TransMedics Group, Inc. (TMDX) FY 2024 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 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 NOP, an innovative turnkey solution to provide outsourced organ procurement, OCS perfusion management and transplant logistics services, to provide transplant programs in the United States with a more efficient process to procure donor organs with the OCS. Since 2023, we have offered logistics services through our NOP, including aviation transportation, ground transportation, and other coordination activity. 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 PMA from the FDA, for both DBD organs and 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 growing our NOP; 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 issuance of the Notes, proceeds from the sale of common stock in our public offerings, and revenue from commercial sales of our OCS products and NOP services and from sales of our OCS products for use in clinical trials.
Prior to 2024, we had incurred significant annual operating losses since inception and we have only recently achieved profitability. Our ability to generate revenue sufficient to achieve sustained profitability will depend on the continued commercial sales of our OCS products and NOP services. We generated total revenue of $441.5 million and had net income of $35.5 million for the year ended December 31, 2024. We generated total revenue of $241.6 million and incurred a net loss of $25.0 million for the year ended December 31, 2023. As of December 31, 2024, we had an accumulated deficit of $468.2 million. We expect our operating and capital expenditures will continue to increase 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 NOP, including by maintaining and growing our logistics capabilities, including hiring, training and retaining pilots to scale our aviation transportation operations, to support our NOP and reduce dependence on third party transportation, including by means of the acquisition, maintenance or replacement of fixed-wing aircraft or other acquisitions, joint ventures or strategic investments; 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.
Because of the numerous risks and uncertainties associated with product development, commercialization and regulations of our industry, we are unable to accurately predict the timing or amount of increased expenses or if we will be able to maintain profitability. Until such time, if ever, as we can generate substantial revenue sufficient to achieve sustained profitability, we may 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 will have to delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to terminate our operations.
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In March 2023, the U.S. Department of Health and Human Services’ Health Resources and Services Administration, or HRSA, announced initiatives designed to improve the OPTN, including its intent to solicit contract proposals to manage the OPTN, which is currently operated by the United Network for Organ Sharing, or UNOS, under a contract that expired in March 2024. Additionally, in September 2023, the Securing the U.S. Organ Procurement and Transplantation Network Act was signed into law and expressly authorizes HRSA to award multiple grants, contracts or cooperative agreements to support the operation of the OPTN and specifies that the OPTN shall be operated through awards that are distinct from awards made to support the organization tasked with supporting the networks’ board of directors. In September 2024, HRSA began awarding contracts aimed at supporting these initiatives. The impact that the HRSA initiatives and the U.S. Organ Procurement and Transplantation Network Act may have on our business, including on our NOP, is uncertain at this time.
Economic Impacts
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.
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, these customers purchase an additional OCS disposable set for use on their existing organ-specific OCS Console. We also generate service revenue by providing outsourced organ procurement, OCS perfusion management and transplant logistics services under our NOP in the United States. With the acquisition of Summit in August 2023, the purchase of fixed-wing transplant aircraft and the addition of a logistics team, we anticipate increased service revenue from our logistics services.
Prior to our acquisition in 2023, Summit derived its revenue primarily from charter flight services. To a lesser extent, Summit also derived revenue from providing flight school training, managing aircraft and other related services. As part of the Summit integration, we transitioned Summit's charter flight and aircraft management customers to third parties. We do not anticipate generating revenue from charter flights or aircraft management and related services. We are continuing to offer flight school training services. During the years ended December 31, 2024 and 2023 service revenue of $4.4 million and $4.9 million, respectively, was from Summit's legacy operations, unrelated to the NOP and organ transplant.
All of our OCS transplant-related 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 procurement, OCS perfusion management or transplant logistics services under our NOP, and OCS Console, whether sold or loaned to the customer.
Through December 31, 2024, 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 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 received the CE mark for the OCS Liver combined with our solution additives under the MDR in May 2023, with an effective date of April 2023. In addition, we received a Class II Medical Device License from Health Canada for our OCS Liver combined with our solution additives in October 2023 to complement our existing Health Canada licenses for OCS Heart and OCS Lung.
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We expect that our revenue will increase over the long term as a result of the continued growth 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. While we expect our revenue to increase over the long term, revenue from sales may fluctuate from quarter to quarter as the timing of organ transplant procedures is generally unpredictable, and we have observed periodic fluctuations in the availability of donor organs, which impacts the volume of transplants.
