.

Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.

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If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations.

We believe that our existing cash, cash equivalents, and marketable securities will be sufficient for us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months.

We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we ex pect.

We believe that our cash and cash equivalents and marketable securities will be sufficient for us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months.

We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

See “—Liquidity and Capital Resources”.

The impact of the COVID-19 pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions t o the global economy, as well as businesses and capital markets around the world.

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 our business as a result of COVID-19 include the temporary disruption of transplant procedures at many of the organ transplant centers who purchase OCS products;

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limitations on our employees’ and customers’ ability to travel, and delays in product installations, trainings or shipments to and from affected countries and within the United States.

In response to the pandemic , healthcare providers have, and may need to further, reallocate resources, such as physicians, staff, hospital beds and intensive care unit facilities, and the se actions significantly delay the provision of other medical care such as organ transplantation and reduce the number of transplant procedures that are performed, which has a negative impact on our revenue and clinical trial activities.

In response to the pandemic , healthcare providers have, and may need to further, reallocate resources , such as physicians, staff, hospital beds and intensive care unit facilities, and these actions significantly delay the provision of other medical care such as organ transplantation and reduce the number of transplant procedures that are performed, which has a negative impact on our revenue and clinical trial activities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For example, although the FDA had scheduled an advisory committee of experts from outside the FDA to review and evaluate our OCS Heart PMA application in the second quarter of 2020, due to the COVID-19 pandemic the advisory committee meeting was postponed to October 2020 and was further postponed before convening on April 6, 2021.

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

These steps are intended to protect the health and safety of our employees, to establish a process to support the continuous supply of our OCS products at transplant centers globally and to maintain financial flexibility.

These actions include transitioning most employees to a remote work environment, except for those who are deemed essential to product supply and reducing near-term expenses, such as reducing non-essential discretionary expenses.

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

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

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

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

The extent of the future impact on our 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.

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

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In particular, the speed of the continued spread of COVID-19 globally, and the magnitude, duration and frequency of interventions to contain the spread of the virus, such as government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, mandatory shutdowns for non-essential businesses, requirements regarding social distancing, and other public health safety measures, will determine the impact of the pandemic on our business.

Recent Developments

On April 6, 2021, the FDA’s Circulatory Systems Devices Panel of the Medical Devices Advisory Committee convened for an advisory committee meeting to review our clinical evidence from the OCS Heart EXPAND Trial, the associated Continued Access Protocol results, as well as the clinical evidence from our OCS Heart PROCEED II Trial and to provide the FDA with non-binding recommendations with respect to our OCS Heart PMA application.

At the advisory committee meeting, the panel voted:

12 to five, with one abstaining, that the benefits of the OCS Heart outweigh its risks;

10 to six, with two abstaining, that there is reasonable assurance that the OCS Heart is effective;

and nine to seven, with two abstaining, that there is reasonable assurance of the OCS Heart’s safety.

We anticipate FDA will issue a decision regarding whether to approve or deny approval of the PMA application within three to four months following the advisory committee meeting, which decision may or may not follow the advisory committee’s recommendation.

Components of Our Results of Operations

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All of our revenue has been generated by sales to transplant centers in the United States, Europe and Asia-Pacific, or, in some cases, to distributors selling to transplant centers in select countries.

Substantially all of our customer arrangements have multiple-performance obligations that contain deliverables consisting of OCS Perfusion Sets and OCS Solutions.

In some of those multiple-element arrangements, the deliverables also include an OCS Console, whether sold or loaned to the customer.

Substantially all of our customer contracts have multiple-performance obligations that contain promises consisting of OCS Perfusion Sets and OCS Solutions.

In some of those contracts, the promises also include an OCS Console, whether sold or loaned to the customer.

Some of our revenue has been generated from products sold in conjunction with the clinical trials conducted for our OCS products, under arrangements referred to as customer clinical trial agreements.

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Over time, we typically recover the cost of the loaned OCS Console through the customer’s continued purchasing and use of additional OCS disposable sets.

For these reasons, we have determined that part of the arrangement consideration for the disposable set is an implied rental payment for use of the OCS Console.

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

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

For these reasons, we have determined that part of the selling price for the disposable set is an implied rental payment for use of the OCS Console.

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

Because all promises of a customer contract are delivered and recognized as revenue at the same time and because revenue allocated to promises other than OCS disposable sets, such as implied rental income and service revenue, is insignificant, all performance obligations from customer contracts are classified as a single category of revenue in our consolidated statements of operations.

