TransMedics Group, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 1, 2022 (“2021 Form 10-K”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Item 1A. Risk Factors” section of this Quarterly Report on Form 10-Q and the “Item 1A. Risk Factors” section of our 2021 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a commercial-stage medical technology company transforming organ transplant therapy for end-stage organ failure patients across multiple disease states. We developed the OCS to replace a decades-old standard of care that we believe is significantly limiting access to life-saving transplant therapy for hundreds of thousands of patients worldwide. Our innovative OCS technology replicates many aspects of the organ’s natural living and functioning environment outside of the human body. As such, the OCS represents a paradigm shift that transforms organ preservation for transplantation from a static state to a dynamic environment that enables new capabilities, including organ optimization and assessment. We believe the use of the OCS has the potential to significantly increase the number of organ transplants and improve post-transplant outcomes. We have developed our National OCS Program, a turnkey solution to provide outsourced organ retrieval and OCS organ management, to provide transplant programs with a more efficient process to procure donor organs with the OCS. We designed the OCS to be a platform that allows us to leverage core technologies across products for multiple organs. To date, we have developed three OCS products, one for each of lung, heart and liver transplantations, making the OCS the only multi-organ technology platform. We have commercialized the OCS Lung and OCS Heart outside of the United States. All three of our products, OCS Lung, OCS Heart, and OCS Liver have received Pre-Market Approval, or PMA, from the Food and Drug Administration, or FDA, as follows: • OCS Lung for the preservation of standard criteria donor lungs for double-lung transplantation; • OCS Lung for the preservation of donor lungs initially deemed unsuitable due to limitations of cold storage for double-lung transplantation; • OCS Heart for the preservation of DBD donor hearts deemed unsuitable due to limitations of cold storage (e.g. >4 hours of cross-clamp time); • OCS Heart for the ex vivo reanimation, functional monitoring, and beating-heart preservation of DCD hearts (FDA approval received on April 28, 2022), and • OCS Liver for the preservation of DBD and DCD donor livers < 55 years old, macrosteatosis <15% and with < 30 mins of warm ischemia time. Since our inception, we have focused substantially all of our resources on designing, developing and building our proprietary OCS technology platform and organ-specific OCS products; obtaining clinical evidence for the safety and effectiveness of our OCS products through clinical trials; securing regulatory approval; organizing and staffing our company; planning our business; raising capital; commercializing our products; developing our market and distribution chain and providing general and administrative support for these operations. To date, we have funded our operations primarily with proceeds from sales of preferred stock, borrowings under loan agreements, proceeds from the sale of common stock in our public offerings, and revenue from clinical trials and commercial sales of our OCS products. Since 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 $15.9 million and incurred a net loss of $10.6 million for the three months ended March 31, 2022. We generated net revenue of $30.3 million and incurred a net loss of $44.2 million for the year ended December 31, 2021. As of March 31, 2022, we had an accumulated deficit of $453.0 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. markets, including growing our commercial team, which will pursue increasing commercial sales of our OCS products; scaling our manufacturing operations; building our commercial operations; continuing research, development and clinical trial efforts; seeking regulatory clearance for new products and product enhancements, including new indications, in both the 16 U nited States and select non-U.S. markets ; and operating as a public company. As a result, we will need substantial additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research, development and clinical trials expenses. Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Until such time, if ever, as we can generate substantial net revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings, debt financings and strategic alliances. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations. As of March 31, 2022, we had cash, cash equivalents and marketable securities of $72.0 million. Our credit facility of $35.0 million with OrbiMed matures on June 22, 2023. We believe that our 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 12 months following the filing of our Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources”. COVID-19 The COVID-19 pandemic, including efforts to contain the spread of the coronavirus, has impacted, and may continue to impact, our business, financial condition, operating results and cash flows, including as a result of the impact of new variants. Impacts to our business as a result of COVID-19 have included the temporary disruption of transplant procedures at many of the organ transplant centers who purchase OCS products; customer delays or reductions in customer capital expenditures and operating budgets and the related impact on our product sales; disruptions to our manufacturing operations and supply chain caused by facility closures, reductions in operating hours, staggered shifts and other social distancing efforts; labor shortages; decreased productivity and unavailability of materials or components; delays of reviews and approvals by the FDA and other health authorities; delays in our clinical trial enrollment; limitations on our employees’ and customers’ ability to travel, and delays in product installations, trainings or shipments to and from other 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, as they prioritize limited resources and personnel capacity to focus on the treatment of patients with COVID-19. 