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. 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 that directly support organ procurement and OCS perfusion management services and transportation and logistics costs, including labor costs for pilots, aircraft depreciation, aircraft costs, fuel, crew travel, maintenance and third-party flight costs and ground transportation that support organ delivery. For the years ended December 31, 2024 and 2023, cost of service revenue also included approximately $3.1 million and $4.4 million, respectively, of costs related to Summit's legacy operations, unrelated to the NOP and organ transplant.
Gross profit is the amount by which revenue exceeds cost of revenue in each reporting period and gross margin is gross profit divided by revenue. Our overall gross margin is impacted by the relative mix of product and service revenue, as product and service revenue have different margin profiles. Product and service gross margins are also 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 overall cost of revenue will increase or decrease in absolute dollars primarily as, and to the extent that, our revenue increases or decreases. 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 product gross margin. We also expect to see modest improvements in the future in our services gross margin 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.
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, and recruiting and temporary service fees related to such personnel;
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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.
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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.
Acquired In-Process Research and Development Expenses
Acquired in-process research and development expenses, or IPR&D, consist of the acquisition value of transactions that do not qualify as a business combination and that do not have an alternative future use.
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, and recruiting and temporary service fees for such personnel. Selling, general and administrative expenses also include direct and allocated facility-related costs, costs to support the NOP, 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 and amortization of sales and marketing-related intangible assets. 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 NOP.
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 discounts 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. In May 2023, we issued and sold $460.0 million in aggregate principal amount of our 1.50% convertible senior notes, due 2028.
Interest Income and Other Income (Expense), Net
Interest income and 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.
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Results of Operations
Comparison of the Years Ended December 31, 2024, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2024, 2023 and 2022:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| (in thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Net product revenue | $ | 273,866 | $ | 176,069 | $ | 79,234 | ||||||
| Service revenue | 167,674 | 65,554 | 14,225 | |||||||||
| Total revenue | 441,540 | 241,623 | 93,459 | |||||||||
| Cost of revenue: | ||||||||||||
| Cost of net product revenue | 58,345 | 41,015 | 16,970 | |||||||||
| Cost of service revenue | 121,114 | 46,515 | 11,217 | |||||||||
| Total cost of revenue | 179,459 | 87,530 | 28,187 | |||||||||
| Gross profit | 262,081 | 154,093 | 65,272 | |||||||||
| Operating expenses: | ||||||||||||
| Research, development and clinical trials | 55,968 | 36,055 | 26,812 | |||||||||
| Acquired in-process research and development expenses | — | 27,212 | — | |||||||||
| Selling, general and administrative | 168,617 | 119,553 | 69,897 | |||||||||
| Total operating expenses | 224,585 | 182,820 | 96,709 | |||||||||
| Income (loss) from operations | 37,496 | (28,727 | ) | (31,437 | ) | |||||||
| Other income (expense): | ||||||||||||
| Interest expense | (14,409 | ) | (10,791 | ) | (3,726 | ) | ||||||
| Interest income and other income (expense), net | 12,693 | 12,847 | (1,002 | ) | ||||||||
| Total other income (expense), net | (1,716 | ) | 2,056 | (4,728 | ) | |||||||
| Income (loss) before income taxes | 35,780 | (26,671 | ) | (36,165 | ) | |||||||
| (Provision) benefit for income taxes | (316 | ) | 1,643 | (66 | ) | |||||||
| Net income (loss) | $ | 35,464 | $ | (25,028 | ) | $ | (36,231 | ) |
Revenue
OCS transplant-related revenue consists of:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | ||||||||||
| (in thousands) | ||||||||||||
| OCS transplant revenue by country by organ: | ||||||||||||
| United States | ||||||||||||
| Lung total revenue | $ | 15,755 | $ | 10,548 | $ | 5,207 | ||||||
| Heart total revenue | 96,663 | 59,080 | 37,583 | |||||||||
| Liver total revenue | 309,462 | 151,719 | 157,743 | |||||||||
| Total United States OCS transplant revenue | 421,880 | 221,347 | 200,533 | |||||||||
| All other countries | ||||||||||||
| Lung total revenue | 1,926 | 1,272 | 654 | |||||||||
| Heart total revenue | 13,198 | 14,012 | (814 | ) | ||||||||
| Liver total revenue | 158 | 104 | 54 | |||||||||
| Total all other countries OCS transplant revenue | 15,282 | 15,388 | (106 | ) | ||||||||
| Total OCS transplant revenue | $ | 437,162 | $ | 236,735 | $ | 200,427 |
We also had service revenue unrelated to OCS transplant of $4.4 million and $4.9 million for the years ended December 31, 2024 and 2023, respectively.
