TransMedics Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Fiscal three months ended March 30, 2019; comparisons are to the three months ended March 31, 2018. Amounts below are in U.S. dollars unless stated otherwise.
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 outside the body. Its products address lung, heart and liver transplants. The company’s revenue is primarily from single-use organ-specific disposable sets; consoles are also sold or loaned to transplant centers.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $4.676 million | $2.519 million |
| Gross profit / gross margin | $2.573 million / 55% | $0.924 million / 37% |
| Operating expenses | $8.535 million | $5.705 million |
| Loss from operations | $(5.962) million | $(4.781) million |
| Net loss | $(6.895) million | $(4.901) million |
| Net loss per share, basic and diluted | $(4.86) | $(3.61) |
| Cash used in operating activities | $(7.266) million | $(6.331) million |
At March 30, 2019, cash and cash equivalents were $12.215 million; restricted cash was $0.5 million. Current assets were $30.059 million and current liabilities were $16.201 million. Total assets were $38.759 million, total liabilities $51.278 million, and accumulated deficit $342.831 million.
Long-term debt was $33.785 million net of discount, against $35.0 million principal. The OrbiMed credit facility bears a stated interest rate of 11.3% at quarter-end, matures in June 2023 and requires quarterly interest-only payments until maturity. Debt is secured by substantially all company and guarantor assets, including intellectual property; the company reported compliance with the minimum-liquidity covenant at March 30.
Material changes versus the prior comparable period
- Revenue increased $2.157 million, approximately 86%. U.S. revenue rose to $2.953 million from $0.821 million, while revenue outside the U.S. was broadly flat at $1.723 million versus $1.698 million.
- By product, Lung revenue was $1.412 million, Heart $1.922 million and Liver $1.342 million. Management attributed growth mainly to more disposable sets sold, including U.S. commercial OCS Lung sales and Liver trial sales.
- U.S. disposable-set selling prices were approximately 11% higher year over year. Management said higher pricing and production efficiencies helped raise gross margin to 55% from 37%.
- Operating expenses rose $2.830 million, led by a $2.413 million increase in selling, general and administrative costs to support U.S. commercialization and preparation for public-company operations. Research, development and clinical-trial expenses increased $0.417 million.
- Net loss increased $1.994 million. Interest expense increased $0.835 million, primarily following the increase in borrowings in June 2018.
- Operating cash use increased to $7.266 million. Higher inventory and receivables absorbed cash, partly offset by increased accounts payable and accrued liabilities. Cash and cash equivalents declined from $20.241 million at December 29, 2018.
Outlook, risks and unusual items
- Management expected continued operating losses and said it could not predict when, or whether, profitability would be achieved. It expected increased spending on commercial expansion, manufacturing, research and development, clinical trials, regulatory work and public-company costs.
- The company completed its IPO on May 6, 2019, after the quarter-end: 6,543,500 shares were sold at $16 per share. Net proceeds were $97.4 million after underwriting discounts and commissions, before other offering costs. Management expected IPO proceeds plus existing cash to fund operating expenses, capital expenditures and debt service for at least 12 months, while cautioning that assumptions could prove wrong.
- The IPO-related corporate reorganization converted preferred stock into common stock. The preferred-stock warrant liability was also converted into common-stock warrants, ending future fair-value remeasurement of that liability.
- Key risks include continuing losses and potential future funding needs; dependence on OCS adoption and a limited number of customers; reimbursement, regulatory and clinical-trial outcomes; supplier concentration; competition; and debt covenants. Two customers each represented at least 10% of Q1 revenue (13% and 11%).
- The OrbiMed agreement includes a $3.0 million minimum-liquidity covenant, restrictions on certain activities and default provisions that can accelerate repayment. The company received a waiver for the covenant requiring an unqualified audit opinion on its 2018 financial statements.
- A requested extension for one U.S. patent licensed from the Department of Veterans Affairs had interim approval; final approval and the extension term were unresolved. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
- ASC 606 was adopted effective December 30, 2018 using the modified retrospective method; management said adoption did not materially affect the financial statements.
Important facts for investors to verify
- Whether the post-quarter IPO proceeds, net of remaining offering costs, provide the expected operating runway and how quickly cash is being used.
- Whether commercial OCS Lung sales and adoption of the OCS across organs can sustain revenue growth and improve gross margins.
- Customer concentration, reimbursement coverage, and the pace and results of active clinical trials and regulatory reviews, particularly for Heart and Liver products.
- Debt-service capacity, covenant compliance and the implications of the facility’s security interest, interest rate and maturity terms.
- The status of the VA patent-term extension and the company’s exposure to limited-source suppliers.