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 our revenue and cash flows. These measures and challenges may continue for the duration of the COVID-19 pandemic. The COVID-19 pandemic has also impacted, and may continue to impact, our third party suppliers, including through the effects of facility closures, reductions in operating hours, staggered shifts and other social distancing efforts, labor shortages, decreased productivity and unavailability of materials or components. In addition, inflation, changes in trade policies, and the imposition of duties and tariffs could adversely impact the price or availability of raw materials, the components of our products as well as shipping and transportation costs. While we maintain an inventory of finished products and raw materials used in our OCS products, a further prolonged pandemic could lead to shortages in the raw materials necessary to manufacture our products. The extent to which COVID-19 impacts operations of our third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence. If we experience a prolonged disruption in our manufacturing, supply chains, or commercial operations, we would expect to experience a material adverse impact on our business, financial condition, results of operations and prospects. Recent Developments On April 28, 2022, we received a PMA from the FDA for the use in the United States of the OCS Heart for use with organs from donors after circulatory death. The PMA for the OCS Heart was based on the results of the OCS DCD Heart Trial. Components of Our Results of Operations 17 Net Revenue We generate revenue primarily from sales of our single-use, organ-specific disposable sets used on our organ-specific OCS Consoles. To a lesser extent, we also generate revenue from the sale of OCS Consoles to customers and from the implied rental of OCS Consoles loaned to customers at no charge. For each new transplant procedure, customers purchase an additional OCS disposable set for use on the customer’s existing organ-specific OCS Console. All of our revenue has been generated by sales to transplant centers and Organ Procurement Organizations, not-for-profit organizations responsible for recovering organs from deceased donors for transplantation, 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 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. We have customer agreements under which we loan our OCS Consoles to the customer for the duration of the agreement. In such cases, we place an organ-specific OCS Console at the customer site for its use free of charge, and the customer separately purchases from us the OCS disposable sets used in each transplant procedure. When we loan the OCS Console to the customer, we retain title to the console at all times and do not require minimum purchase commitments from the customer related to any OCS products. In such cases, we invoice the customer for OCS disposable sets based on customer orders received for each new transplant procedure and the prices set forth in the customer agreement. Over time, we typically recover the cost of the loaned OCS Console through the customer’s continued purchasing and use of additional OCS disposable sets. For these reasons, we have determined that part of the selling price for the disposable set is an implied rental payment for use of the OCS Console. 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 made 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 did not provide us with a separately identifiable benefit, we recorded such payments as a reduction of revenue from the customer, resulting in our net revenue presentation. We did not record any reimbursable clinical trial costs as a reduction of revenue for the three months ended March 31, 2022. We recorded reimbursable clinical trial costs as a reduction of revenue of $0.6 million for the three months ended March 31, 2021. Through March 31, 2022, all of our sales outside of the United States have been commercial sales (unrelated to any clinical trials). We expect that our net revenue will increase over the long term as a result of receiving PMAs for the OCS Lung, OCS Heart and OCS Liver in the United States. Additionally, commercial sales of OCS disposable sets generally have a higher average selling price than clinical trial sales of OCS disposable sets. We also expect that our net revenue will increase over the long term as a result of anticipated growth in non-U.S. sales if national healthcare systems begin to reimburse transplant centers for the use of the OCS, if transplant centers utilize the OCS in more transplant cases, and if more transplant centers adopt the OCS in their programs. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue consists primarily of costs of components of our OCS Consoles and disposable sets, costs of direct materials, labor and the manufacturing overhead that directly supports production, and costs related to the depreciation of OCS Consoles loaned to customers. When we loan an OCS Console to a customer for its use free of charge, we capitalize as property and equipment the cost of our OCS Console and depreciate these assets over the five-year estimated useful life of the console. Included in the cost of OCS disposable sets are the costs of our OCS Lung, OCS Heart and OCS Liver Solutions. We expect that cost of revenue will increase or decrease in absolute dollars primarily as, and to the extent that, our net revenue increases or decreases. Gross profit is the amount by which our net revenue exceeds our cost of revenue in each reporting period. We calculate gross margin as gross profit divided by net revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of components and direct materials, manufacturing overhead costs, direct labor, the selling price of our OCS products and fluctuations in amounts paid by us to customers related to reimbursements of their clinical trial expenses during clinical trials. 