Under some of our customer clinical trial agreements, we make payments to our customers for reimbursements of clinical trial materials and for specified clinical documentation related to their use of our OCS products.

Because some of these payments do not provide us with a separately identifiable benefit, we record such payments as a reduction of revenue from the customer, resulting in our net revenue presentation.

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

We recorded reimbursable clinical trial costs as a reduction of revenue of $0.6 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively.

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

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

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

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

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

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

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

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

Our OCS Heart EXPAND CAP trial began patient enrollment in May 2019 and is currently

enrolling patients.

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

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

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

Our OCS Heart DCD CAP trial began patient enrollment in December 2020 and is currently enrolling patients .

Our OCS Liver PROTECT CAP trial began patient enrollment in February 2020 and has completed initial enrollment;

however, we have applied to the FDA to enroll additional patients in this trial.

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

Through September 30, 2020, all of our sales outside of the United States have been commercial sales (unrelated to any clinical trials) and our net revenue has been generated primarily from sales of OCS disposable sets and, to a much lesser extent, sales of OCS Consoles.

Through March 31, 2021, all of our sales outside of the United States have been commercial sales (unrelated to any clinical trials) and our net revenue has been generated primarily from sales of OCS disposable sets and, to a much lesser extent, sales of OCS Consoles.

Commercial sales of OCS disposable sets generally have a higher average selling price than clinical trial sales of OCS disposable sets.

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sales if national healthcare systems begin to reimburse transplant centers for the use of the OCS, if transplant centers utilize the OCS in more transplant cases, and if more transplant centers adopt the OCS in their programs.

We expect that net revenue will decrease in the short term as a result of the COVID-19 pandemic.

We expect that net revenue will continue to be negatively impacted in 2021 a result of the COVID-19 pandemic.

Cost of Revenue, Gross Profit and Gross Margin

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Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of components and direct materials, manufacturing costs, headcount, the selling price of our OCS products and fluctuations in amounts paid by us to customers related to reimbursements of their clinical trial expenses.

We expect that cost of revenue as a percentage of net revenue will decrease and gross margin and gross profit will increase over the long term as our sales and production volumes increase and our cost per unit of our OCS disposable sets decreases due to efficiencies of scale.

We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and increase our gross margin.

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We expect that our selling, general and administrative expenses will increase over the long term as we increase our headcount to support the expected continued sales growth of our OCS products.

We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with our continued operation as a public company.

We also anticipate that we will continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with our continued operation as a public company.

Other Income (Expense)

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Interest expense consists of interest expense associated with outstanding borrowings under our loan agreement as well as the amortization of debt discount associated with such agreement.

Change in Fair Value of Preferred Stock Warrant Liability

Prior to our IPO in May 2019, we had outstanding warrants to purchase preferred stock.

We classified these warrants as a liability on our consolidated balance sheet that we remeasured to fair value at each reporting date, and we recognized changes in the fair value of the warrant liability as a component of other income (expense) in our consolidated statements of operations.

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

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

Other Income (Expense), Net

Other income (expense), net includes interest income, foreign currency transaction gains and losses and other non-operating income and expense items unrelated to our core operations.

Other income (expense), net includes interest income, realized and unrealized foreign currency transaction gains and losses and other non-operating income and expense items unrelated to our core operations.

Interest income consists of interest earned on our invested cash balances.

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Results of Operations

Prior to 2020, our fiscal year ended on the last Saturday in December, and we reported fiscal years using a 52/53-week convention.

Under this convention, certain fiscal years contained 53 weeks.

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

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

In February 2020, we changed the end of our fiscal year end from the last Saturday in December to December 31.

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

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

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

Fiscal Three Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Cost of revenue

Operating expenses:

Research, development and clinical trials

Selling, general and administrative

Total operating expenses

Loss from operations

Other income (expense):

Interest expense

Other income (expense), net

Total other expense, net

Loss before income taxes

Provision for income taxes

Net Revenue, Cost of Revenue and Gross Profit

Fiscal Three Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Cost of revenue

Fiscal Three Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Net revenue by geography:

United States

Outside the U.S.