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Revenue from customers in the United States related to OCS transplant was $421.9 million in the year ended December 31, 2024 and increased by $200.5 million compared to the year ended December 31, 2023, primarily due to higher sales volumes of our OCS Liver and OCS Heart disposable sets. Revenue for each organ in the table above includes net product revenue from sales of disposable sets as well as service revenue for organ procurement, OCS perfusion management and transplant logistics services under the NOP in the United States. Establishing the NOP, which launched in late 2021, has allowed us to broaden our customer base and increase utilization of the OCS in organ transplantation. Substantially all of our customers in the United States now participate in the NOP. By adding logistics to our NOP offering in late 2023, we have been able to further increase product and service revenue.
Revenue from customers outside the United States was $15.3 million and $15.4 million in the years ended December 31, 2024 and 2023, respectively.
Cost of Revenue, Gross Profit and Gross Margin
Cost of net product revenue increased by $17.3 million in the year ended December 31, 2024 compared to the year ended December 31, 2023. Cost of service revenue increased by $74.6 million in the year ended December 31, 2024 compared to the year ended December 31, 2023 as we increased utilization of the NOP. Gross profit increased by $108.0 million in the year ended December 31, 2024 compared to the year ended December 31, 2023. Cost of service revenue included approximately $3.1 million and $4.4 million for the years ended December 31, 2024 and 2023, respectively, of costs from Summit's legacy operations, unrelated to the NOP and organ transplant.
Overall gross margin was 59% and 64% for the years ended December 31, 2024 and 2023, respectively. The decrease in gross margin from 2023 to 2024 was driven primarily by an increase in service revenue, which has a lower gross margin than product revenue. Gross margin from net product revenue was 79% and 77% for the years ended December 31, 2024 and 2023, respectively. The increase in product gross margin was primarily as a result of increased sales volume and increased sales of higher margin OCS disposable sets. Gross margin from service revenue was 28% and 29% for the years ended December 31, 2024 and 2023, respectively, and consisted primarily of organ procurement, OCS perfusion management and transplant logistics services under our NOP. The decrease in service gross margin was primarily due to investments in our NOP network, including aviation-related expenditures, to prepare for future growth. Service revenue gross margin for the year ended December 31, 2023, included the introduction of transportation and logistics services and the integration of Summit.
Operating Expenses
Research, Development and Clinical Trials Expenses
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | ||||||||||
| (in thousands) | ||||||||||||
| Personnel related (including stock-based compensation expense) | $ | 21,927 | $ | 15,489 | $ | 6,438 | ||||||
| Laboratory supplies and research materials | 13,990 | 7,939 | 6,051 | |||||||||
| Consulting and third-party services | 12,920 | 5,788 | 7,132 | |||||||||
| Clinical trials costs | 478 | 1,077 | (599 | ) | ||||||||
| Facility related and other | 6,653 | 5,762 | 891 | |||||||||
| Total research, development and clinical trials expenses | $ | 55,968 | $ | 36,055 | $ | 19,913 |
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Total research, development and clinical trials expenses increased by $19.9 million from $36.1 million in the year ended December 31, 2023 to $56.0 million in the year ended December 31, 2024. Personnel related costs increased by $6.4 million primarily due to increased headcount to support development efforts for our next generation OCS and overall compensation increases. Personnel related costs included stock-based compensation expense of $4.2 million and $2.8 million for the years ended December 31, 2024 and 2023, respectively. Consulting and third-party services costs increased by $7.1 million due to development efforts by our external development consultants for our next generation OCS, other product development and digital tools. Laboratory supplies and research materials costs increased by $6.1 million from the year ended December 31, 2023 to the year ended December 31, 2024 primarily due to our increased need for supplies and materials used for development of our next generation OCS. Facility related and other costs increased by $0.9 million from the year ended December 31, 2023 to the year ended December 31, 2024 due primarily to the increased costs of supporting a larger group of research and development personnel and their development efforts. Clinical trial costs decreased by $0.6 million due to the timing of clinical trials.
Acquired In-Process Research and Development Expenses
IPR&D in 2023 was related to the acquisition of certain assets related to lung and heart perfusion technology from Bridge to Life Ltd. and its subsidiary Tevosol, Inc., together BTL.
Selling, General and Administrative Expenses
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | ||||||||||
| (in thousands) | ||||||||||||
| Personnel related (including stock-based compensation expense) | $ | 109,475 | $ | 72,717 | $ | 36,758 | ||||||
| Professional and consultant fees | 18,313 | 17,401 | 912 | |||||||||
| NOP support | 12,289 | 11,985 | 304 | |||||||||
| Tradeshows and conferences | 4,328 | 4,575 | (247 | ) | ||||||||
| Facility related and other | 24,212 | 12,875 | 11,337 | |||||||||
| Total selling, general and administrative expenses | $ | 168,617 | $ | 119,553 | $ | 49,064 |
Total selling, general and administrative expenses increased by $49.1 million from $119.6 million in the year ended December 31, 2023 to $168.6 million in the year ended December 31, 2024 due primarily to increases in personnel related costs, and facility related and other costs. Personnel related costs increased by $36.8 million primarily due to the continued expansion of our team to support the growth in our business. Stock-based compensation expense increased by $11.0 million, due primarily to additional grants to new and existing employees and the modification of stock awards pursuant to the transition agreement with our former Chief Financial Officer. Facility related and other costs increased by $11.3 million due primarily to increased costs associated with post-approval studies and information technology infrastructure costs, and depreciation and amortization expense due to the growth in our business. Professional and consultant fees increased by $0.9 million due primarily to increased fees in 2024 related to information technology and other enterprise solutions costs to support the growth in our business. Professional and consultant fees in the year ended December 31, 2023 included transaction costs of $2.0 million related to our Summit acquisition.
Other Income (Expense)
Interest Expense
Interest expense was $14.4 million and $10.8 million for the years ending December 31, 2024 and 2023, respectively. The increase was due primarily to interest expense on the $460.0 million principal amount of the Notes, which were issued in May 2023.
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net for the years ended December 31, 2024 and 2023 included interest income of $13.4 million and $12.5 million, respectively, from interest earned on invested cash balances. Other income (expense), net included $0.7 million of realized and unrealized foreign currency transactions losses for the year ended December 31, 2024, and $0.3 million of realized and unrealized foreign currency transactions gains during the year ended December 31, 2023.
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(Provision) Benefit for Income Taxes
Income taxes for the years ended December 31, 2024 and 2023 included a tax provision of $0.3 million and less than $0.1 million, respectively, related to state and foreign income taxes. For the year ended December 31, 2023, we also recorded a tax benefit of $1.7 million for the release of a portion of our valuation allowance related to the net deferred tax liabilities recorded in purchase accounting. As part of the allocation of the purchase price of Summit, we recorded deferred tax liabilities for the differences between the fair value recognized in purchase accounting and the tax basis of property, plant and equipment and intangible assets. The net deferred tax liability is a source of income to support the recognition of a portion of our existing deferred tax assets. Therefore, we released the same amount of our valuation allowance. We maintain a valuation allowance on our overall net deferred tax asset as we deem it more likely than not that the net deferred tax asset will not be realized.
Comparison of the Years Ended December 31, 2023 and 2022
For a discussion of our results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022, 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, 2023, 2022 and 2021 included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Liquidity and Capital Resources
Prior to 2024, we had incurred significant annual operating losses since inception and we may continue to incur losses in the future. To date, we have funded our operations primarily with proceeds from borrowings under loan agreements, proceeds from the issuance of our Notes, proceeds from the sale of common stock in our public offerings and revenue from commercial sales of our OCS products and NOP services and from sales of our OCS products for use in clinical trials. On May 11, 2023, we issued $460.0 million aggregate principal amount of the Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The total net proceeds from the sale of the Notes, after deducting debt issuance costs of $14.6 million, and purchases of Capped Calls of $52.1 million, were $393.3 million. At December 31, 2024, our principal source of liquidity was cash of $336.7 million
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by (used in) operating activities | $ | 48,803 | $ | (13,028 | ) | $ | (45,817 | ) | ||||
| Net cash provided by (used in) investing activities | (129,303 | ) | (193,953 | ) | 54,513 | |||||||
| Net cash provided by financing activities | 22,874 | 400,418 | 167,927 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (536 | ) | 193 | (1,021 | ) | |||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (58,162 | ) | $ | 193,630 | $ | 175,602 |
Operating Activities
During the year ended December 31, 2024, operating activities provided $48.8 million of cash, primarily resulting from our net income of $35.5 million and net non-cash charges of $58.3 million, partially offset by net cash used by changes in our operating assets and liabilities of $45.0 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2024 consisted primarily of an increase in accounts receivable of $34.3 million, an increase in inventory of $8.4 million and an increase in prepaid expenses and other current assets of $6.3 million, partially offset by an increase in accounts payable and accrued expenses and other current liabilities of $6.5 million.
During the year ended December 31, 2023, operating activities used $13.0 million of cash, primarily resulting from our net loss of $25.0 million and net cash used by changes in our operating assets and liabilities of $44.3 million, partially offset by net non-cash charges of $56.3 million, which included an IPR&D charge of $27.2 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2023 consisted primarily of an increase in accounts receivable of $33.8 million, an increase in inventory of $28.1 million and an increase in prepaid expenses and other current assets of $2.1 million, partially offset by an increase in accounts payable and accrued expenses and other current liabilities of $21.2 million.
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Changes in accounts receivable, inventory, prepaid expenses and other current assets, 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, 2024, net cash used in investing activities of $129.3 million consisted primarily of purchases of property, plant and equipment of $129.7 million, including an increase of $110.2 million in transplant aircraft.
During the year ended December 31, 2023, net cash used in investing activities of $194.0 million consisted of purchases of property, plant and equipment of $151.8 million, including $141.9 million of transplant-related aircraft purchases, the purchase of IPR&D assets from BTL for $27.2 million and the purchase of Summit for $14.9 million, net of cash received.
Financing Activities
During the year ended December 31, 2024, net cash provided by financing activities of $22.9 million consisted of proceeds from the issuance of common stock upon exercise of stock options of $20.8 million and proceeds from the issuance of common stock in connection with the 2019 Employee Stock Purchase Plan of $2.1 million.
During the year ended December 31, 2023, net cash provided by financing activities of $400.4 million consisted of net proceeds from the issuance of our Notes of $445.4 million, partially offset by payments of $52.1 million for associated capped calls, proceeds from the issuance of common stock upon exercise of stock options of $6.2 million and proceeds from the issuance of common stock in connection with the 2019 Employee Stock Purchase Plan of $1.0 million.
For a discussion of our cash flows for the year ended December 31, 2022, 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, 2023.
Convertible Senior Notes
On May 11, 2023, we issued $460.0 million aggregate principal amount of the Notes, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act, pursuant to an indenture dated May 11, 2023, by and between us and U.S. Bank Trust Company, National Association, or the Indenture.
The initial conversion price of the Notes is approximately $94.00 per share of common stock, which represents a premium of approximately 32.5% over the closing price of our common stock on May 8, 2023. The Notes will mature on June 1, 2028, unless earlier repurchased, redeemed or converted. We used $52.1 million of the proceeds from the sale of the Notes to fund the cost of entering into capped call transactions, described below. The proceeds from the issuance of the Notes were approximately $393.3 million, net of capped call transaction costs of $52.1 million and initial purchaser discounts and other debt issuance costs totaling $14.6 million. The Notes bear interest at a rate of 1.50% per year and interest is payable semiannually in arrears on June 1 and December 1 of each year. The initial conversion rate is 10.6388 shares of common stock per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $94.00 per share of common stock. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events as described in the Indenture.
Before March 1, 2028, noteholders have the right to convert their Notes only upon the occurrence of certain events, including certain corporate events, and during the five business days immediately after any ten consecutive trading days in which the trading price per $1,000 principal amount of Notes is less than ninety-eight percent (98%) of the as converted value. Additionally, the noteholder can convert their Notes during any calendar quarter (and only during such calendar quarter), commencing after the calendar quarter ending on September 30, 2023 but before March 1, 2028, provided the last reported sale price of the common stock for at least 20 trading days is greater than or equal to 130% of the conversion price during the 30 consecutive trading days ending on the last trading day of a calendar quarter. From and after March 1, 2028, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We have the right to elect to settle conversions either in cash, shares or in a combination of cash and shares of our common stock.
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Prior to June 8, 2026, the Notes will not be redeemable. On or after June 8, 2026, we may redeem for cash all or any portion of the Notes (subject to the partial redemption limitation set forth in the Indenture), at our option, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. In addition, calling any Note for redemption will constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
A conditional conversion feature of the Notes was triggered on June 30, 2024 and again on September 30, 2024, as the last reported sale price of our common stock was greater than or equal to 130% of the conversion price of the Notes for at least 20 trading days during the period of 30 consecutive trading days ending on and including the last trading day of each of the quarters ended June 30, 2024 and September 30, 2024, respectively, and the Notes therefore became convertible at the noteholders’ election in the immediately following calendar quarters ended September 30, 2024 and December 31, 2024, respectively. If this condition or another conversion condition is met in the future, the Notes may again become convertible, otherwise the Notes will be convertible at the noteholders’ election from March 1, 2028 through the close of business on the second scheduled trading day immediately before the maturity date.
Long-Term Debt
In July 2022, we entered into a credit agreement with CIBC as amended by the First Amendment to Credit Agreement, dated as of May 8, 2023, by and among the Company and CIBC, or the First Amendment, the Second Amendment to Credit Agreement, dated as of June 23, 2023, by and among the Company and CIBC, or the Second Amendment, and the Third Amendment to Credit Agreement, dated as of November 9, 2023, by and among the Company and CIBC, or the Third Amendment, pursuant to which we borrowed $60.0 million, referred to herein as the CIBC Credit Agreement.
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 1.50%, 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%. At our option, we may prepay borrowings outstanding under the CIBC Credit Agreement, without a prepayment fee. 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), as defined, 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, 2024, we were in compliance with all financial 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.
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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 NOP, scale our manufacturing and sterilization operations, continue research, development and clinical trial efforts, seek regulatory approval for new products and product enhancements, including new indications, both in the United States and in select non-U.S. markets, and seek greater control of air and ground transport for our NOP. 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. The timing and amount of our operating and capital expenditures will depend on many factors, including:
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the amount of 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 growth 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 maintaining and improving our commercial operations, including the NOP;
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the costs associated with maintaining and growing our logistics capabilities, including by means of attracting, training and retaining pilots, and the acquisition, maintenance, or replacement of fixed-wing aircraft for our aviation transportation services or other acquisitions, joint ventures or strategic investments;
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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.
Material Contractual Obligations
Our contractual obligations include amounts payable as principal and interest payments under the CIBC Credit Agreement. As of December 31, 2024, our outstanding principal balance was $60.0 million, which is repayable in equal monthly installments starting in July 2026 until its maturity in July 2027. We estimate we will pay $3.9 million in interest payments during 2025. Our estimate of payments is based on an assumed rate of 6.4%, which was the interest rate in effect at December 31, 2024.
On May 11, 2023, we issued $460.0 million aggregate principal amount of the Notes. The Notes bear interest at a rate of 1.50% per year, payable semi-annually in arrears on June 1 and December 1 of each year. The Notes will mature on June 1, 2028, unless earlier converted, redeemed or repurchased.
We lease facilities under long-term non-cancelable operating leases that have a weighted average remaining lease term of 3.7 years as of December 31, 2024. As of December 31, 2024, we had fixed lease payment obligations of $10.3 million, of which $3.3 million is payable during 2025. We also lease facilities under short-term leases, for which we expect to pay approximately $1.5 million in 2025 under existing leases.
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We intend to acquire additional fixed-wing aircraft as we scale our fleet of aircraft. During the year ended December 31, 2024, we acquired eight transplant-related fixed-wing aircraft with an aggregate purchase price of $109.6 million and we plan to acquire additional aircraft in 2025, including two aircraft purchased in January 2025 and February 2025 with an aggregate purchase price of $28.4 million.
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, 2024, our remaining purchase commitment is $5.0 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 material 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 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, these customers purchase an additional OCS disposable set for use on their existing organ-specific OCS Console. We also generate service revenue by providing outsourced organ procurement, OCS perfusion management and transplant logistics 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 procurement, OCS perfusion management and transplant logistics services under our NOP or 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 procurement, OCS perfusion management and transplant logistics services.
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.
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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 procurement, OCS perfusion management and transplant logistics 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 procurement, OCS perfusion management or transplant logistics 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
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. Revenue is reported net of taxes.
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 $2.5 million and $0.8 million as of December 31, 2024 and 2023, respectively.
At the end of each reporting period, we assess whether losses should be accrued on long-term manufacturing purchase commitments in accordance with ASC Topic 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 consolidated statements of operations unless they are deemed recoverable through firm sales contracts 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.
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Business Combinations and Fair Value Estimates
In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business and the acquisition is accounted for as an asset acquisition. If this is not the case, we then further evaluate whether the acquisition includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, we conclude that the acquisition is a business and account for it as a business combination.
Determining the fair value of assets acquired and liabilities assumed in a business combination is judgmental in nature and can involve the use of significant estimates and assumptions. Fair value and useful life determinations are based on, among other things, valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. Actual results may vary from these estimates and may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever comes first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within operating results.
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.