18 We expect that cost of revenue as a percentage of net revenue will moderately decrease and gross margin and gross profit will moderately increase over the long term as our sales and production volumes increase and our cost per unit of our OCS disposable sets decreases due to economies of scale. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and increase our gross margin. While we expect gross margin to increase over the long term, it will likely fluctuate from quarter to quarter . Operating Expenses Research, Development and Clinical Trials Expenses Research, development and clinical trials expenses consist primarily of costs incurred for our research activities, product development, hardware and software engineering, clinical trials to continue to develop clinical evidence of our products’ safety and effectiveness, regulatory expenses, testing, consultant services and other costs associated with our OCS technology platform and OCS products, which include: • employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research, hardware and software development, regulatory and clinical trial functions; • expenses incurred in connection with the clinical trials of our products, including under agreements with third parties, such as consultants, contractors and data management organizations; • the cost of maintaining and improving our product designs, including the testing of materials and parts used in our products; • laboratory supplies and research materials; and • facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance. We expense research, development and clinical trials costs as incurred. In the future, we expect that research, development and clinical trials expenses will increase over the long term due to ongoing product development and approval efforts. We expect to continue to perform activities related to obtaining additional regulatory approvals for expanded indications in the United States and other served geographies, as well as developing the next generation of our OCS technology platform. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in our commercial team and personnel in executive, marketing, finance and administrative functions. Selling, general and administrative expenses also include direct and allocated facility-related costs, promotional activities, marketing, conferences and trade show costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We expect to continue to increase headcount in our commercial team and increase marketing efforts as we continue to grow commercial sales of our OCS products in both U.S. and select non-U.S. markets. We expect that our selling, general and administrative expenses will increase over the long term as we increase our headcount to support the expected continued sales growth of our OCS products. Other Income (Expense) Interest Expense Interest expense consists of interest expense associated with outstanding borrowings under our loan agreement as well as the amortization of debt discount associated with such agreement. Other Income (Expense), Net Other income (expense), net includes interest income, realized and unrealized foreign currency transaction gains and losses and other non-operating income and expense items unrelated to our core operations. Interest income consists of interest earned on our invested cash balances. Foreign currency transaction gains and losses result from intercompany transactions as well as transactions with customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded. 19 Results of Operations Comparison of the Three Months Ended March 31, 2022 and 2021 The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Change (in thousands) Net revenue $ 15,880 $ 7,053 $ 8,827 Cost of revenue 3,776 2,242 1,534 Gross profit 12,104 4,811 7,293 Operating expenses: Research, development and clinical trials 7,534 4,532 3,002 Selling, general and administrative 13,939 6,786 7,153 Total operating expenses 21,473 11,318 10,155 Loss from operations (9,369 ) (6,507 ) (2,862 ) Other income (expense): Interest expense (960 ) (952 ) (8 ) Other expense, net (227 ) (454 ) 227 Total other expense, net (1,187 ) (1,406 ) 219 Loss before income taxes (10,556 ) (7,913 ) (2,643 ) Provision for income taxes (6 ) (4 ) (2 ) Net loss $ (10,562 ) $ (7,917 ) $ (2,645 ) Net Revenue Three Months Ended March 31, 2022 2021 Change (in thousands) Net revenue by geography: United States $ 13,561 $ 5,757 $ 7,804 Outside the U.S. 2,319 1,296 1,023 Total net revenue $ 15,880 $ 7,053 $ 8,827 Net revenue by OCS product: OCS Lung net revenue $ 2,298 $ 2,430 $ (132 ) OCS Heart net revenue 5,713 4,181 1,532 OCS Liver net revenue 7,869 442 7,427 Total net revenue $ 15,880 $ 7,053 $ 8,827 Net revenue from customers in the United States was $13.6 million in the three months ended March 31, 2022 and increased by $7.8 million compared to the three months ended March 31, 2021, primarily due to higher sales volumes of our OCS Liver and OCS Heart disposable sets as a result of the FDA approval for these two products in the third quarter of 2021. This increase was partially offset by lower sales volumes of our OCS Lung disposable sets. Net revenue from sales of OCS Liver disposable sets in the United States increased by $7.4 million due primarily to higher sales volumes of OCS Liver disposable sets resulting from the recent FDA approval of the OCS Liver product along with the expansion of our National OCS Program to provide a streamlined solution for transplant centers to use the OCS Liver. Net revenue from sales of OCS Heart disposable sets in the United States increased by $0.7 million also primarily as a result of the FDA approval of the OCS Heart in the third quarter of 2021. Both the OCS Heart and the OCS Liver were approved for commercial sale in September 2021, which has provided the opportunity for increased sales volumes and pricing. Net revenue from sales of OCS Lung disposable sets in the United States decreased by $0.4 million due to lower sales volumes of OCS Lung disposable sets, which were negatively impacted by the Omicron variant of COVID-19 in the early part of the first quarter of 2022. Net revenue from customers outside the United States was $2.3 million in the three months ended March 31, 2022 compared to $1.3 million in the