Pulmonx(LUNG) - 2021 Q1 - Quarterly Report

FORM 10-Q Cover Page This document is Pulmonx Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, identifying its filer status and outstanding common stock - The document is a Quarterly Report on Form 10-Q for Pulmonx Corporation for the quarterly period ended March 31, 2021[2] - Pulmonx Corporation is a Delaware-incorporated registrant with Commission File Number 001-39562, trading on The Nasdaq Stock Market LLC under the symbol LUNG[2][3] - The registrant is classified as a Non-accelerated filer, a Smaller reporting company, and an Emerging growth company[4] - As of April 30, 2021, there were 36,247,816 shares of Common Stock outstanding[4] Table of Contents The report is organized into two main parts: Financial Information and Other Information, detailing unaudited financials, management's analysis, and legal disclosures - The report is structured into two main parts: Part I. Financial Information and Part II. Other Information[6] - Part I includes unaudited financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures[6] - Part II covers legal proceedings, risk factors, unregistered sales of securities, and exhibits[6] FORWARD-LOOKING STATEMENTS This section cautions readers about forward-looking statements regarding future operations, financial condition, and business strategy, which involve substantial risks and uncertainties - This Quarterly Report contains forward-looking statements regarding future results of operations, financial condition, business strategy, plans, and objectives, which involve substantial risks and uncertainties[9] - Readers are cautioned not to rely on these statements as predictions of future events, and the company undertakes no obligation to update them[11] - Key areas of forward-looking statements include product design and marketing, COVID-19 impact, expected growth, market acceptance, reimbursement, regulatory developments, and intellectual property protection[12][14] PART I. FINANCIAL INFORMATION This part presents Pulmonx Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter - The financial statements are unaudited interim condensed consolidated financial statements prepared in accordance with U.S. GAAP[43] - The statements include Condensed Consolidated Balance Sheets, Statements of Operations and Comprehensive Loss, Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), and Statements of Cash Flows[6] Item 1. Financial Statements (Unaudited) This item presents the unaudited condensed consolidated financial statements for Pulmonx Corporation, including the Balance Sheets, Statements of Operations and Comprehensive Loss, Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), and Statements of Cash Flows, along with detailed notes providing further explanations and disclosures Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :--------------------------------- | :--------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $209,283 | $231,561 | | Short-term marketable securities | $9,784 | — | | Accounts receivable, net | $5,119 | $4,228 | | Inventory | $11,916 | $10,741 | | Total current assets | $239,344 | $249,989 | | Total assets | $255,270 | $263,708 | | Liabilities | | | | Total current liabilities | $14,023 | $12,526 | | Total liabilities | $38,655 | $37,574 | | Stockholders' Equity | | | | Total stockholders' equity | $216,615 | $226,134 | - Total assets decreased by $8.4 million, primarily due to a decrease in cash and cash equivalents, partially offset by an increase in marketable securities and inventory[17] - Total stockholders' equity decreased by $9.5 million from December 31, 2020, to March 31, 2021[18] Condensed Consolidated Statements of Operations and Comprehensive Loss This section details the company's financial performance over specific periods, including revenue, expenses, and net loss Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenue | $9,244 | $8,618 | | Cost of goods sold | $2,633 | $2,968 | | Gross profit | $6,611 | $5,650 | | Research and development | $3,034 | $1,565 | | Selling, general and administrative | $15,604 | $10,189 | | Total operating expenses | $18,638 | $11,754 | | Loss from operations | $(12,027) | $(6,104) | | Net loss | $(12,045) | $(7,163) | | Net loss per share attributable to common stockholders, basic and diluted | $(0.34) | $(3.76) | - Net loss increased by 68.2% to $12.0 million for the three months ended March 31, 2021, compared to $7.2 million in the prior-year period[22][177] - Revenue increased by 7.3% to $9.2 million, while gross profit increased by 17.0% to $6.6 million[22][177] - Operating expenses significantly increased, with Research and development up 93.9% and Selling, general and administrative up 53.1%[22][177] Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) This section outlines changes in the company's equity structure, including common stock, additional paid-in capital, and accumulated deficit Key Changes in Stockholders' Equity (in thousands) | Metric | Balances at January 1, 2021 | Balances at March 31, 2021 | | :------------------------------------ | :-------------------------- | :------------------------- | | Common Stock (Shares) | 35,693,753 | 35,803,664 | | Common Stock (Amount) | $36 | $36 | | Additional Paid-In Capital | $467,147 | $469,948 | | Accumulated Other Comprehensive Income | $1,685 | $1,410 | | Accumulated Deficit | $(242,734) | $(254,779) | | Total Stockholders' Equity | $226,134 | $216,615 | - Total stockholders' equity decreased by $9.5 million from January 1, 2021, to March 31, 2021, primarily due to a net loss of $12.0 million[26] - Stock-based compensation expense contributed $2.5 million to additional paid-in capital during the period[26] - All outstanding convertible preferred stock converted into common stock upon the closing of the IPO in October 