Good afternoon, and welcome to TransMedics' First Quarter 2023 Earnings Conference Call. I would now like to turn the call over to Brian Johnston from the Gilmartin Group for a few introductory comments.

Thank you. Earlier today, TransMedics released financial results for the quarter ended March 31, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call, including during the question-and-answer portion that include forward-looking statements within the meaning of Federal Securities Laws. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, examinations of operating trends, the potential commercial opportunity for our products, and our future financial expectations, which include expectations for growth in our organization, guidance, and our expectations for revenue, gross margin, and operating expenses in 2023 are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. Additional information regarding these risks and uncertainties appears under the heading 'Risk Factors' on our Form 10-K filed with the Securities and Exchange Commission on February 27, 2023, and our subsequent filings with the Securities and Exchange Commission, which are available at www.sec.gov and on our website at www.transmedics.com. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 1, 2023. And with that, I'll turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you, Brian. Good afternoon, everyone, and welcome to TransMedics First Quarter 2023 Earnings Call. Joining me today is Stephen Gordon, our Chief Financial Officer. Since our last update, we have continued building on our strong 2022 performance, making progress on many of our previously outlined growth goals for 2023. I'm pleased to report that our first quarter results showed significant commercial momentum and increased clinical adoption through the TransMedics NOP. In Q1, we also scaled our supply capacity for our OCS perfusion modules. Here are the top-line results. In Q1, we achieved total revenue of $41.6 million, reflecting 162% year-over-year growth and 32% growth over Q4 2022. NOP remained the primary driver for our revenue growth, a trend we anticipate will continue in the foreseeable future. Additionally, we demonstrated continued improvement on our profit and loss statement as we benefited from increasing operating leverage, which Stephen will elaborate on in his section. Before discussing the Q1 details, I want to highlight that we published our first annual ESG report on our website this morning. Now let’s explore some detailed highlights from Q1 2023. Q1 marked a new high in case volume, largely driven by liver and heart cases, which increased for the fifth consecutive quarter. Lung volumes are still lagging as we work to revive this important market. In line with our growth strategy, we expanded the number of liver and heart transplant programs utilizing OCS and NOP. There were 32 liver programs using OCS and NOP in Q1, with 15 being active repeat users. For heart, there were 40 programs, 11 of which were active repeat users. There were 9 lung programs using the OCS and NOP, with 6 being repeat users. We are not concerned about the lung center trend given the small numbers and our previous guidance that it will take about 12 to 18 months for our efforts to significantly influence lung program growth. Nearly 91% of our total U.S. case volume came from NOP, with approximately 96% of liver, 83% of heart, and 91% of lung cases attributed to the NOP program. We see these penetration rates as encouraging and align with our goal of having TransMedics NOP manage the majority of U.S. transplant volume in the coming years. In Q1, we also started increasing our production and sterilization capacity, mainly by scaling our second shift in our existing cleanroom operations. We expect gradual capacity expansion as we bring our new cleanroom online. Having received FDA certification for our new cleanroom in Q1, we are confident that it will be operational by late Q2. Our Q1 results clearly show the rapid increase in clinical demand for our OCS technology and NOP service model. We are focused on strengthening our supply chain and NOP infrastructure to sustain and further boost our growth. To meet this growing demand, we are specifically enhancing OCS production availability and NOP infrastructure capacity. We continue investing in our manufacturing capacity and supply chain to ensure continuous product availability, which includes increasing production and sterilization capacity and managing our raw material supply chain. We are also expanding our NOP infrastructure by growing our surgical and field clinical staffing in the next 12 to 18 months, and we plan to add 2 to 3 new launch points later this year to reach larger pools of potential donors more efficiently. We will also enhance the logistical management of the NOP case flow by recruiting a senior logistics executive from Amazon, who will lead efforts to streamline our logistical workflow from the initial transplant center's call to the organ arriving at the transplant center. One key aspect of this initiative is the development of a digital command and dispatch center to manage our national NOP workload. We look forward to sharing more detailed information about this initiative towards the end of 2023. Additionally, we announced plans to launch the customer-facing part of the TransMedics OCS connect application, which will give surgeons and clinicians real-time updates on the organ's status and logistics. This application aims to provide better transparency and communication between our team and transplant clinical staff. Lastly, we intend to eventually control the transport function for NOP transplant cases to eliminate a critical bottleneck for our growth. Our NOP volumes are currently outpacing the capacity and flight range of the fragmented air charter model in use today. We plan to launch this important TransMedics aviation initiative in H2 2023, establishing a national dedicated NOP transplant charter flight network. I look forward to discussing this exciting initiative later this year. It’s crucial to understand that all air transport for heart, lung, and liver transplants in the U.S. is allocated via chartered flights, which are included in the organ acquisition cost center and are reimbursed by commercial transplant payers and CMS. Historically, OPOs coordinated flights for transplant programs, but the organ allocation system has since shifted from a regional to a national basis. This change allows for broader allocation, which has led to the reliance on regional charter flight brokers, creating inefficiencies in the transportation process. This outdated model can become a significant bottleneck for NOP growth. We strongly believe that establishing our dedicated national network of charter flights will further drive NOP and TransMedics business growth in the U.S. Our OCS technology and NOP service model are initiating a transformative change in organ transplantation in the United States, as highlighted by our first-quarter performance. We believe this is just the beginning, and we are determined to maintain our momentum with ambitious goals for the future. We are focused on executing our strategy for sustained long-term growth. I would like to address potential challenges that could temporarily impact our growth for the remainder of 2023. First, supply chain and production capacity constraints may arise, particularly concerning raw material demand as we scale production. While we do not foresee major issues currently, we could experience delays related to parts availability or obsolescence. Second, clinical NOP staffing delays could restrict our ability to expand into new regions until resolved. Lastly, any delays in establishing our logistical network and air transport may temporarily slow progress later this year into 2024. Nevertheless, given our strong Q1 2023 results and confidence in our finished goods supply trajectory against potential challenges, we are raising our annual revenue guidance for 2023 to between $160 million and $170 million, up from $138 million to $145 million. This new guidance signifies a growth of 71% to 82% over our total revenue in 2022. Now, let me turn the call over to Stephen for a detailed overview of our financial results for the quarter.

Thank you, Waleed. I will now provide some additional details on the Q1 results and other financial information for the quarter. For the first quarter of 2023, our total revenue was $41.6 million, this is an increase of 162% from the first quarter of 2022 and a 32% sequential increase from last quarter. In the U.S., revenue was $37.5 million, an increase of 177% from Q1 2022 and 29% sequentially from last quarter. The organ breakdown on U.S. revenue was $23.1 million of OCS liver, $13 million of OCS heart, and $1.4 million of lung. Ex-U.S. revenue was $4.1 million, a 75% increase from Q1 of 2022, of which $3.8 million was from heart and $0.2 million from lung. Regarding the breakout of product and service revenue this quarter, as a reminder, service revenue includes the added amounts we charge for the surgical procurement and organ management as part of the NOP. In Q1, product revenue was $34 million and service revenue was $7.6 million. So service revenue was 18% of the total in Q1. Gross margin for the first quarter of 2023 was 69%. While this is down from 76% in the first quarter of 2022, it is a sequential increase from the 66% reported in Q4 of 2022. The margin on product revenue was 79% in Q1 and the margin on service revenue was 27% in Q1 2023. The sequential improvement in service margin reflected some of the improvements in production capacity and drove the higher overall sequential gross margin. Total operating expenses for the quarter were $30.9 million, 44% above Q1 2022 operating expenses, driven primarily by our continued investment in scaling both the NOP and overall company operations. Operating loss was $2.1 million in the first quarter of 2023, compared to $9.4 million in the first quarter of 2022, demonstrating the strong leverage in the business as we grow our revenue. Our net loss for the first quarter of 2023 was $2.6 million compared to $10.6 million in the first quarter of 2022. Our total cash was $195.4 million as of March 31, 2023, which equates to a reduction of $5.8 million from the balance at the end of Q4 2022. Our weighted average common shares outstanding for the quarter were $32.3 million. Overall, our financial results in Q1 2023 reflect our continued execution of the OCS and NOP growth plan. We have been able to unlock additional production capacity as planned, which was reflected in both our top and bottom line results. And just to repeat our guidance update, we are increasing annual revenue guidance to the range of $160 million to $170 million, which represents 71% to 82% growth. Now I would like to turn the call back to Waleed for closing comments.

Thank you, Stephen. We are excited about our Q1 results and the ongoing demand for our OCS technology and NOP clinical services. However, we believe we are still in the early stages of the long-term growth trajectory we foresee for TransMedics. We are not complacent and recognize that this rapid growth could bring challenges. We are dedicated to advancing our operational, commercial, and clinical initiatives while addressing any challenges to achieve our growth potential in both the short and long term. We are eager to continue making progress on our strategic initiatives throughout 2023. I will now hand the call over to the operator for Q&A.

Our first question is from Bill Plovanic with Canaccord.

I'm going to start out by congratulating you on the quarter. I'm curious how capacity issues impacted new account adoption. Are you limiting your sales team from acquiring new accounts this past quarter? What does the new clean room contribute to net capacity, and when will it be operational in the coming quarters? Also, how does this affect the gross margin?

Thank you for the question, Bill. I’ll address the first two parts, and then Stephen will cover the impact on gross margin. The capacity ramp-up in Q1 was limited to a lesser extent compared to Q3 and Q4 of last year, allowing us to delve deeper into some accounts. We aimed not to restrict new account additions in Q1, which is why there was notable growth in new accounts for heart and liver. However, the number of repeat and active users remained slightly up or flat because we focused on bringing in new accounts while also supplying our traditional users with the added capacity, which commenced at the beginning of Q1. By the end of Q1, this capacity constraint was largely resolved due to increased capacity. Regarding the new clean room, we anticipate a significant capacity increase over the next 18 to 24 months, estimating it to be around four times the current capacity. However, when we open the new clean room, it won't be fully staffed right away and will take time to ramp up. We are committed to continually evaluating our capacity and want to avoid a situation similar to what we experienced in Q2, Q3, and Q4 of last year. Nick and the team are closely monitoring this, and we'll be proactive in preventing any significant back-order scenarios. Now I’ll hand it over to Stephen to discuss gross margin.

Bill, this is Stephen. So regarding gross margin, we did see a sequential increase. Primarily, that was around the service margin this quarter because we didn't have as much logistical costs of moving disposables quickly around the country to meet NOP needs. So we're able to kind of reduce that some. At the same time, we do have additional costs from the new clean room that's already kind of baked into our margin. So as I've said in the past, I expect a moderate increase in margin as our revenue grows sequentially, and I still feel like that's the right answer.

Great. For my second question regarding aviation, I appreciate the detailed discussion on potential expansion. First, what is the most likely pathway to enter this business, and what will the associated costs be? Is this through acquisition, or are you considering a build-up approach, acquiring planes individually? Second, do you anticipate needing to raise capital, whether through equity, debt, or other means, to pursue your objectives? Lastly, how will this affect your revenue, gross margin, and operating income?

Thank you, Bill. Again, I'll address the first two parts of your question, and I'll let Stephen address the impact on the P&L. We evaluated all different options of how to build the TransMedics aviation business in TransMedics. We have completely eliminated the organic option of adding one plane at a time because it will take significantly long time for TransMedics to secure a Part 135 charter operating license. It is going to take at least 12 to 18 months. So our two most efficient paths are either acquiring a Part 135 operator that has significant assets of jets that we can leverage quickly or creating a joint venture with one operator that has, again, a license and a significant number of assets. These are the two options that we are actively pursuing across the United States. As far as the ability to finance this, we've always stated publicly that we do not expect to tap into our current balance sheet to finance anything related to the aviation business. So we're exploring different modalities of financing that are non-dilutive or less dilutive forms of financing options in front of us. And we're working with our advisers on the different options. I'll turn it on to Stephen.

Yes, Bill, from a P&L perspective, the revenue for flights is not in our P&L today. So we would think of that as an adder from a revenue perspective for each transplant, whether it's $20,000 or $30,000 depends on the length of the flight. So that will be one change. So more of our revenue would be in the service bucket, although we think the service revenue, the service margin will be improved. The overall company gross margin percent may come down a bit. But from a dollar perspective, it should be an accretive to our income. And once we're in positive EPS, it would be favorable to EPS.

The next question is from Allen Gong with JPMorgan.

Congratulations on a very strong quarter. There are a lot of exciting developments in heart and liver, but I want to address the lung area for a moment. It is still facing significant challenges, even as the rest of your portfolio is performing well. I understand that the lung segment was notably affected by COVID and has not fully bounced back, despite the recovery in transplants. What details can you share about your strategy to revive that market for OCS?