three months ended March 31, 2021. The increase in net revenue from customers outside the United States was primarily due to a progressive return to pre-COVID-19 volumes of transplant procedures in the European 20 market. Net revenue from sales of OCS Heart disposable sets outside the United States increased by $ 0.8 million due to increased sales volume of OCS Heart d isposable sets . Net revenue from OCS Lung d isposable sets increased by $ 0.2 million from the three months ended March 31, 2021 to the three months ended March 31, 2022 due to higher sales volumes of OCS Lung disposable sets . Cost of Revenue, Gross Profit and Gross Margin Cost of revenue increased by $1.5 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Gross profit increased by $7.3 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Gross margin was 76% and 68% for the three months ended March 31, 2022 and 2021, respectively. Gross margin increased primarily as a result economies of scale from higher sales volumes and an increase in pricing. Operating Expenses Research, Development and Clinical Trials Expenses Three Months Ended March 31, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation expense) $ 2,252 $ 2,130 $ 122 Clinical trials costs 563 977 (414 ) Consulting and third-party testing 2,479 312 2,167 Laboratory supplies and research materials 1,137 410 727 Other 1,103 703 400 Total research, development and clinical trials expenses $ 7,534 $ 4,532 $ 3,002 Total research, development and clinical trials expenses increased by $3.0 million from $4.5 million in the three months ended March 31, 2021 to $7.5 million in the three months ended March 31, 2022. Consulting and third-party testing, laboratory supplies and research materials and other costs increased by $2.2 million, $0.7 million and $0.4 million, respectively, due to increased activity in our next generation program and ongoing existing research activities. Clinical trial costs decreased by $0.4 million due to the completion of pre-market approval clinical trial enrollment activity following the approval of the OCS Heart and OCS Liver by the FDA in September 2021. Selling, General and Administrative Expenses Three Months Ended March 31, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation expense) $ 8,387 $ 3,838 $ 4,549 Professional and consultant fees 2,088 1,402 686 Tradeshows and conferences 453 188 265 Other 3,011 1,358 1,653 Total selling, general and administrative expenses $ 13,939 $ 6,786 $ 7,153 Total selling, general and administrative expenses increased by $7.2 million from $6.8 million in the three months ended March 31, 2021 to $13.9 million in the three months ended March 31, 2022 due to increases in personnel related costs, professional and consultant fees, tradeshows and conferences and other costs. Personnel related costs increased by $4.5 million primarily due to the continued expansion of our team to support the National OCS Program and commercial growth of our OCS Lung, OCS Heart and OCS Liver products in the United States, as well as an increase in stock-based compensation expense of $1.1 million due primarily to additional grants to new and existing employees. Professional and consultant fees increased by $0.7 million due to additional sales and administration costs related to the expansion of our National OCS Program. Tradeshows and conferences costs increased by $0.3 million as a result of an increase in activities as restrictions implemented in response to the COVID-19 pandemic were eased. Other costs increased by $1.7 million due to increased logistics costs related to the expansion of our National OCS Program. 21 Other Income (Expense) Interest Expense Interest expense was $1.0 million for each of the three months ended March 31, 2022 and 2021. Other Expense, Net Other expense, net for the three months ended March 31, 2022 and 2021 included interest income of less than $0.1 million in each period resulting from interest earned on invested cash balances, and $0.2 million and $0.5 million of realized and unrealized foreign currency transactions losses, respectively. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements, proceeds from the sale of common stock in our public offerings and revenue from clinical trials and commercial sales of our OCS products. As of March 31, 2022, we had cash, cash equivalents, and marketable securities of $72.0 million. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Three Months Ended March 31, 2022 2021 (in thousands) Net cash used in operating activities $ (18,406 ) $ (7,330 ) Net cash provided by investing activities 10,514 9,272 Net cash provided by financing activities 405 583 Effect of exchange rate changes on cash, cash equivalents and restricted cash (196 ) (379 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ (7,683 ) $ 2,146 Operating Activities During the three months ended March 31, 2022, operating activities used $18.4 million of cash, primarily resulting from our net loss of $10.6 million and net cash used by changes in our operating assets and liabilities of $11.4 million, partially offset by net non-cash charges of $3.6 million. Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2022 consisted primarily of an increase in accounts receivable of $5.8 million, an increase in inventory of $2.9 million and a decrease in accounts payable and accrued expenses and other current liabilities of $4.0 million, partially offset by an increase in operating lease liabilities of $1.2 million related to the reimbursement of tenant improvement costs. 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. 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 three months ended March 31, 2022, net cash provided by investing activities of $10.5 million consisted of proceeds from sales and maturities of marketable securities of $14.5 million, partially offset by purchases of marketable securities of $2.0 million and purchases of property and equipment of $2.0 million. 