2020[35][118] Condensed Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(9,672) | $(9,849) | | Net cash (used in) provided by investing activities | $(12,531) | $10,024 | | Net cash provided by financing activities | $13 | $1,308 | | Effect of exchange rate changes on cash and cash equivalents | $(88) | $222 | | Net (decrease) increase in cash and cash equivalents | $(22,278) | $1,705 | | Cash, cash equivalents and restricted cash, at end of the period | $209,514 | $16,472 | - Net cash used in operating activities was $9.7 million in Q1 2021, primarily due to net loss, increased inventory, and accounts receivable[208] - Net cash used in investing activities was $12.5 million in Q1 2021, mainly driven by purchases of marketable securities[210] - Net cash provided by financing activities was negligible ($13 thousand) in Q1 2021, a significant decrease from $1.3 million in Q1 2020[30][212] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements 1. Formation and Business of the Company This note describes Pulmonx Corporation's business, its medical technology products, and the impact of its IPO and the COVID-19 pandemic - Pulmonx Corporation is a commercial-stage medical technology company providing minimally invasive treatment for severe emphysema using the Zephyr Endobronchial Valve, Chartis Pulmonary Assessment System, and StratX Lung Analysis Platform[33][135] - The company completed its Initial Public Offering (IPO) on October 5, 2020, issuing 11,500,000 shares of common stock at $19.00 per share, resulting in approximately $201.4 million in net proceeds[34][142] Financial Status (as of March 31, 2021, in millions) | Metric | Amount | | :------------------------------------------ | :----- | | Accumulated Deficit | $(254.8) | | Cash, Cash Equivalents and Marketable Securities | $221.6 | | Net Cash Used in Operating Activities (Q1 2021) | $(9.7) | - Management believes existing cash, cash equivalents, and marketable securities will fund planned operations for at least the next 12 months[37][144] - The COVID-19 pandemic has significantly delayed and decreased procedures using the company's products, adversely impacting sales and operations[38][39] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and significant estimates used in preparing the unaudited interim condensed consolidated financial statements - The unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiaries[40][42] - A 1-for-10 reverse stock split was effected on September 22, 2020, and all share and per share amounts have been retroactively adjusted[41] - Management makes significant estimates and assumptions, including for inventory reserves, long-term asset recoverability, equity instrument valuations, and deferred tax assets[44][46] - The company relies on single-source suppliers for critical components, sub-assemblies, and materials for its products[50] 3. Recent Accounting Pronouncements This note details the adoption of new accounting standards and the evaluation of others not yet effective, assessing their impact on financial statements - The company adopted ASU 2019-12 (Income Taxes) as of January 1, 2021, with no material impact on its financial statements[55] - The company is currently evaluating the impact of ASU 2020-04 (Reference Rate Reform) and ASU 2020-06 (Convertible Instruments and Contracts in an Entity's Own Equity), which are not yet adopted[57][58] - ASU 2016-13 (Financial Instruments – Credit Losses) is effective for the company for fiscal years beginning after December 15, 2022, and its impact is being evaluated[59] 4. Fair Value Measurements This note categorizes assets and liabilities measured at fair value into a three-level hierarchy based on input observability and details financial assets - Assets and liabilities measured at fair value are categorized into a three-level hierarchy based on the observability of inputs[60][61] Financial Assets Measured at Fair Value (March 31, 2021, in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :------------------------ | :------ | :------ | :------ | :------ | | Money market funds | $1,540 | $— | $— | $1,540 | | Commercial paper (cash equivalents) | $— | $1,000 | $— | $1,000 | | U.S. Treasury bonds | $507 | $— | $— | $507 | | U.S. Government agency bonds | $— | $3,008 | $— | $3,008 | | Corporate bonds | $— | $773 | $— | $773 | | Commercial paper (marketable securities) | $— | $7,994 | $— | $7,994 | | Total financial assets | $2,047 | $12,775 | $— | $14,822 | - There were no liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2021[66][68] - The Success Fee derivative liability was settled on October 5, 2020, upon the company paying $1.9 million in connection with the IPO[71] 5. Balance Sheet Components This note provides detailed breakdowns of key balance sheet items, including cash, inventory, goodwill, and accrued liabilities Cash and Cash Equivalents (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :------------------------ | :--------------- | :---------------- | | Cash | $206,743 | $221,028 | | Money market funds | $1,540 | $10,533 | | Commercial paper | $1,000 | — | | Total cash and cash equivalents | $209,283 | $231,561 | Inventory (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :---------------- | :--------------- | :---------------- | | Raw materials | $3,043 | $3,342 | | Work in process | $313 | $227 | | Finished goods | $8,560 | $7,172 | | Total inventory | $11,916 | $10,741 | - Goodwill remained at $2.3 million as of March 31, 2021, with no impairment losses recognized since its acquisition in March 2009[77] Accrued Liabilities (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :--------------- | :---------------- | | Accrued employee bonuses and commissions | $1,989 | $2,374 | | Accrued vacation | $1,941 | $1,810 | | Other accrued personnel related expenses | $2,382 | $1,368 | | Accrued professional fees | $1,781 | $1,313 | | Total accrued