TransMedics Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Fiscal three months ended March 31, 2020; comparatives are for the three months ended March 30, 2019. Amounts below are in millions, except per-share data and percentages. The company changed its fiscal year-end to December 31 in February 2020.
Business context and financial performance
TransMedics is a commercial-stage medical technology company developing and selling its Organ Care System (OCS), a platform for preserving and assessing donor organs. It has products for lung, heart and liver transplantation; U.S. commercial sales at the time were primarily for OCS Lung, while U.S. Heart and Liver activity included clinical-trial sales.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $7.530 | $4.676 |
| Gross profit / gross margin | $4.860 / 65% | $2.573 / 55% |
| Operating expenses | $12.877 | $8.535 |
| Operating loss | $(8.017) | $(5.962) |
| Net loss | $(8.852) | $(6.895) |
| Net loss per share, basic and diluted | $(0.42) | $(4.86) |
| Cash used in operating activities | $(8.176) | $(7.266) |
Revenue increased 61% year over year, primarily reflecting more disposable sets sold. OCS Heart revenue rose to $4.131 million from $1.922 million; Lung revenue was $2.008 million versus $1.412 million, and Liver revenue was $1.391 million versus $1.342 million. The company attributed improved gross margin to higher U.S. selling prices and greater sales volume spreading fixed manufacturing costs. Research, development and clinical-trial expense increased to $6.225 million, and selling, general and administrative expense increased to $6.652 million. The larger year-over-year loss reflects operating-expense growth outpacing gross-profit growth. Per-share comparisons are affected by the 2019 IPO and share-count changes.
Liquidity, cash flow and debt
- At March 31, cash and cash equivalents were $24.738 million and marketable securities were $47.816 million, totaling $72.554 million; restricted cash was another $0.500 million. Management said available cash, equivalents and securities were expected to fund operations, capital expenditures and debt service for at least 12 months after filing.
- Operating activities used $8.176 million. Investing activities provided $12.715 million, mainly from marketable-security sales and maturities; financing activities provided $0.152 million. Cash, cash equivalents and restricted cash increased $4.646 million to $25.238 million.
- Debt principal was $35.0 million, with a carrying value net of discount and current portion of $34.269 million. The OrbiMed facility matures in June 2023; the reported March 31 interest rate was 10.5%, and the quarter’s weighted-average effective rate was approximately 12.2%. Principal and interest are generally payable at maturity after quarterly interest-only payments. The debt is secured by substantially all company and guarantor assets and includes a $3.0 million minimum-liquidity covenant. The company reported covenant compliance.
- Current assets were $91.704 million and current liabilities were $15.039 million. The company reported total liabilities of $50.240 million and stockholders’ equity of $46.683 million.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management expects continuing losses and increased longer-term spending on commercialization, manufacturing scale-up, research and development, clinical trials and regulatory work. It said revenue is expected to decrease in the short term because of COVID-19.
- Although Q1 results were not significantly affected by COVID-19, the filing describes transplant-procedure disruptions, reduced access to transplant centers, constrained sales and clinical teams, temporarily reduced manufacturing and distribution, possible supply shortages, and clinical-trial and regulatory delays. The OCS Heart PMA advisory committee meeting was postponed from Q2 and was then anticipated in the second half of 2020. The duration and financial impact were uncertain.
- Other key risks include ongoing losses and possible need for additional financing; customer concentration (one customer was 17% of Q1 revenue and 17% of receivables at quarter-end); reliance on limited or sole-source suppliers; regulatory approval and reimbursement uncertainty; competition; and variable-rate debt and covenant obligations.
- On April 20, 2020, the company received a $2.2 million Paycheck Protection Program loan and repaid it in full on May 1. A related April 23 credit-agreement amendment set conditions for permitted PPP borrowing and forgiveness. These were subsequent events, not Q1-period borrowings.
- The company amended its Andover leases in January, extending the terms to December 2026 and adding space; disclosed future operating-lease payments totaled $13.771 million. A requested extension of one VA-licensed U.S. patent had only interim protection through September 23, 2020 at filing; final extension approval was pending. The company reported no material legal proceedings.
Important facts for investors to verify
- Whether COVID-19 caused the anticipated 2020 sales decline, manufacturing constraints or delays to trials and FDA review, and how those developments affected subsequent results.
- Revenue growth, selling prices, disposable-set volumes and gross-margin durability, particularly given the shift between commercial and clinical-trial sales.
- Cash burn and management’s 12-month liquidity assessment against ongoing losses, debt service, lease commitments and any need for additional capital.
- Progress and outcomes for the OCS Heart and Liver regulatory programs, including the postponed Heart PMA advisory committee review.
- Compliance with OrbiMed covenants and terms of the debt facility, and the status of the VA patent-term extension and CE Mark recertification requirements.