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 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 believe the use of the OCS has the potential to significantly increase the number of organ transplants and improve post-transplant outcomes. 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; 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 National OCS Program; 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 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 $62.1 million and incurred a net loss of $29.5 million for the nine months ended September 30, 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 September 30, 2022, we had an accumulated deficit of $472.0 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; growing our National OCS Program; scaling our manufacturing operations; building our commercial operations; developing 18 the next generation OCS; continuing research, development and clinical trial efforts; seeking regulatory clearance for new products and product enhancements, including new indications, in both the 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 September 30, 2022, we had cash and cash equivalents of $204.5 million . We believe that our cash and cash equivalents 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”. Economic Impacts and COVID-19 Inflation, changes in trade policies, and the imposition of duties and tariffs have and could continue to adversely impact the price or availability of raw materials, the components of our products as well as shipping and transportation costs. For example, the global economy has experienced extreme volatility and disruptions, including significant volatility in commodity and market prices, declines in consumer confidence, declines in economic growth, supply chain interruptions, uncertainty about economic stability and record inflation globally. Unfavorable economic conditions have and could continue to result in a variety of risks to our business, including impacts on demand and pricing for our products and difficulty in forecasting our financial results. A weak or declining economy also could strain our suppliers, possibly resulting in supply chain disruptions. 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. Continued impacts to our business as a result of COVID-19 may include disruptions to our manufacturing operations and supply chain; labor shortages; decreased productivity and unavailability of materials or components; 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. While we maintain an inventory of finished products and raw materials used in our OCS products, further prolonged pandemic-related disruptions 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. Components of Our Results of Operations 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. We also generate revenue by providing outsourced organ retrieval and OCS organ management services under our National OCS Program. 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 19 Solutions. In some of those contracts , the promises also include an OCS Console, whether sold or loaned to the customer , as well as organ retrieval and OCS organ management services under our National OCS Program . 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. When a customer order includes disposable sets and organ retrieval or OCS organ management services, we have determined that the disposable sets and services constitute separate performance obligations and we recognize revenue as the disposable sets and services are delivered to the customer. Net revenue relating to organ retrieval and OCS organ management services sold under our National OCS Program represented approximately 17% of net revenue for the three months ended September 30, 2022 and 13% of net revenue for the nine months ended September 30, 2022. 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. Through September 30, 2022, all of our sales outside of the United States have been commercial sales (unrelated to any clinical trials). Our sales in the EU are dependent on obtaining and maintaining the CE Mark certifications for each of our OCS products. As required by the EU Medical Devices Regulation (Regulation 2017/745), or the MDR, we received recertification of the CE Mark in September 2022 for each of the OCS Heart and OCS Lung systems, which includes the OCS Console, the OCS disposables, and the OCS solution additives. We also received the recertification of the CE Mark in September 2022 for the OCS Liver Console and disposables. We have applied for and expect to receive the CE Mark for the OCS Liver combined with our solution additives under the MDR within the next 12 months. 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. 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, depreciation of OCS Consoles loaned to customers and the cost of services provided for organ retrieval and OCS organ management services. 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 cost of services provided in the National OCS Program, 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. 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, our product enhancements improve manufacturing efficiency, and our revenue mix continues to change as we provide more services and the efficiency in the provisioning of these services improves due to scale and experience .We intend to use our design, engineering and manufacturing capabilities to further 20 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 agreements as well as the amortization of debt discount associated with such agreements. In July 2022, we entered into a credit agreement with Canadian Imperial Bank of Commerce, or CIBC, under which we borrowed $60.0 million. At that time, we repaid the remaining $35.0 million of principal that had been outstanding under our prior credit agreement with OrbiMed Royalty Opportunities II, LP, or OrbiMed. 