TransMedics Group, Inc. (TMDX) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. 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 Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, 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 Annual Report on 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 also developed our National OCS Program, or NOP, an innovative turnkey solution to provide outsourced organ retrieval and OCS organ management, to provide transplant programs in the United States with a more efficient process to procure donor organs with the OCS. We believe the use of the OCS combined with the NOP 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 heart, lung and liver transplantations, making the OCS the only FDA approved, portable, multi-organ, warm perfusion technology platform. All three of our products, OCS Heart, OCS Lung and OCS Liver, have received Pre-Market Approval, or PMA, from the Food and Drug Administration, or FDA. Also, all three of our products, OCS Heart, OCS Lung and OCS Liver are approved for both organs donated after brain death, or DBD organs, and organs donated after circulatory death, or DCD organs.
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 and expanding our National OCS Program; developing and expanding 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 revenue sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated total revenue of $93.5 million and incurred a net loss of $36.2 million for the year ended December 31, 2022. As of December 31, 2022, we had an accumulated deficit of $478.7 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; expanding our NOP; scaling our manufacturing and sterilization operations; developing the next generation OCS; continuing research, development and clinical trial efforts; seeking regulatory clearance for new products and product enhancements, including additional indications or other organs, in both the United 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.
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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 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 December 31, 2022, we had cash of $201.2 million. We believe that our cash 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 Annual Report on Form 10-K. 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, other material and labor costs, 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 pricing and availability of raw materials and components for our products, which could make it difficult to forecast our inventory needs and financial results.
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 or spikes in infection rates. 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
Revenue
We generate net product 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 product revenue from the sale of OCS Consoles to customers and 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 service revenue by providing outsourced organ retrieval and OCS organ management services under our NOP in the United States.
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 and may also contain promises for organ retrieval and OCS organ management services under our NOP, and an OCS Console, whether sold or loaned to the customer.
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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 each delivered 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.
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 product revenue presentation.
Through December 31, 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 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 and as a result of the continued expansion of the NOP in the United States. We also expect that our 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 net product revenue consists 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 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 it over its five-year estimated useful life. Included in the cost of OCS disposable sets are the costs of our OCS Lung, OCS Heart and OCS Liver Solutions. Cost of service revenue primarily consists of labor and overhead and transportation costs that directly support organ retrieval and OCS organ management services. We expect that cost of revenue will increase or decrease in absolute dollars primarily as, and to the extent that, our revenue increases or decreases.
Gross profit is the amount by which our revenue exceeds our cost of revenue in each reporting period. We calculate gross margin as gross profit divided by 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 under the NOP and the selling price of our OCS products and NOP services.
We expect that the cost of net product revenue as a percentage of net product 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 and improved manufacturing efficiency. 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. We also expect to see modest improvements in the future in our gross margin on services as we provide more services and the efficiency in provisioning of these services improves due to scale and experience. While we expect our gross margins to increase over the long term, they will likely fluctuate from quarter to quarter.
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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:
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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;
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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;
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the cost of maintaining and improving our product designs, including the testing of materials and parts used in our products;
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laboratory supplies and research materials; and
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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, logistics 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 and our National OCS Program.
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
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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.
Provision for Income Taxes
Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated in the United States, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. We record provisions for foreign income taxes of an insignificant amount related to the operations of one of our foreign subsidiaries.
As of December 31, 2022, we had federal net operating loss carryforwards of $378.5 million, which may be available to offset future taxable income, of which $209.5 million of the total net operating loss carryforwards expire at various dates beginning in 2023, while the remaining $169.0 million do not expire but are limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2022, we had state net operating loss carryforwards of $321.2 million, which may be available to offset future taxable income and expire at various dates beginning in 2030. As of December 31, 2022, we also had U.S. federal and state research and development tax credit carryforwards of $9.0 million and $5.5 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2023 and 2024, respectively. As of December 31, 2022, we had no foreign net operating loss carryforwards. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.