Total net revenue

Net revenue by OCS product:

OCS Lung net revenue

OCS Heart net revenue

OCS Liver net revenue

Total net revenue

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

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

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

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

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

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

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

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

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

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

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

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

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

Cost of Revenue, Gross Profit and Gross Margin

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

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

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

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

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

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

Operating Expenses

Research, Development and Clinical Trials Expenses

Fiscal Three Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Personnel related (including stock-based compensation expense)

Clinical trials costs

Consulting and third-party testing

Laboratory supplies and research materials

Total research, development and clinical trials expenses

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

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

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

Selling, General and Administrative Expenses

Fiscal Three Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Personnel related (including stock-based compensation expense)

Professional and consultant fees

Tradeshows and conferences

Total selling, general and administrative expenses

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

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

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

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

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

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

Other Income (Expense)

Interest Expense

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

Other Income (Expense), Net

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

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

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

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

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Interest expense

Change in fair value of preferred stock warrant liability

Other income (expense), net

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Provision for income taxes

Net Revenue, Cost of Revenue and Gross Profit

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

(in thousands)

Cost of revenue

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

Three Months Ended March 31,

(in thousands)

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Total net revenue

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

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

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

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

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

In addition, the U.S.

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

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

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

Net revenue from customers outside the U.S.

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

Net revenue from customers in the United States was $5.8 million in the three months ended March 31, 2021 and increased by $0.5 million compared to the three months ended March 31, 2020, primarily due to a $1.5 million increase in OCS Lung product and OCS Heart product sales, partially offset by a $0.9 million decrease in sales of OCS Liver products.

Net revenue from sales of OCS Lung products in the United States increased from $1.9 million in the three months ended March 31, 2020 to $2.3 million in the three months ended March 31, 2021.

The increase was due primarily to higher sales volume of OCS Lung disposable sets.

Net revenue from OCS Heart disposable sets sold to customers for use in our ongoing clinical trials in the United States increased by $1.1 million, while net revenue from OCS Liver disposable sets sold in the United States decreased by $0.9 million.

The increase in net revenue from OCS Heart disposable sets is attributed to higher volume of OCS Heart disposable sets sold in the OCS Heart DCD CAP Trial.

The lower sales volume of OCS Liver disposable sets was primarily a result of the substantial completion of enrollment of approved patients in our OCS Liver Protect CAP Trial early in the first quarter of 2021.

Net revenue from customers outside the United States was $1.3 million in the three months ended March 31, 2021 compared to $2.3 million in the three months ended March 31, 2020.

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

Net revenue from sales of OCS Lung disposable sets outside the United States was relatively flat and net revenue from OCS Heart disposable sets decreased by $1.0 million from the three months ended March 31, 2020 to the three months ended March 31, 2021.

Cost of Revenue, Gross Profit and Gross Margin

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

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

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

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

Cost of revenue decreased by $0.4 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Gross profit was relatively flat in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Gross margin was 68% and 65% for the three months ended March 31, 2021 and 2020, respectively.

Gross margin increased primarily as a result of efficiency in the production process.

Operating Expenses

Research, Development and Clinical Trials Expenses

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

Three Months Ended March 31,

(in thousands)

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Total research, development and clinical trials expenses

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

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

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

Total research, development and clinical trials expenses decreased by $1.7 million from $6.2 million in the three months ended March 31, 2020 to $4.5 million in the three months ended March 31, 2021 .

Clinical trial costs decreased by $1.0 million due to a reduction in ongoing trial enrollment activity primarily related to the OCS Heart DCD CAP Trial.

Consulting and third-party testing and laboratory supplies and research materials costs decreased by $0.4 million and $0.2 million, respectively, due primarily to decreased activities as a result of the continued impact of the COVID-19 pandemic.

Selling, General and Administrative Expenses

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

Three Months Ended March 31,

(in thousands)

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Total selling, general and administrative expenses

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

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

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

Total selling, general and administrative expenses increased by $0.1 million from $6.7 million in the three months ended March 31, 2020 to $6.8 million in the three months ended March 31, 2021 due to an increase in personnel related costs, partially offset by decreases in professional and consultant fees, tradeshows and conferences and other costs.

Personnel related costs increased from the continued expansion of our commercial team to support commercial sales of our OCS Lung product in the United States.

Stock-based compensation expense also increased by $0.6 million due primarily to additional grants to new and existing employees.

The decrease in professional and consultant fees, tradeshows and conferences and other expenses was due to overall reduced travel, tradeshow and conference activity as a result of the COVID-19 pandemic.

Other Income (Expense)

Interest Expense

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

Change in Fair Value of Preferred Stock Warrant Liability

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

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

Interest expense was $1.0 million for each of the three months ended March 31, 2021 and 2020.