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. 21 Results of Operations Comparison of the Three Months Ended September 30, 2022 and 2021 The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 Change (in thousands) Net revenue $ 25,683 $ 5,370 $ 20,313 Cost of revenue 7,568 1,597 5,971 Gross profit 18,115 3,773 14,342 Operating expenses: Research, development and clinical trials 6,808 5,163 1,645 Selling, general and administrative 16,851 10,335 6,516 Total operating expenses 23,659 15,498 8,161 Loss from operations (5,544 ) (11,725 ) 6,181 Other income (expense): Interest expense (787 ) (979 ) 192 Other expense, net (1,076 ) (249 ) (827 ) Total other expense, net (1,863 ) (1,228 ) (635 ) Loss before income taxes (7,407 ) (12,953 ) 5,546 Provision for income taxes (19 ) (9 ) (10 ) Net loss $ (7,426 ) $ (12,962 ) $ 5,536 Net Revenue Three Months Ended September 30, 2022 2021 Change (in thousands) Net revenue by geography: United States $ 23,285 $ 3,112 $ 20,173 Outside the U.S. 2,398 2,258 140 Total net revenue $ 25,683 $ 5,370 $ 20,313 Net revenue by OCS product: OCS Lung net revenue $ 1,599 $ 2,522 $ (923 ) OCS Heart net revenue 11,541 2,848 8,693 OCS Liver net revenue 12,543 — 12,543 Total net revenue $ 25,683 $ 5,370 $ 20,313 22 Net revenue from customers in the United States was $23.3 million in the three months ended September 30, 2022 and increased by $20.2 million compared to the three months ended September 30, 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 along with the expansion of our National OCS Program to provide a streamlined solution for transplant centers to use the OCS for all FDA-approved indications for lung, heart and liver. The increase in OCS Liver and OCS Heart net revenue was partially offset by lower sales volumes of our OCS Lung disposable sets. Net revenue from customers who participated in our National OCS Program accounted for approximately 90% of total net revenue from customers in the United States for the three months ended September 30, 2022. Net revenue for each of our disposable products in the table above includes net revenue from sales of disposable sets as well as service revenue for organ retrieval and OCS organ management services under the National OCS Program. Net revenue relating to organ retrieval and OCS organ management services sold under our National OCS Program represented approximately 17% of net revenue for the three months ended September 30, 2022. Net revenue from sales of OCS Liver disposable sets in the United States increased by $12.5 million due primarily to higher sales volumes of OCS Liver disposable sets resulting from the recent FDA approval of the OCS Liver product. Net revenue from sales of OCS Heart disposable sets in the United States increased by $8.5 million also primarily as a result of the FDA approval of the OCS Heart in the third quarter of 2021 and the additional DCD Heart PMA supplement indication approved by the FDA in April 2022. Net revenue from sales of OCS Lung disposable sets in the United States decreased by $0.9 million due to a decrease in sales volumes of OCS Lung disposable sets. Net revenue from customers outside the United States was $2.4 million in the three months ended September 30, 2022 and increased by $0.1 million compared to the three months ended September 30, 2021. Net revenue outside of the United States increased for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 due to increased pricing. This increase was partially offset by an unfavorable impact of foreign exchange rates of $0.3 million. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue increased by $6.0 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Gross profit increased by $14.3 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Gross profit in the three months ended September 30, 2022 included a favorable impact of $1.4 million as a result of changes in estimates of certain clinical trial accruals. Gross margin was 71% and 70% for the three months ended September 30, 2022 and 2021, respectively. Operating Expenses Research, Development and Clinical Trials Expenses Three Months Ended September 30, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation expense) $ 2,351 $ 2,141 $ 210 Clinical trials costs 630 738 (108 ) Consulting and third-party testing 815 720 95 Laboratory supplies and research materials 1,581 593 988 Other 1,431 971 460 Total research, development and clinical trials expenses $ 6,808 $ 5,163 $ 1,645 23 Total research, development and clinical trials expenses increased by $1.6 million from $5.2 million in the three months ended September 30, 2021 to $6.8 million in the three months ended September 30, 2022. Laboratory supplies and research materials and other costs increased by $1.0 million and $0.5 million, respectively, due to increased activity in our next generation program and ongoing existing research activities. Selling, General and Administrative Expenses Three Months Ended September 30, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation expense) $ 9,961 $ 5,607 $ 4,354 Professional and consultant fees 1,789 1,638 151 Tradeshows and conferences 838 246 592 Other 4,263 2,844 1,419 Total selling, general and administrative expenses $ 16,851 $ 10,335 $ 6,516 Total selling, general and administrative expenses increased by $6.5 million from $10.3 million in the three months ended September 30, 2021 to $16.9 million in the three months ended September 30, 2022 due to increases in personnel related costs, professional and consultant fees, tradeshows and conferences and other costs. Personnel related costs increased by $4.4 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 $0.6 million due primarily to additional grants to new and existing employees. Tradeshows and conferences costs increased by $0.6 million as a result of an increase in in-person activities as restrictions implemented in response to the COVID-19 pandemic were eased. Other costs increased by $1.4 million due to increased start-up and logistics costs related to the expansion of our National OCS Program. Other Income (Expense) Interest Expense Interest expense was $0.8 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. The increase in principal under our new debt agreement was more than offset by a lower interest rate on our new debt. Other Expense, Net Other expense, net for the three months ended September 30, 2022 and 2021 included interest income of $0.4 million and less than $0.1 million, respectively, from interest earned on invested cash balances, and $0.9 million and $0.3 million of realized and unrealized foreign currency transactions losses, respectively. Other expense, net for the three months ending September 30, 2022 also includes a loss on extinguishment of debt of $0.6 million. 24 Comparison of the Nine Months Ended September 30, 2022 and 2021 The following table summarizes our results of operations for the nine months ended September 30, 2022: Nine Months Ended September 30, 2022 2021 Change (in thousands) Net revenue $ 62,084 $ 20,594 $ 41,490 Cost of revenue 17,515 6,421 11,094 Gross profit 44,569 14,173 30,396 Operating expenses: Research, development and clinical trials 21,056 15,990 5,066 Selling, general and administrative 48,171 26,283 21,888 Total operating expenses 69,227 42,273 26,954 Loss from operations (24,658 ) (28,100 ) 3,442 Other income (expense): Interest expense (2,719 ) (2,896 ) 177 Other expense, net (2,087 ) (532 ) (1,555 ) Total other expense, net (4,806 ) (3,428 ) (1,378 ) Loss before income taxes (29,464 ) (31,528 ) 2,064 Provision for income taxes (47 ) (19 ) (28 ) Net loss $ (29,511 ) $ (31,547 ) $ 2,036 Net Revenue Nine Months Ended September 30, 2022 2021 Change (in thousands) Net revenue by geography: United States $ 54,984 $ 14,627 $ 40,357 Outside the U.S. 7,100 5,967 1,133 Total net revenue $ 62,084 $ 20,594 $ 41,490 Net revenue by OCS product: OCS Lung net revenue $ 6,736 $ 8,524 $ (1,788 ) OCS Heart net revenue 25,318 11,628 13,690 OCS Liver net revenue 30,030 442 29,588 Total net revenue $ 62,084 $ 20,594 $ 41,490 25 Net revenue from customers in the United States was $55.0 million in the nine months ended September 30, 2022 and increased by $40.4 million compared to the nine months ended September 30, 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 along with the expansion of our National OCS Program to provide a streamlined solution for transplant centers to use the OCS for all FDA-approved indications for lung, heart and liver. The increase in OCS Liver and OCS Heart net revenue was partially offset by lower sales volumes of our OCS Lung disposable sets. Net revenue from customers who participated in our National OCS Program accounted for approximately 85% of total net revenue from customers in the United States for the nine months ended September 30, 2022. Net revenue for each of our disposable products in the table above includes net revenue from sales of disposable sets as well as service revenue for organ retrieval and OCS organ management services under the National OCS Program. Net revenue relating to organ retrieval and OCS organ management services sold under our National OCS Program represented 13% of net revenue for the nine months ended September 30, 2022. Net revenue from sales of OCS Liver disposable sets in the United States increased by $29.6 million due primarily to higher sales volumes of OCS Liver disposable sets resulting from the recent FDA approval of the OCS Liver product. Net revenue from sales of OCS Heart disposable sets in the United States increased by $12.8 million also primarily as a result of the FDA approval of the OCS Heart in the third quarter of 2021 and the additional DCD Heart PMA supplement indication approved by the FDA in April 2022. Net revenue from sales of OCS Lung disposable sets in the United States decreased by $2.0 million due to a decrease in sales volumes of OCS Lung disposable sets. Net revenue from customers outside the United States was $7.1 million in the nine months ended September 30, 2022 compared to $6.0 million in the nine months ended September 30, 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 market. Net revenue from sales of OCS Heart disposable sets and OCS Lung disposable sets outside the United States increased due to higher sales volumes and to a lesser extent price increases. The increase in net revenue outside of the United States was partially offset by an unfavorable impact of foreign exchange rates of $2.4 million. Cost of Revenue, Gross Profit and Gross Margin Cost of revenue increased by $11.1 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Gross profit increased by $30.4 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Gross profit in the nine months ended September 30, 2022 included a favorable impact of $1.4 million as a result