Thank you, Allen, for your question. As I mentioned previously, we hope to share more specific details about our initiatives as the year progresses. Essentially, we are focusing on three main strategies. First, we are leveraging the success of the NOP in liver and heart to enhance our presence in the lung market, which we discussed in detail at ISHLT. Second, we aim to reeducate various market participants, including patient groups, on the significance of OCS Lung for those on the waiting list for a lung transplant, as well as for pulmonologists and transplant surgeons. The last three years of COVID have led to a loss of focus on the importance of machine perfusion for lungs. The third area, which I will be somewhat vague about for now, involves finding the right catalyst to drive significant clinical interest in machine perfusion for lungs using our NOP platform. I will leave it at that for now, Allen, but I assure you that we will provide more details in the coming quarters. I am not worried about the trend we observed in Q1. We are monitoring developments in Q2 and feel that our initial efforts are starting to show positive results. However, we will not slow down; we plan to continue pushing forward with all three strategies as we advance. Additionally, we will explore other approaches as well. This market is important to us, and we are committed to it.

And then another question with a bit of a more positive slant. When I look at your updated guidance, it looks like a really impressive beat in raised quarter. But when I look at what you've kind of left for yourself, Q2, Q3, Q4, you're basically implying flat revenues, right? On a quarterly basis. Now I'm not saying the cadence will exactly be like that. But what's really holding you back from meaningfully outperforming that once you have capacity up and running at the end of Q2? Like why shouldn't you be able to really outperform this bar you've set for yourself?

Thank you, Allen. Excellent question. So Allen, we were trying in the script, to identify a nuance that is taking place as we ramp up production capacity, which has been our Achilles heel for the last three quarters. Now we're straining our ability to secure raw material at the same pace or at the same volume as we historically have kept in inventory. So we have to be conservative and prudent to make sure that we allow Nick and the team to have enough buffer of raw material. They don't know what's coming around the corner. We are ramping up our purchasing of every raw material we use for the build of all of our product solutions. So we had to leave some room to allow for some surprises to take place. And also, as you know, we are conservative by nature, and we like to be realistic. We know that in med tech, having 70% to 80% growth is not an easy thing to do. And we think this is very realistic, and we hope to do better. But right now, we have to be prudent; the team is working very hard to make sure that we don't run out of raw material. The other area, as I stated on the call, is making sure that we're ramping up our staffing and ramping up our control of our logistical network, specifically aviation. If we get all these three done, Allen, this is when I feel confident that going forward and our long-term growth trajectory. But this is a year that we're still building. We're still building our supply infrastructure, our NOP infrastructure, we're upgrading and scaling our logistics. We're adding a whole new business unit in TransMedics called TransMedics aviation. So we have to be prudent and realistic, and we feel pretty strongly and excited about the opportunity here and the potential in front of us. We feel that the guidance we outlined reflects reality from where we see it.

The next question is from Cecilia Furlong with Morgan Stanley.

Great. Congrats on another strong quarter. I wanted to start, Waleed, with some of your comments in the Q&A, just about the center targeting balance that you talked about in Q1 as you work through some of the supply. And as you think going forward, just as capacity increases, can you talk about how you're thinking about the focus on bringing on new or the earlier stage NOP users versus really recircling on and driving deeper utilization across your current repeat users? And then also, as we think about, what are you contemplating the balance from a commercial standpoint on trying to reinvigorate lung versus driving those heart as well as liver sites going forward?

Thank you, Cecilia, for the question. I believe my response to both questions will be similar. From the moment we went public, we have made it clear that we are not limited to a single organ company or a one-trick pony. TransMedics can fully realize its potential when we have all three organs functioning effectively. Moreover, with the recent FDA approval of heart and liver transplants, we have publicly indicated that this enhances our business's resilience against any challenges faced by one organ, such as delays. Hence, we will keep pushing on all three fronts to drive overall growth for the business, irrespective of the source. Regarding the second part of your question, our growth strategy is not centered on a single aspect. We aim to deepen our engagement with our current accounts and increase the number of users in the United States, which we will continue to pursue. Therefore, the expansion of centers is crucial for us. While it's possible to achieve significant growth by intensifying our efforts within a core group of centers, that's not our sole focus. We are actively working on all fronts: enhancing penetration and overall volume in existing centers, reaching out to new centers to introduce them to NOP and its benefits for patients and staff, and fostering deeper growth in their overall volume. This is our plan for the coming years. We believe that executing this coherent strategy will be the key to substantial growth and success for TransMedics and, in our perspective, will make us more resilient to any challenges we might face as we pursue this growth potential.