liabilities | $9,756 | $8,651 | 6. Long Term Debt and Convertible Notes This note details the company's long-term debt and convertible notes, including repayment, new agreements, and their conversion status - The Oxford Finance Loan was fully repaid in February 2020 for $17.3 million, including a $1.9 million Success Fee paid upon the IPO in October 2020[84][189] - The company executed a CIBC Loan in February 2020 for up to $32.0 million, with $17.0 million advanced (Tranche A)[87][91][194][195] - The $33.0 million aggregate principal amount of 2020 Notes, including accrued interest, converted into 2,561,484 shares of common stock upon the IPO closing in October 2020[99][201] Contractual Maturities of Financing Obligations (as of March 31, 2021, in thousands) | Year | Amount | | :-------------------------- | :----- | | 2021 (remaining nine months) | $544 | | 2022 | $5,369 | | 2023 | $6,078 | | 2024 | $5,837 | | 2025 | $1,480 | | Total | $19,308 | 7. Revenue Recognition This note explains the company's revenue recognition policies and details contract liabilities, primarily deferred revenue - The company's contract liabilities, primarily deferred revenue, were $0.1 million as of March 31, 2021, consistent with December 31, 2020[103] - Deferred revenue as of December 31, 2020, was recognized as revenue during the three months ended March 31, 2021[103] - Revenue is disaggregated by major geographic region, as disclosed in Note 14, 'Segment Information'[104] 8. Leases, Lease Commitments and Contingencies This note outlines the company's lease agreements, associated costs, liabilities, and involvement in legal proceedings - The company renewed its headquarters lease in Redwood City, California, for an additional five years, expiring in July 2025[105] Operating Lease Costs (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $728 | $380 | | Short-term lease cost | $3 | $3 | | Variable lease cost | $147 | $60 | | Total lease cost | $878 | $443 | Lease Liabilities (as of March 31, 2021, in thousands) | Metric | Amount | | :-------------------------------- | :----- | | Total minimum lease payments | $10,684 | | Present value of future minimum lease payments | $9,474 | | Current lease liabilities | $1,774 | | Long-term lease liabilities | $7,700 | - The company is involved in a legal proceeding with a former distributor, but does not believe the impact will be material to its financial position[112] 9. Income Taxes This note details the income tax expense for the reporting periods, primarily attributable to state minimum and foreign income taxes - Income tax expense for the three months ended March 31, 2021, and 2020 was primarily attributable to state minimum income tax and foreign income taxes[113][114] - The Coronavirus Aid, Relief, and Economic Security (CARES) Act did not provide an income tax benefit due to historical U.S. losses and a full valuation allowance against net deferred tax assets[114] 10. Warrants for Convertible Preferred Stock This note describes the exercise of warrants for convertible preferred stock and confirms no outstanding warrants as of the reporting dates - In January and February 2020, warrants to purchase 213,876 shares of Series C-1 convertible preferred stock were exercised, yielding $2.3 million in cash proceeds[115] - As of March 31, 2021, and December 31, 2020, no Series C-1 convertible preferred stock warrants were outstanding[116] 11. Convertible Preferred Stock This note confirms the conversion of all outstanding convertible preferred stock into common stock upon the IPO closing - Upon the closing of the IPO in October 2020, all outstanding shares of convertible preferred stock converted into 17,797,026 shares of common stock[118] - There was no issued and outstanding convertible preferred stock as of March 31, 2021, and December 31, 2020[118] 12. Stockholders' Equity This note details the company's common stock, shares reserved for future issuance, and stock-based compensation expense - As of March 31, 2021, the company had 35,803,664 shares of common stock issued and outstanding[18] Shares Reserved for Future Issuance | Metric | March 31, 2021 | December 31, 2020 | | :------------------------------------ | :--------------- | :---------------- | | Common stock options issued and outstanding | 2,759,165 | 2,923,403 | | Common stock available for future grants | 4,604,812 | 3,233,794 | | Common stock available for ESPP | 1,076,937 | 720,000 | | Total | 8,440,914 | 6,877,197 | Total Stock-Based Compensation Expense (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of goods sold | $90 | $15 | | Research and development | $318 | $15 | | Selling, general and administrative | $1,860 | $179 | | Total | $2,268 | $209 | - As of March 31, 2021, there was $14.1 million of unrecognized compensation costs related to non-vested common stock options and restricted stock units, expected to be recognized over a weighted-average period of 2.18 years[128] 13. Net Loss per Share Attributable to Common Stockholders This note presents the calculation of net loss per share, highlighting the impact of increased weighted-average common shares outstanding Net Loss per Share Attributable to Common Stockholders | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to common stockholders (in thousands) | $(12,045) | $(7,163) | | Weighted-average common shares used to compute basic and diluted net loss per share | 35,370,760 | 1,906,715 | | Net loss per share attributable to common stockholders, basic and diluted | $(0.34) | $(3.76) | - The significant decrease in net loss per share is primarily due to a substantial increase in weighted-average common shares outstanding following the IPO[129] - Potentially dilutive securities were excluded from the diluted net loss per share calculation due to their antidilutive impact, as the company reported a net loss[54][129] 