Pulmonx(LUNG) - 2021 Q4 - Annual Report

PART I Business Pulmonx is a commercial-stage medical technology company providing a minimally invasive treatment for severe emphysema, a form of COPD. Its core solution comprises the Zephyr Endobronchial Valve, the Chartis Pulmonary Assessment System, and the StratX Lung Analysis Platform. The company targets a global market opportunity of approximately $12 billion. It operates through a direct sales force in the U.S. and a mix of direct sales and distributors internationally. The business is supported by a strong body of clinical evidence and established reimbursement in major markets. For the fiscal year 2021, the company generated $48.4 million in revenue but incurred a net loss of $48.7 million, reflecting continued investment in commercial expansion and R&D Financial Performance (FY 2021 vs. FY 2020) | Metric | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Revenue | $48.4 million | $32.7 million | | Gross Margin | 73.6% | 64.8% | | Net Loss | ($48.7 million) | ($32.2 million) | | Accumulated Deficit | ($291.4 million) | - | - The company's solution, comprised of the Zephyr Valve, Chartis System, and StratX Platform, is designed to treat severe emphysema patients who are not candidates for or do not want surgery[23] - The estimated global market opportunity is approximately $12 billion, addressing around 500,000 patients in the U.S. and 700,000 in select international markets[23][38] - The Zephyr Valve is commercially available in over 25 countries, with more than 100,000 valves used to treat over 25,000 patients[25] Our Solution - The solution consists of three main components: the Zephyr Endobronchial Valve (implant), the Chartis Pulmonary Assessment System (diagnostic tool), and the StratX Lung Analysis Platform (cloud-based CT analysis service)[49] - The Zephyr Valve is a one-way valve placed via a minimally invasive bronchoscopic procedure to occlude diseased parts of the lung, allowing trapped air to escape and reducing hyperinflation[30][50] - The StratX Platform is a cloud-based CT analysis service that helps physicians identify target lobes for treatment by assessing emphysema destruction, fissure completeness, and lobar volume[62] - The Chartis System is a balloon catheter and console system used during the procedure to assess collateral ventilation, which is critical for predicting patient response to the Zephyr Valve treatment[68] Clinical Trials and Results - The safety and effectiveness of the Zephyr Valve have been evaluated in multiple randomized controlled trials (RCTs), including LIBERATE, TRANSFORM, IMPACT, and STELVIO, which collectively studied approximately 450 patients[77] Summary of Key Randomized Controlled Trial Results | Trial | N | Procedural Success (TLVR %) | FEV1 % Improvement | 6MWD Improvement | SGRQ Improvement | | :--- | :--- | :--- | :--- | :--- | :--- | | LIBERATE | 190 | 84% | 18.0% | 39 m | -7.1 pts | | TRANSFORM | 97 | 90% | 29.3% | 79 m | -6.5 pts | | IMPACT | 93 | 89% | 16.3% | 28 m | -7.5 pts | | STELVIO | 68 | 88% | 17.8% | 74 m | -14.7 pts | - The most common serious complication is pneumothorax (collapsed lung), which occurred in 18-34% of patients in clinical trials. While most cases are manageable with standard care, they can be life-threatening in rare instances[82][276] - The pivotal LIBERATE study met all primary and secondary endpoints at 12 months, showing statistically significant improvements in lung function, exercise capacity, and quality of life compared to medical management alone[90] Third-Party Reimbursement - In the U.S., the procedure is reimbursed using established Category I CPT and ICD-10 PCS codes, with payments made through APC (outpatient) and MS-DRG (inpatient) groupings[151] - Major commercial payors like Aetna, Humana, Anthem, and Health Care Service Corporation have issued positive coverage policies. United Healthcare no longer considers the procedure experimental[161] - Medicare covers the procedure on a case-by-case basis when deemed medically necessary, as there is no national or local coverage determination (NCD/LCD) currently in place[160][284] - Outside the U.S., reimbursement is established in major markets across Europe and Asia Pacific, including Germany, the UK, Australia, and South Korea[164] Competition - The company competes with existing treatments such as medical management, LVRS, and lung transplantation[171] - Major competitive products include the Spiration Valve System from Olympus Corporation and the InterVapor System from Broncus Medical, Inc. (not approved in the U.S.)[171] - Key competitive factors include patient outcomes, product safety, clinical evidence, ease-of-use, cost-effectiveness, and the availability of reimbursement[175] Manufacturing and Supply - All products are manufactured at the company's headquarters in Redwood City, California, which is ISO 13485:2016 certified, MDD certified, and an FDA-registered medical device establishment[184][190] - The company relies on single-source suppliers for several critical components used in its devices and prioritizes qualifying backup sources[185][192] - Manufacturing and distribution operations are subject to the FDA's Quality System Regulation (QSR) and the EU's Medical Device Regulation (MDR)[187] Government Regulation - The Zephyr Valve is a Class III medical device and received FDA approval through the Premarket Approval (PMA) process[200] - The company is subject to extensive and ongoing regulation by the FDA, including Quality System Regulation (QSR), Medical Device Reporting (MDR), and post-approval study requirements[194][211] - In the European Union, products are regulated under the Medical Device Regulation (MDR), which replaced the Medical Devices Directive (MDD) in May 2021, requiring CE mark certification[212] - The company is also subject to federal and state fraud and abuse laws, such as the Anti-Kickback Statute and the False Claims Act, as well as data privacy laws like HIPAA and GDPR[220][213][216] Risk Factors The company faces significant risks, including a history of net losses with no guarantee of future profitability, and heavy reliance on a single product, the Zephyr Valve. Business success is contingent on market adoption by physicians and hospitals, which can be hindered by the ongoing COVID-19 pandemic, potential product complications like pneumothorax, and the need for adequate third-party reimbursement. Other key risks include dependence on single-source suppliers, potential for product liability claims, intense competition, and the need to comply with extensive government regulations. A material weakness in internal financial controls has been identified, which could impact financial reporting and investor confidence - The company has a history of significant net losses ($48.7 million in 2021) and expects to continue incurring losses as it invests in growth[256] - Business currently depends entirely on the commercial success of a single product, the Zephyr Valve, for a limited indication (severe emphysema)[260] - The COVID-19 pandemic has had and may continue to have a material adverse impact on business by delaying elective procedures and disrupting operations[268] - Use of the Zephyr Valve involves risks, including serious complications such as pneumothorax (18-34% of patients in trials) and, in rare cases, death[276][277] - A material weakness in internal controls over financial reporting was identified for the year ended Dec 31, 2021, related to IT general controls for user access and segregation of duties[503][504] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[518] Properties The company's corporate headquarters, including office, manufacturing, and laboratory space, is located in approximately 50,000 square feet of leased space in Redwood City, California. Additional office and warehouse spaces are leased in Redwood City and Switzerland - The corporate headquarters, including manufacturing, is located in a leased 50,000 square foot facility in Redwood City, California[521] Legal Proceedings The company is not currently a party to any material legal proceedings. It may be subject to various claims in the ordinary course of business, but none are expected to have a material adverse effect - The company is not a party to any material legal proceedings at this time[524] Mine Safety Disclosures This item is not applicable to the company - Not applicable[526] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock has been listed on the Nasdaq Global Select Market under the symbol "LUNG" since its IPO on October 1, 2020. As of February 23, 2022, there were approximately 160 holders of record. The company does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings for business development and expansion - Common stock is listed on the Nasdaq Global Select Market under the symbol "LUNG" since October 1, 2020[529] - The company does not anticipate paying any cash dividends in the foreseeable future[531] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2021, revenue grew 47.9% to $48.4 million, driven by recovery from the COVID-19 pandemic and commercial expansion in both U.S. and international markets. Gross margin improved to 73.6% from 64.8% in 2020 due to higher volumes and better operating leverage. However, the net loss widened to $48.7 million from $32.2 million, primarily due to a 51.6% increase in selling, general, and administrative expenses and a 75.1% increase in R&D expenses as the company invested in its sales force, marketing, and clinical programs. The COVID-19 pandemic continued to create regional variability in procedure volumes. As of December 31, 2021, the company had $191.0 million in cash, cash equivalents, and marketable securities, which management believes is sufficient to fund operations for at least the next 12 months Results of Operations Comparison of Results of Operations (FY 2021 vs. FY 2020) | Line Item | 2021 (in thousands) | 2020 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $48,416 | $32,733 | $15,683 | 47.9% | | Gross Profit | $35,630 | $21,202 | $14,428 | 68.1% | | Gross Margin | 73.6% | 64.8% | - | - | | R&D Expenses | $13,063 | $7,460 | $5,603 | 75.1% | | SG&A Expenses | $69,871 | $46,074 | $23,797 | 51.6% | | Loss from Operations | ($47,304) | ($32,332) | ($14,972) | 46.3% | | Net Loss | ($48,661) | ($32,231) | ($16,430) | 51.0% | - Revenue growth was driven by a $8.8 million increase in U.S. sales and a $6.9 million increase in international sales, reflecting recovery from the COVID-19 pandemic and commercial expansion[579] - The increase in R&D expenses was primarily due to higher personnel costs ($1.7 million) and increased costs for clinical trials ($2.8 million)[581] - The increase in SG&A expenses was mainly driven by higher payroll and personnel-related costs ($16.7 million) as the company expanded its sales, marketing, and administrative functions, along with increased advertising ($4.0 million) and insurance costs ($2.1 million)[583] Liquidity and Capital Resources Key Liquidity Metrics (as of Dec 31, 2021) | Metric | Amount (in millions) | | :--- | :--- | | Cash, Cash