Great. Super helpful. And if I could follow up as well. Just on margins, specifically, the service margin component of gross margin that we saw pick up. Stephen, if you could talk through how we should think about just that component of gross margin through the balance of the year? And then secondly, on OpEx as well as we think specifically SG&A some of the initiatives you talked about in terms of building out, adding incremental components to NOP. Just how we should think about the balance of this year from an OpEx and SG&A standpoint.

Thanks, Cecilia. So first, on the service margin, we were able to see, as I mentioned, an increase in Q1 from the kind of challenging situation we were in Q4, so I think we should see that stay. So we should be kind of at that level. I don't expect a big increase in that level from where we were in Q1, but we should remain there as long as we don't fall into another device or disposable shortage situation. So that will help as our revenue grows and help our overall margin for the company. As far as OpEx, I mean, we grew OpEx about 44%. I think I mentioned in the last call, kind of growth overall annually in the 30% to 35% range. That includes a lot of these initiatives, so I think that gives a sense of how we're investing.

Next question is from Suraj Kalia with Oppenheimer.

Waleed, Stephen, Tamer. Can you hear me all right?

Yes. Perfect Suraj.

Perfect. Gentlemen, congrats on another nice quarter. So Waleed, I was asked a question by a client that threw me for a loop. Maybe you can help clarify. So the question was should TransMedics have waited to get into the logistics, i.e., TransMedics aviation until a critical mass of organs are under their belt. I believe you gave a number of 535 done until sometime in April. Would it have made more sense to reach 1,000, 2,000? Any additional color there would be great.

Sure, Suraj, thank you for your question. We would not have considered this if we didn't believe we have reached a critical mass. What we anticipate could potentially disrupt the entire logistics process. We are confident that we have sufficient critical mass at this point. However, we are also worried that by the end of the year, our volume will increase significantly to the point where it could become challenging to secure airplanes for our operations. We're already facing difficulties finding airplanes for our missions currently, and we foresee our volume being much higher by year-end and into 2024. So your question is valid, and we want to emphasize that we believe we have achieved a critical mass now, and what we see ahead encourages us to act quickly and decisively before it becomes a bigger issue.

Waleed, I have a question for you and one for Stephen, and then I'll get back in line. Waleed, it's been over a year since we received heart approvals. In terms of heart and liver transplants, how should we view the market? Are you taking market share from cold storage, or do you believe the overall market is expanding? And Stephen, when it comes to TransMedics aviation, will it operate as a separate subsidiary with its own profit and loss statements, or will everything fall under the TransMedics umbrella for traditional reporting, including operating expenses? Additionally, am I being unreasonable in estimating that over the next two years, with 25 surgeons per organ and around 16 leased planes, we could be looking at an incremental expense of approximately $50 million to $70 million per year?

Thank you, Suraj. Let me address the first question. The answer is both. We're capturing a significant share of the existing market while also expanding the overall market. The numbers are clear. We've seen heart growth of 9% last year, lung growth of 7%, and liver growth of 3%. We expect overall growth for these organs to be higher in 2023. We're taking a substantial percentage of their current volume. This is possible because we're streamlining the process through the NOP. As I mentioned earlier in response to Cecilia's question, our strategy is not only to take from the existing market but to also grow the overall market. Our results validate this approach. We have shown our ability to achieve both in our 2022 results, and we are continuing to see that trend in 2023, which we anticipate will persist going forward.

And Suraj, regarding the subsidiary question, I do not foresee it operating as a separate entity with its own reporting. Instead, I anticipate it will be incorporated into our overall profit and loss statement. As for the investment, I cannot provide specific details at this time, but I can confirm it will generate additional revenue and incur costs. Therefore, it will not be breakeven; it will contribute positively to TransMedics' bottom line. I hope that clarifies things.

This concludes our question-and-answer session. I would like to turn the conference back over to Waleed Hassanein for any closing remarks.

Thank you. We thank you all for your time this evening, and we look forward to having our next call for our Q2 results. Have a wonderful evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.