Other Income (Expense), Net

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

Other income (expense), net for the three months ended March 31, 2021 and 2020 included interest income of less than $0.1 million and $0.3 million, respectively, resulting from interest earned on invested cash balances, and $0.5 million and $0.1 million, respectively, of realized and unrealized foreign currency transaction losses.

Liquidity and Capital Resources

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To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements, proceeds from the sale of common stock in our public offerings and revenue from clinical trials and commercial sales of our OCS products.

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

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

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

The aggregate net proceeds received by us from the offering were approximately $75.0 million, after deducting underwriting discounts and commissions as well as other offering costs of $0.6 million.

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

Fiscal Nine Months Ended

September 30, 2020

September 28, 2019

Since May 2019, we have funded our operations with the proceeds from our 2019 initial public offering of our common stock and our 2020 follow-on public offering.

The follow-on public offering was completed on May 26, 2020 and resulted in net proceeds of $75.1 million.

As of March 31, 2021, we had cash, cash equivalents, and marketable securities of $118.1 million.

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

Three Months Ended March 31,

(in thousands)

Cash used in operating activities

Cash used in investing activities

Cash provided by in financing activities

Cash provided by investing activities

Cash provided by financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

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Operating Activities

During the fiscal nine months ended September 30, 2020, operating activities used $23.1 million of cash, primarily resulting from our net loss of $22.4 million and net cash used by changes in our operating assets and liabilities of $3.7 million, partially offset by net non-cash charges of $3.0 million.

Net cash used by changes in our operating assets and liabilities for the fiscal nine months ended September 30, 2020 consisted primarily of a $3.1 million decrease in accounts payable and accrued expenses, a $2.4 million increase in inventory and a $0.7 million increase in prepaid expenses and other current assets, partially offset by a $1.2 million increase in deferred revenue and a $0.5 million decrease in accounts receivable.

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

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

During the three months ended March 31, 2021, operating activities used $7.3 million of cash, primarily resulting from our net loss of $7.9 million and net cash used by changes in our operating assets and liabilities of $2.0 million, partially offset by net non-cash charges of $2.6 million.

Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2021 consisted primarily of a $0.9 million increase in prepaid expenses and other current assets, a $0.6 million increase in accounts receivable, a $0.4 million increase in inventory and a $0.3 million decrease in accounts payable and accrued expenses and other current liabilities, partially offset by a $0.2 million increase in deferred revenue.

During the three months ended March 31, 2020, operating activities used $8.2 million of cash, primarily resulting from our net loss of $8.9 million and net cash used by changes in our operating assets and liabilities of $0.3 million, partially offset by net non-cash charges of $1.0 million.

Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2020 consisted primarily of a $0.2 million increase in inventory and a $0.6 million decrease in accounts payable and accrued expenses and other current liabilities, both partially offset by a $0.4 million decrease in accounts receivable and a $0.3 million increase in deferred rent.

Changes in accounts receivable, inventory, accounts payable, and accrued expenses and other current liabilities in each reporting period are generally due to growth in our business and timing of invoices and payments.

Investing Activities

During the fiscal nine months ended September 30, 2020, net cash used in investing activities of $51.5 million consisted of $101.5 million in purchases of marketable securities and $0.5 million in purchases of property and equipment, partially offset by proceeds from sales and maturities of marketable securities of $50.5 million.

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

During the three months ended March 31, 2021, net cash provided by investing activities of $9.3 million consisted of proceeds from sales and maturities of marketable securities of $21.0 million, partially offset by $11.7 million in purchases of marketable securities.

During the three months ended March 31, 2020, net cash provided by investing activities of $12.7 million consisted of proceeds from sales and maturities of marketable securities of $17.2 million, partially offset by $4.2 million in purchases of marketable securities and $0.3 million in purchases of property and equipment.

Financing Activities

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

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

During the three months ended March 31, 2021, net cash provided by financing activities of $0.6 million consisted of proceeds from the issuance of common stock in connection with the employee stock purchase plan of $0.2 million and proceeds from the issuance of common stock upon exercise of stock options of $0.4 million.

During the three months ended March 31, 2020, net cash provided by financing activities of $0.2 million consisted of proceeds from the issuance of common stock in connection with the employee stock purchase plan of $0.2 million and proceeds from the issuance of common stock upon exercise of stock options of $0.1 million, partially offset by payments of offering costs related to our IPO of $0.1 million.

Long-Term Debt

In June 2018, TransMedics entered into the Credit Agreement with OrbiMed, pursuant to which it borrowed $35.0 million.