22 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. Financing Activities During the three months ended March 31, 2022, net cash provided by financing activities of $0.4 million consisted of proceeds from the issuance of common stock upon exercise of stock options of $0.2 million and proceeds from the issuance of common stock in connection with the 2019 Employee Stock Purchase Plan of $0.2 million. 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 2019 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. Long-Term Debt 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, 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. At our option, we may prepay outstanding borrowings under the Credit Agreement. We are required to make a final payment in an amount equal to 3.0% of the principal amount of any prepayment or repayment, which we are accreting to interest expense over the term of the Credit Agreement using the effective interest method. All obligations under the Credit Agreement are guaranteed by us and each of our material subsidiaries. All obligations of us and each guarantor are secured by substantially all of our and each guarantor’s assets, including their intellectual property, subject to certain exceptions, including a perfected security interest in substantially all tangible and intangible assets of us and each guarantor. Under the Credit Agreement, we have agreed to certain affirmative and negative covenants to which we will remain subject until maturity. The financial covenants include maintaining a minimum liquidity amount of $3.0 million; the requirement, on an annual basis, to deliver to OrbiMed annual audited financial statements with an unqualified audit opinion from our independent registered public accounting firm; and restrictions on our activities, including limitations on dispositions, mergers or acquisitions; encumbering our intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions. The obligations under the Credit Agreement are subject to acceleration upon the occurrence of specified events of default, including payment default, change in control, bankruptcy, insolvency, certain defaults under other material debt, certain events with respect to governmental approvals (if such events could cause a material adverse change in our business), failure to comply with certain covenants, including the minimum liquidity and unqualified audit opinion covenants, and a material adverse change in our business, operations or other financial condition. As of March 31, 2022, we were in compliance with all of the covenants under the Credit Agreement. Upon the occurrence of an event of default and until such event of default is no longer continuing, the Applicable Margin will increase by 4.0% per annum. If an event of default (other than certain events of bankruptcy or insolvency) occurs and is continuing, OrbiMed may declare all or any portion of the outstanding principal amount of the borrowings plus accrued and unpaid interest to be due and payable. Upon the occurrence of certain events of bankruptcy or insolvency, all of the outstanding principal amount of the borrowings plus accrued and unpaid interest will automatically become due and payable. In addition, we may be required to prepay outstanding borrowings, subject to certain exceptions, with portions of net cash proceeds of certain asset sales and certain casualty and condemnation events. While we do not expect that the transition from LIBOR, including any legal or regulatory changes made in response to its future phase out, or the risks related to its discontinuance will have a material effect on our financing costs, the impact is uncertain at this time. 23 Funding Requirements As we continue to pursue and increase commercial sales of our OCS products, we expect our costs and expenses to increase in the future, particularly as we expand our commercial team, grow our National OCS Program, scale our manufacturing operations, continue research, development and clinical trial efforts, and seek regulatory approval for new products and product enhancements, including new indications, both in the United States and in select non-U.S. markets. In addition, following the closing of our IPO, we have incurred and expect to continue to incur additional costs associated with operating as a public company. The timing and amount of our operating and capital expenditures will depend on many factors, including: • the amount of net revenue generated by sales of our OCS Consoles, OCS disposable sets and other products that may be approved in the United States and select non-U.S. markets; • the costs and expenses of expanding our U.S. and non-U.S. sales and marketing infrastructure and our manufacturing operations; • the extent to which our OCS products are adopted by the transplant community; • the ability of our customers to obtain adequate reimbursement from third-party payors for procedures performed using the OCS products; • the degree of success we experience in commercializing our OCS products for additional indications; • the costs, timing and outcomes of post-approval studies or any future clinical studies and regulatory reviews, including to seek and obtain approvals for new indications for our OCS products; • the emergence of competing or complementary technologies; • the number and types of future products we develop and commercialize; • the costs associated with building our commercial operations; • the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and • the level of our selling, general and administrative expenses. We believe that our existing cash, cash equivalents, and marketable securities will enable us to fund our operating expenses, capital expenditure requirements, and debt service payments for at least 12 months following the filing of this Quarterly Report on Form 10-Q. We may need to raise additional funding, which might not be available on favorable terms or at all. See “Item 1A. Risk Factors—Risks Related to Our Financial Position and Need for Additional Capital” in our 2021 Form 10-K. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from those disclosed in our consolidated financial statements and the related notes and other financial information included in our 2021 Form 10-K. Recently Issued Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.