14. Segment Information This note provides revenue and long-lived asset information disaggregated by geographic region, confirming the company operates as a single segment - The company operates as a single reportable and operating segment, with performance evaluated based on consolidated financial information and revenue by geographic region[130] Revenue by Geographic Area (in thousands) | Region | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | United States | $4,289 | $4,489 | | Europe, Middle-East and Africa ("EMEA") | $4,044 | $3,457 | | Asia Pacific | $911 | $633 | | Other International | $— | $39 | | Total | $9,244 | $8,618 | - International sales (EMEA and Asia Pacific) accounted for 53.6% of total revenue for Q1 2021, surpassing U.S. sales[222][131] Long-Lived Assets by Geographic Area (in thousands) | Region | March 31, 2021 | December 31, 2020 | | :------------- | :--------------- | :---------------- | | United States | $1,749 | $1,437 | | EMEA | $43 | $29 | | Asia Pacific | $7 | $8 | | Total | $1,799 | $1,474 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Pulmonx Corporation's financial condition and results of operations for the three months ended March 31, 2021. It covers the company's business overview, the impact of the COVID-19 pandemic, key factors affecting the business, detailed analysis of revenue and expenses, and liquidity and capital resources. The discussion highlights the company's growth strategy, financial performance, and future outlook, including anticipated challenges and investments - The discussion should be read in conjunction with the condensed consolidated financial statements and notes, and contains forward-looking statements subject to risks[134] Overview This section provides a high-level summary of Pulmonx's business, market opportunity, key product achievements, and financial status - Pulmonx is a commercial-stage medical technology company providing a minimally invasive treatment for severe emphysema using the Zephyr Endobronchial Valve, Chartis Pulmonary Assessment System, and StratX Lung Analysis Platform[135] - The company estimates a global market opportunity of approximately $12 billion, targeting 500,000 patients in the U.S. and 700,000 internationally[135] - The Zephyr Valve received FDA PMA in June 2018, is commercially available in over 25 countries, and has established reimbursement in major markets[137][139] Key Financials (Three Months Ended March 31, 2021, in millions) | Metric | Amount | | :------------------------------------------ | :----- | | Revenue | $9.2 | | Gross Margin | 71.5% | | Net Loss | $(12.0) | | Accumulated Deficit | $(254.8) | | Cash, Cash Equivalents and Marketable Securities | $221.6 | | Outstanding Term Loans and Credit Agreements (net) | $17.3 | - The company expects to continue incurring net losses for several years due to significant investments in research and development, and sales and marketing expansion[143] Impact of the COVID-19 Pandemic This section discusses the adverse effects of the COVID-19 pandemic on the company's business, including delayed procedures and recovery challenges - The COVID-19 pandemic has materially and adversely impacted the business by decreasing and delaying procedures, with the impact extending into Q1 2021[145][150] - U.S. markets showed initial recovery indicators in March 2021, but international recovery was stalled by new lockdowns in Europe[147] - The company implemented measures including safety protocols, building over four months of inventory, expanding its U.S. sales force, and accelerating virtual physician education and direct-to-patient marketing[149] - Uncertainty remains regarding sustained recovery, potential resurgence of COVID-19 variants, and long-term effects on provider capacity and patient access to care[148][150] Factors Affecting our Business and Results of Operations This section identifies critical factors influencing the company's performance, including sales force, market acceptance, reimbursement, competition, and R&D investments - The ability to recruit, train, and retain a productive sales force is critical for growth, requiring significant investment and time[152] - Physician, patient, and hospital awareness and acceptance of the solution are essential for establishing it as a standard of care, necessitating ongoing education and marketing efforts[154] - Third-party reimbursement is a key strategy, with many commercial payors still considering the solution not medically necessary or approving on a case-by-case basis[156][157] - The industry is highly competitive, with larger companies possessing advantages in established relationships, name recognition, and sales/marketing resources[158] - Leveraging manufacturing capacity and investing in efficiencies are crucial for improving gross margins by spreading fixed costs over more units[159] - Continuous investment in research and development for existing and next-generation technologies, including AeriSeal, is vital for product improvement and market expansion[160] - The business experiences seasonality, particularly in the first and third quarters internationally, and potentially in the U.S. due to the elective nature of procedures[163] Components of Our Results of Operations This section breaks down the key components of the company's financial results, explaining revenue, cost of goods sold, and various operating expenses - Revenue is primarily derived from the sale of Zephyr Valves and delivery catheters, with fluctuations influenced by procedure volume, pricing, discounts, and geographic mix[164][165] - Cost of goods sold includes payroll, materials, manufacturing overhead, and inventory adjustments, with gross margin affected by manufacturing costs, pricing pressures, and the mix of U.S. vs. international sales[166][167] - Research and development expenses cover engineering, product