We have a Credit Agreement with OrbiMed, pursuant to which we borrowed $35.0 million.

Borrowings under the Credit Agreement bear interest at an annual rate equal to the LIBOR subject to a minimum of 1.0% and a maximum of 4.0%, plus 8.5%, or the Applicable Margin, subject in the aggregate to a maximum interest rate of 11.5%.

In addition, bor rowings under the Credit Agreement bear paid-in-kind, or PIK interest, at an annual rate equal to the amount by which LIBOR plus the Applicable Margin exceeds 11.5%, but not to exceed 12.5%.

The PIK interest is added to the principal amount of the borrowin gs outstanding at the end of each quarter until the maturity date of the Credit Agreement in June 2023.

In addition, borrowings under the Credit Agreement bear paid-in-kind, or PIK interest, at an annual rate equal to the amount by which LIBOR plus the Applicable Margin exceeds 11.5%, but not to exceed 12.5%.

The PIK interest is added to the principal amount of the borrowings outstanding at the end of each quarter until the maturity date of the Credit Agreement 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.

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Our current prepayment premium is 4.5% and will decrease to zero in June 2021.

We are als o required to make a final payment in an amount equal to 3.0% of the principal amount of any prepayment or repayment, which we are accreting to interest expense over the term of the Credit Agreement using the effective interest method.

We are also required to make a final payment in an amount equal to 3.0% of the principal amount of any prepayment or repayment, which we are accreting to interest expense over the term of the Credit Agreement using the effective interest method.

All obligations under the Credit Agreement are guaranteed by us and each of our material subsidiaries.

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and engaging in certain other business transactions.

The obligations under the Credit Agreement are subject to acceleration upon the occurrence of specified events of default, including payment default, change in control, bankruptcy, insolvency, certain defaults under ot her material debt, certain events with respect to governmental approvals (if such events could cause a material adverse change in our business), failure to comply with certain covenants, including the minimum liquidity and unqualified audit opinion covenants, and a material adverse change in our business, operations or other financial condition.

As of September 30, 2020, we were in compliance with all of the covenants under the Credit Agreement.

The obligations under the Credit Agreement are subject to acceleration upon the occurrence of specified events of default, including payment default, change in control, bankruptcy, insolvency, certain defaults under other material debt, certain events with respect to governmental approvals (if such events could cause a material adverse change in our business), failure to comply with certain covenants, including the minimum liquidity and unqualified audit opinion covenants, and a material adverse change in our business, operations or other financial condition.

As of March 31, 2021, we were in compliance with all of the covenants under the Credit Agreement.

Upon the occurrence of an event of default and until such event of default is no longer continuing, the Applicable Margin will increase by 4.0% per annum.

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In addition, we may be required to prepay outstanding borrowings, subject to certain exceptions, with portions of net cash proceeds of certain asset sales and certain casualty and condemnation events.

While we do not expect that the transition from LIBOR, including any legal or regulatory changes made in response to its future phase out, or the risks related to its discontinuance will have a material effect on our financing costs, the impact is uncertain at this time.

Funding Requirements

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the level of our selling, general and administrative expenses.

We believe that our existing cash, cash e quivalents, and marketable securities will enable us to fund our operating expenses, capital expenditure requirements, and debt service payments for at least 12 months following the filing of this Quarterly Report on Form 10-Q.

We may need to raise additi onal funding, which might not be available on favorable terms or at all.

We believe that our existing cash, cash equivalents, and marketable securities will enable us to fund our operating expenses, capital expenditure requirements, and debt service payments for at least 12 months following the filing of this Quarterly Report on Form 10-Q.

We may need to raise additional funding, which might not be available on favorable terms or at all.

See “Item 1A.

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Contractual Obligations and Commitments

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

Payments Due by Period

(in thousands)

Operating lease commitments(1)

Debt obligations(2)

Amounts in table reflect payments due for our leases of office and laboratory space in Andover, Massachusetts under two operating lease agreements.

On January 9, 2020, we amended these lease agreements to, among other things, extend the expiration date of each lease to December 2026, increase the rentable square feet subject to each lease, and increase annual base rent for each lease.

On June 2, 2020, we further amended these lease agreements to delay the commencement date of the increased space and extend the expiration date for each lease to December 2027.

For more information, see “Note 10.

Operating Leases” to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

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

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

There have been no material changes to our contractual obligations and commitments from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Form 10-K.

Inflation Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis