TransMedics Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Fiscal quarter and six months ended June 29, 2019; comparisons are with the periods ended June 30, 2018. Amounts are in U.S. dollars unless noted.
Business context
TransMedics is a commercial-stage medical technology company developing and selling its Organ Care System (OCS), a platform for preserving and assessing donor organs. Revenue comes mainly from organ-specific disposable sets and solutions, with smaller contributions from console sales and implied console rentals. The company completed its IPO and corporate reorganization on May 6, 2019. OCS Lung had U.S. FDA approvals; OCS Heart and OCS Liver remained dependent on clinical trials and further regulatory approvals for U.S. commercialization.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $5.7 million | $2.9 million | $10.3 million | $5.4 million |
| Gross profit | $3.3 million | $1.2 million | $5.9 million | $2.1 million |
| Gross margin | 59% | 40% | 58% | 39% |
| Operating loss | $7.7 million | $5.2 million | $13.7 million | $9.9 million |
| Net loss | $9.2 million | $6.1 million | $16.1 million | $11.0 million |
| Net loss per share | $0.70 | $1.30 | $2.21 | $2.36 |
Revenue grew approximately 94% in Q2 and 90% for the six-month period. U.S. revenue drove the increase: Q2 U.S. sales were $4.3 million versus $1.3 million, while non-U.S. revenue declined to $1.4 million from $1.6 million. Management attributed improved gross margin to higher U.S. selling prices, the mix shift of OCS Lung sales from clinical-trial to commercial sales, and improved manufacturing efficiency. Operating expenses rose substantially, particularly selling, general and administrative costs, reflecting commercial expansion and public-company expenses.
Six-month operating cash use was $19.4 million, compared with $13.8 million a year earlier. At June 29, cash and cash equivalents were $47.2 million and marketable securities were $49.0 million; together, $96.2 million. Restricted cash was an additional $0.5 million. Total current assets were $116.1 million and current liabilities were $15.4 million.
Long-term debt had a $35.0 million principal balance and $33.9 million carrying value net of discount. The loan bears a variable rate; the rate was 11.3% at June 29, 2019, with interest-only payments until maturity in June 2023. Debt is secured by substantially all company and guarantor assets, including intellectual property, and includes a $3.0 million minimum-liquidity covenant. The company reported compliance with that covenant.
Material changes and unusual items
- The May 2019 IPO issued 6,543,500 shares at $16 per share. Net proceeds were $91.4 million after underwriting discounts and issuance costs. The company reported using about $1.0 million by June 29, primarily for OCS Lung commercialization, R&D, and general corporate purposes.
- Preferred shares converted to common stock in connection with the IPO; preferred-stock warrants were converted to common-stock warrants, and the warrant liability was reclassified to equity. The company will no longer remeasure that liability.
- Q2 revenue growth reflected more U.S. disposable-set sales, including commercial OCS Lung sales and clinical-trial activity for Heart and Liver. Management said U.S. OCS disposable-set selling prices were about 30% higher year over year in the quarter.
- Customer clinical-trial reimbursements reduced revenue by $0.5 million in Q2 and $1.2 million for the six-month period. One customer accounted for 17% of Q2 revenue; a customer accounted for 16% of receivables at quarter end.
Outlook, commentary and risks
Management expects continued losses and increased spending on sales and clinical adoption, manufacturing scale-up, R&D, clinical trials, regulatory work, and public-company costs. It stated that cash, cash equivalents, and marketable securities should fund operating expenses, capital expenditures, and debt service for at least 12 months following the filing, while cautioning that estimates depend on assumptions and additional funding may be needed. The filing provides no quantitative revenue or earnings guidance.
Key risks include dependence on OCS market acceptance and reimbursement, regulatory approvals and clinical outcomes, reliance on a limited number of customers and certain sole- or limited-source suppliers, competition, ongoing operating losses and possible financing needs, and variable-rate debt and covenant compliance. Non-U.S. revenue was lower year over year for the six-month period, primarily due to unfavorable currency movements. Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 29, 2019.
Important facts for investors to verify
- Whether U.S. commercial adoption and disposable-set volumes continue to grow, and how much revenue comes from commercial sales versus clinical trials.
- Progress, timing, and outcomes of Heart and Liver trials and regulatory submissions, including any new indications.
- Revenue concentration, customer receivable exposure, supplier constraints, and reimbursement coverage in the U.S. and international markets.
- Operating cash burn and management’s 12-month liquidity estimate, including the impact of investment maturities, debt service, and planned spending.
- Debt interest terms, collateral and covenants, and the potential need for additional capital before reaching profitability.