improvements, and clinical trials, expected to increase with additional personnel and new product offerings[171] - Selling, general and administrative expenses include sales, marketing, and administrative personnel costs, advertising, insurance, and public company expenses, also expected to increase with expansion[172][173] - Interest expense relates to term loan facilities, while other income (expense), net, primarily consists of changes in fair value of derivative liabilities and foreign currency exchange gains and losses[174][175] Results of Operations: Comparison of the Three Months Ended March 31, 2021 and 2020 This section provides a detailed comparative analysis of the company's financial performance for the three months ended March 31, 2021, versus 2020 Revenue This section analyzes the company's revenue performance, detailing changes in total, U.S., and international sales Revenue Performance (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Total Revenue | $9,244 | $8,618 | $626 | 7.3% | | U.S. Sales | $4,289 | $4,489 | $(200) | (4.5)% | | International Sales | $4,955 | $4,129 | $826 | 20.0% | - Overall revenue increased by $0.6 million, or 7.3%, driven by a recovery in international markets, which offset a decrease in U.S. sales due to the winter COVID-19 surge[178] Cost of Goods Sold and Gross Margin This section examines the cost of goods sold and the resulting gross margin, highlighting factors influencing changes Cost of Goods Sold and Gross Margin (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Cost of goods sold | $2,633 | $2,968 | $(335) | (11.3)% | | Gross margin | 71.5% | 65.6% | 5.9 pp | 9.0% | - Cost of goods sold decreased primarily due to unfavorable variances from lower production in March 2020 resulting from the COVID-19 pandemic[179] - Gross margin improved to 71.5% in Q1 2021 from 65.6% in Q1 2020[179] Research and Development Expenses This section details the changes in research and development expenses, attributing increases to personnel, clinical trials, and facilities Research and Development Expenses (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | R&D Expenses | $3,034 | $1,565 | $1,469 | 93.9% | - The increase was primarily due to an $0.8 million increase in personnel-related expenses, $0.4 million in clinical trial costs, and $0.3 million in facilities and other expenses, reflecting increased investment in R&D activities[181] Selling, General and Administrative Expenses This section analyzes the increase in selling, general, and administrative expenses, driven by personnel, advertising, and public company costs Selling, General and Administrative Expenses (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | SG&A Expenses | $15,604 | $10,189 | $5,415 | 53.1% | - The increase was primarily driven by $3.9 million in payroll and personnel-related expenses (including stock-based compensation), $0.7 million in advertising, $0.7 million in public company insurance costs, and $0.9 million in facility and other expenses[182] - These increases were partially offset by a $0.8 million decrease in global travel and conference-related expenses due to the COVID-19 pandemic[182] Interest Expense and Income This section details changes in interest expense and income, primarily influenced by debt repayment and cash balances Interest Expense and Income (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Interest income | $105 | $74 | | Interest expense | $(217) | $(899) | - Interest expense decreased by $0.7 million, primarily due to a non-recurring $0.4 million loss on debt extinguishment in Q1 2020[183] - Interest income increased due to higher balances of cash, cash equivalents, and marketable securities[183] Other Income (Expense), Net This section explains the changes in other income (expense), net, primarily due to foreign currency exchange gains Other Income (Expense), Net (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Other income (expense), net | $161 | $(147) | - Other income (expense), net, increased by $0.3 million, primarily due to foreign currency exchange gains[184] Liquidity and Capital Resources; Plan of Operation This section discusses the company's financial liquidity, capital resources, and future funding requirements, including details on debt agreements and cash flow Oxford Term Loan This section details the repayment of the Oxford Finance Loan and the associated Success Fee paid upon the IPO - The Oxford Finance Loan, which provided up to $20.0 million, was fully repaid in February 2020 for $17.3 million[188] - A $1.9 million Success Fee was paid to Oxford Finance LLC upon the IPO closing in October 2020, as required by the Success Fee Agreement[187][189] - A $0.4 million loss on debt extinguishment was recorded in Q1 2020 due to the repayment[189] Loan and Security Agreement with Boston Scientific Corp (BSC) This section describes the BSC Agreement, its borrowed amounts, conversion into preferred stock, and subsequent termination - The BSC Agreement provided up to $30.0 million in term loans, with $24.0 million borrowed[192] - All outstanding indebtedness and accrued interest under the BSC Agreement converted into shares of Series G-1 preferred stock in April 2019[193] - The BSC Agreement was terminated in January 2020, ending the ability to draw remaining funds[193] CIBC Term Loan This section details the CIBC Loan agreement, its terms, maturity extension, and compliance with covenants - The company executed a Loan and Security Agreement with CIBC in February 2020, providing up to $32.0 million in debt financing, with $17.0 million advanced (Tranche A)[194] - The loan's maturity date was extended from March 15, 2022, to February 20, 2025, and certain financial covenants were modified in March 2021[195] - The CIBC Loan bears a floating interest rate equal to 1.0% above the Wall Street Journal