of changes in estimates of certain clinical trial accruals. Gross margin was 72% and 69% for the nine months ended September 30, 2022 and 2021, respectively. Gross margin increased primarily as a result of economies of scale from higher sales volumes, partially offset by the unfavorable impact of foreign exchange rates. Operating Expenses Research, Development and Clinical Trials Expenses Nine Months Ended September 30, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation expense) $ 6,851 $ 6,357 $ 494 Clinical trials costs 1,738 2,786 (1,048 ) Consulting and third-party testing 4,448 2,091 2,357 Laboratory supplies and research materials 4,209 2,091 2,118 Other 3,810 2,665 1,145 Total research, development and clinical trials expenses $ 21,056 $ 15,990 $ 5,066 Total research, development and clinical trials expenses increased by $5.1 million from $16.0 million in the nine months ended September 30, 2021 to $21.1 million in the nine months ended September 30, 2022. Personnel related costs increased by $0.5 million primarily due to an increase in stock-based compensation expense of $0.3 million related to additional grants to new and existing employees. Consulting and third-party testing, laboratory supplies and research materials and other costs increased by $2.4 million, $2.1 million and $1.1 million, respectively, due to increased activity in our next generation program and ongoing existing research activities. Clinical trial costs decreased by $1.0 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. 26 Selling, General and Administrative Expenses Nine Months Ended September 30, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation expense) $ 27,557 $ 14,379 $ 13,178 Professional and consultant fees 6,018 4,908 1,110 Tradeshows and conferences 2,478 1,051 1,427 Other 12,118 5,945 6,173 Total selling, general and administrative expenses $ 48,171 $ 26,283 $ 21,888 Total selling, general and administrative expenses increased by $21.9 million from $26.3 million in the nine months ended September 30, 2021 to $48.2 million in the nine months ended September 30, 2022 due to increases in personnel related costs, professional and consultant fees, tradeshows and conferences and other costs. Personnel related costs increased by $13.2 million primarily due to the continued expansion of our team to support the National OCS Program and commercial growth of our OCS Heart and OCS Liver products in the United States, as well as an increase in stock-based compensation expense of $2.2 million due primarily to additional grants to new and existing employees. Professional and consultant fees increased by $1.1 million due to additional sales and administration costs related to the expansion of our National OCS Program. Tradeshows and conferences costs increased by $1.4 million as a result of an increase in in-person activities as restrictions implemented in response to the COVID-19 pandemic were eased. Other costs increased by $6.2 million due to increased start-up and logistics costs related to the expansion of our National OCS Program. Other Income (Expense) Interest Expense Interest expense was $2.7 million and $2.9 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in principal under our new debt agreement was more than offset by a lower interest rate on our new debt. Other Expense, Net Other expense, net for the nine months ended September 30, 2022 and 2021 included interest income of $0.4 million and $0.1 million, respectively, resulting from interest earned on invested cash balances, and $1.9 million and $0.6 million of realized and unrealized foreign currency transactions losses, respectively. Other expense, net for the nine months ending September 30, 2022 also includes a loss on extinguishment of debt of $0.6 million. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from 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. On August 9, 2022 we completed an underwritten public offering of our common stock, which resulted in the sale of 3,737,500 shares of common stock, inclusive of 487,500 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 offering were approximately $139.9 million, after deducting underwriting discounts and commissions as well as other offering costs of $0.7 million. As of September 30, 2022, we had cash and cash equivalents of $204.5 million. 27 Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2022 2021 (in thousands) Net cash used in operating activities $ (41,782 ) $ (22,216 ) Net cash provided by investing activities 57,277 19,275 Net cash provided by financing activities 164,862 1,348 Effect of exchange rate changes on cash, cash equivalents and restricted cash (1,475 ) (493 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 178,882 $ (2,086 ) Operating Activities During the nine months ended September 30, 2022, operating activities used $41.8 million of cash, primarily resulting from our net loss of $29.5 million and net cash used by changes in our operating assets and liabilities of $25.4 million, partially offset by net non-cash charges of $13.2 million. Net cash used by changes in our operating assets and liabilities for the nine months ended September 30, 2022 consisted primarily of an increase in accounts receivable of $16.3 million, an increase in inventory of $6.1 million, and a decrease in accounts payable and accrued expenses and other current liabilities of $3.5 million, partially offset by an increase in operating lease liabilities of $0.6 million. During the nine months ended September 30, 2021, operating activities used $22.2 million of