Results of the Years Ended December 31, 2022, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2022, 2021 and 2020:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Net product revenue | $ | 79,234 | $ | 29,657 | $ | 25,092 | ||||||
| Service revenue | 14,225 | 605 | 547 | |||||||||
| Total revenue | 93,459 | 30,262 | 25,639 | |||||||||
| Cost of revenue: | ||||||||||||
| Cost of net product revenue | 16,970 | 9,031 | 8,961 | |||||||||
| Cost of service revenue | 11,217 | 72 | 43 | |||||||||
| Total cost of revenue | 28,187 | 9,103 | 9,004 | |||||||||
| Gross profit | 65,272 | 21,159 | 16,635 | |||||||||
| Operating expenses: | ||||||||||||
| Research, development and clinical trials | 26,812 | 22,304 | 18,831 | |||||||||
| Selling, general and administrative | 69,897 | 38,283 | 24,188 | |||||||||
| Total operating expenses | 96,709 | 60,587 | 43,019 | |||||||||
| Loss from operations | (31,437 | ) | (39,428 | ) | (26,384 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest expense | (3,726 | ) | (3,874 | ) | (3,985 | ) | ||||||
| Other income (expense), net | (1,002 | ) | (877 | ) | 1,653 | |||||||
| Total other expense, net | (4,728 | ) | (4,751 | ) | (2,332 | ) | ||||||
| Loss before income taxes | (36,165 | ) | (44,179 | ) | (28,716 | ) | ||||||
| Provision for income taxes | (66 | ) | (36 | ) | (32 | ) | ||||||
| Net loss | $ | (36,231 | ) | $ | (44,215 | ) | $ | (28,748 | ) |
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Comparison of the Years Ended December 31, 2022 and 2021
Revenue
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | ||||||||||
| Revenue by country by organ: | ||||||||||||
| United States | ||||||||||||
| Lung total revenue | $ | 7,967 | $ | 9,843 | $ | (1,876 | ) | |||||
| Heart total revenue | 29,902 | 10,103 | 19,799 | |||||||||
| Liver total revenue | 46,169 | 1,915 | 44,254 | |||||||||
| Total United States revenue | 84,038 | 21,861 | 62,177 | |||||||||
| All other countries | ||||||||||||
| Lung revenue | 880 | 822 | 58 | |||||||||
| Heart revenue | 8,451 | 7,579 | 872 | |||||||||
| Liver revenue | 90 | — | 90 | |||||||||
| Total all other countries revenue | 9,421 | 8,401 | 1,020 | |||||||||
| Total revenue | $ | 93,459 | $ | 30,262 | $ | 63,197 |
Revenue from customers in the United States was $84.0 million in the year ended December 31, 2022 and increased by $62.2 million compared to the year ended December 31, 2021, primarily due to higher sales volumes of our OCS Liver and OCS Heart disposable sets, partially offset by lower sales volumes of our OCS Lung disposable sets. Revenue for each organ in the table above includes net product revenue from sales of disposable sets as well as service revenue from organ retrieval and OCS organ management services under the NOP in the United States. Revenue from customers who participated in our NOP accounted for approximately 89% of total revenue from customers in the United States for the year ended December 31, 2022. Revenue from sales of OCS Liver disposable sets and organ retrieval and OCS organ management services in the United States increased by $44.3 million due primarily to higher sales volumes of OCS Liver disposable sets resulting from the recent FDA approval of the OCS Liver product and the expansion of our National OCS Program during the year ended December 31, 2022. Revenue from sales of OCS Heart disposable sets and organ retrieval and OCS organ management services in the United States increased by $19.8 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, as well as the expansion of the National OCS Program during the year ended December 31, 2022. Revenue from sales of OCS Lung disposable sets and organ retrieval and OCS organ management services in the United States decreased by $1.9 million due to a decrease in sales volumes of OCS Lung disposable sets.
Revenue from customers outside the United States was $9.4 million in the year ended December 31, 2022 and increased by $1.0 million compared to the year ended December 31, 2021. Revenue outside of the United States increased for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to increased pricing and increased sales volumes of OCS Lung, OCS Heart and OCS Liver disposable sets. This increase was partially offset by an unfavorable impact of foreign exchange rates of $0.8 million.
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Cost of Revenue, Gross Profit and Gross Margin
Cost of net product revenue increased by $7.9 million from $9.0 million in the year ended December 31, 2021 to $17.0 million in the year ended December 31, 2022. Cost of service revenue increased by $11.1 million from $0.1 million in the year ended December 31, 2021 to $11.2 million in the year ended December 31, 2022, as the National OCS Program launched in late 2021. Gross profit increased by $44.1 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. Gross profit in the year ended December 31, 2022 included a favorable impact of $1.4 million as a result of changes in estimates of certain clinical trial accruals.
Gross margin from net product revenue was 79% and 70% for the years ended December 31, 2022 and 2021, respectively. Gross margin from net product revenue increased primarily as a result of economies of scale from higher sales volumes and increased sales of higher priced OCS disposable sets in the United States. Gross margin from service revenue was 21% for the year ended December 31, 2022 and consisted primarily of organ retrieval and OCS organ management services under our NOP. Service revenue for the year ended December 31, 2021 consisted primarily of a small amount of organ management services provided prior to the expansion of our NOP and training services provided to direct acquisition customers.
Operating Expenses
Research, Development and Clinical Trials Expenses
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | ||||||||||
| (in thousands) | ||||||||||||
| Personnel related (including stock-based compensation expense) | $ | 9,548 | $ | 8,292 | $ | 1,256 | ||||||
| Clinical trials costs | 1,778 | 3,180 | (1,402 | ) | ||||||||
| Consulting and third-party testing | 5,104 | 4,212 | 892 | |||||||||
| Laboratory supplies and research materials | 5,404 | 2,837 | 2,567 | |||||||||
| Other | 4,978 | 3,783 | 1,195 | |||||||||
| Total research, development and clinical trials expenses | $ | 26,812 | $ | 22,304 | $ | 4,508 |
Total research, development and clinical trials expenses increased by $4.5 million from $22.3 million in the year ended December 31, 2021 to $26.8 million in the year ended December 31, 2022. Personnel related costs increased by $1.3 million primarily due to an increase in stock-based compensation expense of $0.4 million related to additional grants to new and existing employees as well as an increase in headcount. Consulting and third-party testing, laboratory supplies and research materials, and other costs increased by $0.9 million, $2.6 million and $1.2 million, respectively, due to increased activity in our next generation program and ongoing existing research activities. Clinical trial costs decreased by $1.4 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
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | |||||||||
| (in thousands) | |||||||||||
| Personnel related (including stock-based compensation expense) | $ | 39,350 | $ | 21,202 | $ | 18,148 | |||||
| Professional and consultant fees | 7,991 | 7,032 | 959 | ||||||||
| Tradeshows and conferences | 4,347 | 1,445 | 2,902 | ||||||||
| Logistics and other | 18,209 | 8,604 | 9,605 | ||||||||
| Total selling, general and administrative expenses | $ | 69,897 | $ | 38,283 | $ | 31,614 |
Total selling, general and administrative expenses increased by $31.6 million from $38.3 million in the year ended December 31, 2021 to $69.9 million in the year ended December 31, 2022 due to increases in personnel related costs, professional and consultant fees, tradeshows and conferences and logistics and other costs. Personnel related costs increased by $18.1 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
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expense of $3.0 million due primarily to additional grants to new and existing employees. Professional and consultant fees increased by $1.0 million due to additional sales and administration costs related to the expansion of our National OCS Program. Tradeshows and conferences costs increased by $2.9 million as a result of increased in-person activities as restrictions implemented in response to the COVID-19 pandemic were eased. Logistics and other costs increased by $9.6 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 $3.7 million and $3.9 million for the years ending December 31, 2022 and 2021, respectively. The decrease was due to a lower interest rate for our indebtedness under the CIBC Credit Agreement, partially offset by an increase in the principal amount of the loan outstanding compared to the principal that had been outstanding under our prior credit agreement with OrbiMed.
Other Expense, Net
Other expense, net for the years ended December 31, 2022 and 2021 included interest income of $0.9 million and $0.1 million, respectively, resulting from higher interest earned on our invested cash balances. Other expense, net also included $1.3 million and $1.0 million of realized and unrealized foreign currency transaction losses, respectively. Other expense, net for the year ended December 31, 2022 also included a loss on extinguishment of debt of $0.6 million.
Comparison of the Years Ended December 31, 2021 and 2020
For a discussion of our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations—Comparison of the Years Ended December 31, 2021 and 2020 included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Liquidity and Capital Resources
At December 31, 2022, our principal source of liquidity was cash of $201.2 million. 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.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Cash used in operating activities | $ | (45,817 | ) | $ | (28,864 | ) | $ | (30,265 | ) | |||
| Cash provided by (used in) investing activities | 54,513 | 29,267 | (41,598 | ) | ||||||||
| Cash provided by financing activities | 167,927 | 1,393 | 75,549 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,021 | ) | (797 | ) | 803 | |||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 175,602 | $ | 999 | $ | 4,489 |
Operating Activities
During the year ended December 31, 2022, operating activities used $45.8 million of cash, primarily resulting from our net loss of $36.2 million and net cash used by changes in our operating assets and liabilities of $26.8 million, partially offset by net non-cash charges of $17.2 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2022 consisted primarily of an increase in accounts receivable of $21.7 million and an increase in inventory of $8.0 million, partially offset by a decrease in prepaid expenses of $2.5 million.