Prime Rate and is collateralized by substantially all of the company's assets[195] - As of March 31, 2021, the company was in compliance with all covenants contained in the CIBC Agreement[93] 2020 Notes This section describes the issuance and subsequent conversion of the 2020 convertible promissory notes into common stock upon the IPO - In April 2020, the company issued $33.0 million in convertible promissory notes (2020 Notes), with an option for an additional $33.0 million[198] - The 2020 Notes included embedded derivatives that were bifurcated and accounted for separately[199] - Upon the closing of the IPO in October 2020, the $33.0 million principal and $0.8 million accrued interest of the 2020 Notes converted into 2,561,484 shares of common stock[201] Credit Agreement This section details the COVID-19 Credit Agreement with UBS Switzerland AG, including the loan amount and repayment terms - In May 2020, Pulmonx International Sàrl received 0.5 million Swiss Francs ($0.5 million U.S. dollar equivalent) under a COVID-19 Credit Agreement with UBS Switzerland AG[202] - The loan is interest-free and payable within 60 months; no repayments had been made as of March 31, 2021[202] Funding Requirements This section outlines the company's expected significant expenditures, ongoing net losses, and future funding needs - The company expects to incur continued significant expenditures for commercial infrastructure, R&D, and public company operations, leading to ongoing net losses[203] - As of March 31, 2021, cash, cash equivalents, and marketable securities totaled $221.6 million, expected to fund operations for at least 12 months[204] - Future funding requirements are substantial and depend on factors such as commercialization costs, R&D activities, the impact of the COVID-19 pandemic, and market acceptance[205] - Additional financing may be sought through equity, debt, or collaborations, which could dilute existing stockholders or impose restrictive covenants[205][206] Summary Statement of Cash Flows This section provides a summary of the company's cash flows from operating, investing, and financing activities Summary of Cash Flows (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(9,672) | $(9,849) | | Net cash (used in) provided by investing activities | $(12,531) | $10,024 | | Net cash provided by financing activities | $13 | $1,308 | | Net increase (decrease) in cash and cash equivalents | $(22,278) | $1,705 | Cash Flows from Operating Activities This section details the net cash used in operating activities, primarily driven by net loss and changes in working capital - Net cash used in operating activities was $9.7 million in Q1 2021, primarily due to a net loss of $12.0 million, increases in inventory and accounts receivable, and a decrease in lease liabilities[208] - These uses were partially offset by non-cash expenses such as stock-based compensation ($2.3 million) and inventory write-downs ($0.5 million), and increases in accounts payable and accrued liabilities[208] Cash Flows from Investing Activities This section explains the net cash used in investing activities, mainly due to purchases of marketable securities and property and equipment - Net cash used in investing activities was $12.5 million in Q1 2021, primarily due to $12.3 million in purchases of marketable securities and $0.2 million in property and equipment[210] - In contrast, Q1 2020 saw $10.0 million provided by investing activities, mainly from maturities of short-term marketable securities[210] Cash Flows from Financing Activities This section details the net cash provided by financing activities, including stock option exercises and debt repayments - Net cash provided by financing activities was less than $0.1 million in Q1 2021, primarily from stock option exercises, offset by repurchases of early exercised options and debt issuance costs[212] - In Q1 2020, $1.3 million was provided, including $16.8 million from the CIBC loan and $2.3 million from warrant exercises, partially offset by $17.2 million in Oxford loan repayments[213] Contractual Obligations and Commitments This section confirms no material changes to the company's contractual obligations since the last annual report - There have been no material changes to the company's contractual obligations as of March 31, 2021, compared to those disclosed in its Annual Report on Form 10-K filed on March 15, 2021[214] Off-Balance Sheet Arrangements This section states that the company has no off-balance sheet arrangements as of the reporting date - As of March 31, 2021, the company did not have any relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements[215] Critical Accounting Policies, Significant Judgments and Use of Estimates This section highlights the significant estimates and assumptions made in preparing the financial statements and confirms no material changes to critical accounting policies - The financial statements are prepared in accordance with U.S. GAAP, requiring management to make significant estimates and assumptions affecting reported amounts[216] - Key areas involving judgment include inventory reserves, asset recoverability, valuation of equity instruments, stock-based compensation, and deferred tax assets[216] - No material changes to critical accounting policies occurred in Q1 2021, except as described in Note 2 to the financial statements[217] JOBS Act Accounting Election This section states that Pulmonx, an emerging growth company, has opted out of the extended transition period for new accounting standards - Pulmonx is an 'emerging growth company' but has irrevocably opted out of the extended transition period for complying with new or revised accounting standards[218] - As a result, the company will comply with new accounting standards on the same dates as non-emerging growth companies[218] Recent Accounting Pronouncements This section refers to Note 3 for additional information on recent accounting pronouncements - Refer to Note 3 to the consolidated financial statements for additional information on recent accounting pronouncements[219] Item 3. Quantitative and Qualitative Disclosures About Market Risk Pulmonx Corporation is exposed to interest rate risk from its cash, cash equivalents, marketable securities, and borrowings, but believes a 10% change in interest rates would not significantly impact its financial statements. The company also faces foreign currency exchange risk, as over half of its revenue is from international sales denominated in local currencies. While operating expenses in these regions are also in local currencies, limiting transaction risk, a 10% change in exchange rates could impact Q1 2021 revenue and operating expenses by approximately $0.5 million and $0.4 million, respectively, with a net $0.1 million impact on net income. The company does not currently hedge foreign currency exposure - The company is exposed to interest rate risks related to its cash, cash equivalents, marketable securities, and borrowings, but believes a 10% change in interest rates would not have a significant impact[220][221] - Foreign currency exchange risk exists as international sales accounted for 53.6% of total revenue in Q1 2021, with most direct sales billed in local currencies[222] - A 10% change in weighted average foreign currency exchange rates would have changed Q1 2021 revenues by approximately $0.5 million and operating expenses by $0.4 million, with a net impact of $0.1 million on net income[222] - The company does not currently hedge its exposure to foreign currency exchange rate fluctuations[222] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2021, and concluded they were effective at a reasonable assurance level. There were no material changes in internal control over financial reporting during the quarter. The section also acknowledges the inherent limitations in any internal control system, emphasizing that controls provide reasonable, not absolute, assurance Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021 - Management, with the participation of the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021[223] - It was concluded that disclosure controls and procedures were effective at the reasonable assurance level[223] Changes in Internal Controls There were no material changes in internal control over financial reporting during the three months ended March 31, 2021 - There were no changes in internal control over financial reporting during the three months ended March 31, 2021, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[224] Inherent Limitations on Effectiveness of Controls This section acknowledges that internal control systems have inherent limitations and provide reasonable, not absolute, assurance of achieving objectives - The effectiveness of any internal control system is subject to inherent limitations, including the exercise of judgment and the inability to eliminate misconduct completely[225] - Management recognizes that controls can only provide reasonable, not absolute, assurance of achieving desired control objectives[225] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, unregistered sales of securities, and exhibits, providing additional non-financial disclosures Item 1. Legal Proceedings The company is occasionally involved in legal proceedings and claims in the ordinary course of business. Management believes there are currently no pending claims or actions that would have a material adverse effect on its results of operations, financial condition, or cash flows - The company may be subject to legal proceedings and claims arising in the ordinary course of business[227] - Management believes that no currently pending claims or actions would have a material adverse effect on the company's results of operations, financial condition, or cash flows[227] Item 1A. Risk Factors This section details significant risks that could adversely affect Pulmonx Corporation's business, financial condition, results of operations, and stock price. These risks are categorized into those related to business and strategy, government regulation, intellectual property, and common stock ownership. Key risks include a history of net losses, reliance on a single product, the ongoing impact of COVID-19, reimbursement challenges, intense competition, and potential intellectual property litigation - Investing in the company's common stock involves significant risks and uncertainties[229] - Actual results could differ materially from forward-looking statements due to the factors described in this section[230] - Principal risk factors are summarized and further detailed across various categories[231] Summary Risk Factor This section summarizes key risks including a history of net losses, reliance on a single product, COVID-19 impact, reimbursement challenges, and intellectual property litigation - The company has a history of significant net losses and expects them to continue, potentially requiring substantial additional capital[232][233] - Reliance on a single product (Zephyr Valve) and dependence on hospital, physician, and patient adoption are key business risks[232][238][241] - The COVID-19 pandemic has adversely affected the business, and the use of the Zephyr Valve involves risks such as pneumothorax or death[232][247][255] - Challenges include achieving and maintaining adequate reimbursement, retaining sales and marketing personnel, limited long-term safety data, and manufacturing risks[232][261][270][273][282] - Operating results may fluctuate significantly, market size estimates may be smaller than anticipated, and the company faces intellectual property litigation risks[232][287][292][431] Risks Related to Our Business and Strategy This section