cash, primarily resulting from our net loss of $31.5 million, partially offset by net cash provided by changes in our operating assets and liabilities of $1.0 million and net non-cash charges of $8.3 million. Net cash provided by changes in our operating assets and liabilities for the nine months ended September 30, 2021 consisted primarily of a decrease in accounts receivable of $2.7 million and an increase in accounts payable and accrued expenses and other current liabilities of $3.6 million, partially offset by an increase in inventory of $4.0 million and an increase in prepaid expenses and other current assets of $1.4 million. Investing Activities During the nine months ended September 30, 2022, net cash provided by investing activities of $57.3 million consisted of proceeds from sales and maturities of marketable securities of $76.9 million, partially offset by purchases of marketable securities of $10.5 million and purchases of property and equipment of $9.1 million. During the nine months ended September 30, 2021, net cash provided by investing activities of $19.3 million consisted of proceeds from sales and maturities of marketable securities of $86.3 million, partially offset by purchases of marketable securities of $66.7 million and purchases of property and equipment of $0.3 million. Financing Activities During the nine months ended September 30, 2022, net cash provided by financing activities of $164.9 million consisted of net proceeds from our public offering of $140.0 million, proceeds from the issuance of long-term debt, net of issuance costs of $58.5 million, proceeds from the issuance of common stock upon exercise of stock options of $1.9 million and proceeds from the issuance of common stock in connection with the 2019 Employee Stock Purchase Plan of $0.5 million, partially offset by the repayments of long-term debt of $36.1 million. During the nine months ended September 30, 2021, net cash provided by financing activities of $1.3 million consisted of proceeds from the issuance of common stock upon exercise of stock options of $0.9 million and proceeds from the issuance of common stock in connection with the employee stock purchase plan of $0.4 million. Long-Term Debt In July 2022, we entered into a credit agreement with CIBC pursuant to which we borrowed $60.0 million, referred to herein as the CIBC Credit Agreement. We used proceeds of the CIBC Credit Agreement to repay all amounts due under our credit agreement with OrbiMed, entered into in June 2018. 28 Borrowings under the CIBC Credit Agreement bear interest at an annual rate equal to either, at our option, (i) the secured overnight financing rate for an interest period selected by us , subject to a minimum of 1.5%, plus 2.0% or (ii) 1.0% plus the higher of a) the prime rate , subject to a minimum of 4.0% or b) the Federal Funds Effective Rate , plus 0.5% . Borrowings under the CIBC Credit Agreement are payable in monthly interest-only payments for the first 24 months, and then payable in equal monthly principal payments plus accrued interest until the maturity date of the CIBC Credit Agreement in J uly 2027. If certain revenue milestones are met after the first 24 months, we may extend the interest-only repayment period by one additional year. At our option, we may prepay borrowings outstanding under the CIBC Credit Agreement, subject to a prepayment fee of 2.0% of outstanding borrowings if paid prior to 12 months after the closing date, and 1.0% if paid after 12 months but prior to 24 months after the closing date. All obligations under the CIBC 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. Under the CIBC Credit Agreement, we have agreed to customary representations and warranties, events of default and certain affirmative and negative covenants to which we will remain subject until maturity. The financial covenants include, among other covenants, (x) a requirement to maintain a minimum liquidity amount of the greater of either (i) the consolidated adjusted EBITDA loss (or gain) for the trailing four month period (only if EBITDA is negative) and (ii) $10.0 million, and (y) a requirement to maintain total net revenue of at least 75% of the level set forth in the total revenue plan presented to CIBC. The obligations under the CIBC 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 and a material adverse change in our business, operations or financial condition. As of September 30, 2022, we were in compliance with all covenants of the CIBC Credit Agreement. During the continuance of an event of default, the interest rate per annum will be equal to the rate that would have otherwise been applicable at the time of the event of default plus 2.0%. If an event of default (other than certain events of bankruptcy or insolvency) occurs and is continuing, CIBC 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. 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 and sterilization 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. For example, if the demand for our products exceeds our existing manufacturing and sterilization capacity, our ability to fulfill orders would be limited until we have sufficiently expanded such operations. 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; 29 • the emergence of competing or complementary technologies or procedures ; • the number and types of future products we develop and commercialize; • the cost of development of the next generation OCS • 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 and cash equivalents 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. 30