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During the year ended December 31, 2021, operating activities used $28.9 million of cash, primarily resulting from our net loss of $44.2 million, partially offset by net non-cash charges of $12.3 million and net cash provided by changes in our operating assets and liabilities of $3.0 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2021 consisted primarily of an increase in accounts payable and accrued expenses and other current liabilities of $10.0 million and a decrease in accounts receivable of $0.8 million, partially offset by an increase in inventory of $4.9 million and an increase in prepaid expenses and other current assets of $3.2 million.
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 year ended December 31, 2022, net cash provided by investing activities of $54.5 million consisted of proceeds from sales and maturities of marketable securities of $76.9 million, partially offset by $10.5 million in purchases of marketable securities and $11.9 million in purchases of property and equipment.
During the year ended December 31, 2021, net cash provided by investing activities of $29.3 million consisted of proceeds from sales and maturities of marketable securities of $104.8 million, partially offset by $72.0 million in purchases of marketable securities and $3.5 million in purchases of property and equipment.
Financing Activities
During the year ended December 31, 2022, net cash provided by financing activities of $167.9 million consisted of net proceeds from our public offering in August 2022 of $139.9 million, net proceeds from the issuance of long-term debt of $58.5 million, proceeds from the issuance of common stock upon exercise of stock options of $4.7 million, proceeds from the issuance of common stock in connection with the 2019 Employee Stock Purchase Plan of $0.5 million and proceeds from the issuance of common stock upon exercise of warrants of $0.4 million, partially offset by the repayments of long-term debt of $36.1 million.
During the year ended December 31, 2021, net cash provided by financing activities of $1.4 million consisted of proceeds from the issuance of common stock upon exercise of stock options of $1.0 million and proceeds from the issuance of common stock in connection with the employee stock purchase plan of $0.4 million.
For a discussion of our cash flows for the year ended December 31, 2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Flows included in our Annual Report on Form 10-K for the year ended December 31, 2021.
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, which was entered into in June 2018.
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 July 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
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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 December 31, 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:
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the amount of net product 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, revenue generated by our services, and expansion of the NOP;
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the costs and expenses of expanding our U.S. and non-U.S. sales and marketing infrastructure and our manufacturing operations;
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the extent to which our OCS products are adopted by the transplant community;
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the ability of our customers to obtain adequate reimbursement from third-party payors for procedures performed using the OCS products;
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the degree of success we experience in commercializing our OCS products for additional indications;
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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;
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the emergence of competing or complementary technologies or procedures;
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the number and types of future products we develop and commercialize;
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the cost of development of the next generation OCS;
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the costs associated with building our commercial operations;
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the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and
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the level of our selling, general and administrative expenses.
We believe that our existing cash will enable us to fund our operating expenses, capital expenditure requirements, and debt service payments for at least 12 months following the filing of our annual report on Form 10-K.
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 this Annual Report on Form 10-K.
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Material Contractual Obligations
Our contractual obligations include amounts payable as principal and interest payments under the CIBC Credit Agreement. As of December 31, 2022, our outstanding principal balance was $60.0 million and is due in 2027. We estimate we will pay $3.7 million in interest payments during 2023. Our estimate of payments is based on an assumed rate of 6.1%, which was the interest rate in effect at December 31, 2022.
We lease our facilities under non-cancelable operating leases that have remaining lease terms of 5 years as of December 31, 2022. As of December 31, 2022, we had fixed lease payment obligations of $10.5 million, of which $2.0 million is payable during 2023.
In January 2021, we entered into an unconditional $9.5 million purchase commitment in the ordinary course of business, for goods with specified annual minimum quantities to be purchased through December 2029. The contract is not cancellable without penalty. As of December 31, 2022, our remaining purchase commitment is $7.0 million.
We also enter into other contracts in the normal course of business with consulting firms, material suppliers and other third parties for clinical trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the discussion above as the amount and timing of such payments are not known.
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.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generate net product 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 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 service revenue by providing outsourced organ retrieval and OCS organ management services under our NOP in the United States.