Equivalents & Marketable Securities | $191.0 | | Accumulated Deficit | ($291.4) | | Outstanding CIBC Loan (net) | $16.9 | Summary of Cash Flows (FY 2021 vs. FY 2020) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in Operating Activities | ($41,388) | ($30,633) | | Net cash (used in) provided by Investing Activities | ($46,255) | $12,694 | | Net cash provided by Financing Activities | $4,456 | $234,831 | - Net cash used in operating activities increased to $41.4 million in 2021, primarily due to the higher net loss and an increase in inventory[612] - Financing activities in 2020 were significantly higher due to net proceeds of $201.4 million from the IPO and $33.0 million from the issuance of 2020 Notes[617] - Management believes existing cash, cash equivalents, and marketable securities will be sufficient to fund operations for at least the next 12 months[547][619] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk related to its cash, cash equivalents, and variable-rate debt under the CIBC Agreement. It is also exposed to foreign currency exchange risk, as 48.4% of its 2021 revenue was from sales outside the U.S., primarily denominated in Swiss francs, Euros, British pounds, and Australian dollars. The company does not currently use hedging instruments for either risk - The company has interest rate risk from its cash equivalents and its variable-rate CIBC Loan ($16.9 million outstanding at 4.71% as of Dec 31, 2021)[653][654] - Foreign currency exchange risk exists as 48.4% of 2021 revenue was generated outside the U.S. A 10% change in foreign currency exchange rates would have impacted net income by approximately $0.7 million[655] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the years ended December 31, 2021 and 2020. The Report of Independent Registered Public Accounting Firm provides an unqualified opinion on the financial statements but an adverse opinion on the company's internal control over financial reporting as of December 31, 2021, due to a material weakness. The critical audit matter identified was the timing of revenue recognition. The financial statements detail the company's financial position, results of operations, changes in equity, and cash flows Consolidated Balance Sheet Data (as of Dec 31) | Account | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Cash, Cash Equivalents & Marketable Securities | $190,982 | $231,561 | | Total Assets | $235,173 | $263,708 | | Total Liabilities | $41,934 | $37,574 | | Total Stockholders' Equity | $193,239 | $226,134 | Consolidated Statement of Operations Data (Year Ended Dec 31) | Account | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Revenue | $48,416 | $32,733 | | Gross Profit | $35,630 | $21,202 | | Loss from Operations | ($47,304) | ($32,332) | | Net Loss | ($48,661) | ($32,231) | | Net Loss Per Share | ($1.35) | ($3.16) | - The independent auditor, BDO USA, LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2021[660] - The critical audit matter identified by the auditor was the evaluation of when performance obligations have been met and the timing of revenue recognition, due to the manual nature of tracking these elements[667] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of December 31, 2021. This conclusion was due to a material weakness identified in internal control over financial reporting related to ineffective information technology general controls in the areas of user access and segregation of duties for certain systems supporting the financial reporting process. The company has begun implementing remediation measures, including enhanced process controls and governance over user access - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[849] - A material weakness was identified in internal control over financial reporting related to ineffective IT general controls for user access and segregation of duties concerning expenditures[854] - Remediation measures are underway, including implementing enhanced process controls around user access management and expanding governance over user access and system controls[855] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, the audit committee, and corporate governance policies is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this section is incorporated by reference from the 2022 Proxy Statement[874][875][877] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this section is incorporated by reference from the 2022 Proxy Statement[879] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as equity compensation plan information, is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this section is incorporated by reference from the 2022 Proxy Statement[880] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this section is incorporated by reference from the 2022 Proxy Statement[882] Principal Accounting Fees and Services Information regarding principal accounting fees and services, as well as the Audit Committee's pre-approval policies, is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this section is incorporated by reference from the 2022 Proxy Statement[884][885] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K. All financial statement schedules are omitted as they are not applicable or the required information is included elsewhere. The exhibits include corporate governance documents, material contracts, and certifications - This section contains the index of financial statements and exhibits filed with the 10-K[887][889] Form 10-K Summary The company reports that there is no Form 10-K summary - None[895]