We recognize revenue from sales to customers applying the following five steps: (1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, performance obligations are satisfied.
Substantially all of our customer contracts have multiple-performance obligations that contain deliverables consisting of OCS Perfusion Sets and OCS Solutions. Customer contract deliverables may also include organ retrieval and OCS organ management services under our National OCS Program or an OCS Console, whether sold or loaned to the customer. We evaluate each promise within a multiple-performance obligation arrangement to determine whether it represents a distinct performance obligation. The primary performance obligations in our customer arrangements from which we derive revenue are the OCS Perfusion Sets, the OCS Solutions, the OCS Console, organ retrieval services and OCS organ management services.
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When a customer order includes an OCS Console, we have determined that customer training and the equipment set-up of the OCS Console, each performed by us, are not distinct because they are not sold on a standalone basis and can only be performed by us in conjunction with a sale or loan of our OCS Console. In addition, we have determined that the OCS Console itself is not distinct because the customer cannot benefit from the OCS Console without the training and equipment set-up having been completed. As a result, when the order includes an OCS Console, we have concluded that training, OCS Console equipment set-up, and the OCS Console itself are highly interdependent and represent a single, combined performance obligation. We recognize revenue from the single, combined performance obligation only once the OCS Console has arrived at the customer site and the training and equipment set-up have been completed by us.
Customer orders may include the loan of an OCS Console as well as 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 arrangement consideration for the disposable set is an implied rental payment for use of the OCS Console. Therefore, we allocate the arrangement consideration between the lease deliverables (i.e., the OCS Console) and non-lease deliverables (i.e., the OCS disposable sets) based on the relative estimated standalone selling price of each distinct performance obligation. To date, the amounts allocated to lease deliverables have been insignificant.
Revenue from sales to customers of OCS Perfusion Sets, OCS Solutions and OCS Consoles is classified as net product revenue in the our consolidated statements of operations. Revenue from sales to customers of organ retrieval and OCS organ management services is classified as service revenue in our consolidated statements of operations.
Revenue is recognized when control is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for the product or services. 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 each delivered to the customer.
Payments Made to Customers
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. We also make payments to customers involved in post-approval studies for information related to the transplant procedures performed. We determine the appropriate accounting treatments for these payments depending on the nature of the payment and whether they are for distinct goods or services.
Other Revenue Considerations
Revenue is reported net of taxes. We do not consider shipping to be a contract performance obligation, therefore shipping costs incurred and billed to customers are recorded as revenue and cost of revenue.
We only include estimated variable amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We do not assess whether promised goods or services are performance obligations if they are deemed immaterial in the context of the contract with the customer. Additionally, we do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Stock-Based Compensation
We account for stock-based awards granted to employees, non-employees and directors based on the fair value of the award on the date of grant. The fair value of option awards is measured using the Black-Scholes option-pricing model. The fair value of restricted common stock awards is measured based on the difference between market value of our common stock on date of grant and the purchase price (if any). Generally, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. Compensation expense for those awards is recognized over the requisite service which is generally the vesting period of the respective award. We account for forfeitures as they occur and
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record compensation cost assuming all option holders will complete the requisite service period. If an award is forfeited, we reverse compensation expense previously recognized in the period the award is forfeited.
The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield.
Valuation of Inventory
We value inventory at the lower of cost or net realizable value, with cost computed using the first-in, first-out method. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, record charges to write down inventories to their estimated net realizable value, after evaluating historical sales, future demand, market conditions and expected product life cycles. Such charges are classified as cost of revenue in our consolidated statements of operations. Any write-down of inventory to net realizable value creates a new cost basis. The reserve for excess and obsolete inventory was $0.3 million as of December 31, 2022 and 2021.
At the end of each reporting period, we assess whether losses should be accrued on long-term manufacturing purchase commitments in accordance with ASC 330, Inventory, which requires that losses that are expected to arise from firm, noncancelable and unhedged commitments for the future purchase of inventory, measured in the same way as inventory losses, should be recognized in the current period in the statements of operations unless they are deemed recoverable through firm sales contacts or when there are other circumstances that reasonably assure continuing sales without price decline. As of the end of each reporting period presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we did not identify any potential losses arising from remaining future purchase commitments as compared to estimated future customer sales through the remainder of the term of the manufacturing purchase commitment and, as a result, did not recognize in a current period any loss provision for future-period remaining purchase commitments.
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 Annual Report on Form 10-K.