outlines risks associated with the company's business model, including financial performance, product reliance, market acceptance, and operational challenges - The company has a history of significant net losses and expects them to continue, requiring substantial additional capital that may not be available on acceptable terms[233][315][319] - Limited experience in marketing and selling its solution, with success dependent on effective marketing, physician/patient education, and payor acceptance[234][239] - Business relies entirely on the Zephyr Valve, and failure to commercialize it or develop additional products will negatively affect results[238] - The COVID-19 pandemic has had a material adverse impact, delaying procedures and creating uncertainty for recovery and future provider capacity[247][249] - Use of the Zephyr Valve involves risks, including pneumothorax or death, which may limit adoption and lead to litigation[255][258] - Inability to achieve and maintain adequate reimbursement levels or if patients face significant out-of-pocket costs will severely hinder commercial success[261][267] - The industry is highly competitive, with larger companies having significant advantages, and new products/technologies posing threats[309][311] - Dependence on a limited number of single-source suppliers makes the company vulnerable to supply shortages and price fluctuations[278] - Significant international operations expose the company to risks like staffing difficulties, increased competition, longer payment cycles, and currency fluctuations[326][327] - Security breaches, loss of data, and other disruptions could compromise sensitive information and expose the company to liability[330][331] Risks Related to Government Regulation and Our Industry This section details risks arising from extensive government regulation, healthcare laws, product recalls, fraud and abuse laws, and clinical trial uncertainties - Products and operations are subject to extensive government regulation (FDA in U.S., Notified Body in EU), with failure to obtain/maintain approvals or comply with requirements leading to adverse impacts[351][355][359] - Changes in the regulatory environment, including healthcare laws and reimbursement policies, could constrain operations, increase costs, or reduce revenue[360][362] - Recalls (voluntary or mandated) or serious safety issues could significantly impact the company, diverting resources, harming reputation, and leading to litigation[368][369] - Subject to federal, state, and foreign fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act) and health information privacy laws (HIPAA, GDPR), with violations leading to substantial penalties[372][376] - Misuse or off-label promotion of products could harm reputation, lead to product liability suits, or result in costly investigations and sanctions[388][390] - Clinical trials for future products are lengthy, expensive, and uncertain, with potential for delays, negative results, or regulatory disagreements[392][397] - Failure to obtain and maintain international regulatory registrations or approvals would prevent marketing and sales outside the U.S.[406] - Healthcare reform measures (e.g., Affordable Care Act changes) could hinder commercial success by limiting coverage or lowering reimbursement[409][412] - Legal, political, and economic uncertainty from Brexit poses additional risks to international operations[414][416] - Employees, consultants, and partners may engage in misconduct, leading to regulatory non-compliance and potential sanctions[429] Risks Related to Our Intellectual Property This section addresses risks concerning intellectual property, including litigation, the difficulty of obtaining and protecting IP rights, and challenges to patent validity - The medical device industry is characterized by extensive IP litigation, and the company may be accused of infringing third-party rights or misappropriating trade secrets[431] - IP litigation can be costly, divert management attention, damage reputation, and force the company to stop making/selling products or pay substantial damages/royalties[435][436] - Success depends on obtaining, maintaining, and protecting IP rights (patents, trademarks, trade secrets), but this process is expensive, complex, and uncertain[440][443] - Patents may not provide sufficient protection, can be challenged, narrowed, or invalidated, and may expire before products are fully commercialized[444][465] - Difficulty in protecting trade secrets and proprietary information from unauthorized use or disclosure, despite confidentiality agreements[446] - Changes in patent law (e.g., Leahy-Smith Act) could increase uncertainties and costs for patent prosecution and enforcement[459][460] - Inability to protect IP rights globally due to varying laws and enforcement challenges in foreign countries[453][455] - Claims of misappropriation of intellectual property by former employees or challenges to ownership could lead to litigation, loss of key personnel, or inability to use essential technologies[457][458] Risks Related to Ownership of Our Common Stock This section covers risks associated with owning the company's common stock, such as market price volatility, dilution, ownership concentration, and anti-takeover provisions - The market price of the common stock is highly volatile and can fluctuate significantly due to various factors, including financial performance, analyst expectations, and market conditions[467] - Future sales and issuances of capital stock or by existing stockholders could dilute ownership and depress the stock price[470][471] - A concentration of ownership (approximately 35%) among executive officers, directors, and principal stockholders may limit new investors' influence on corporate decisions[474] - The company does not intend to pay dividends for the foreseeable future, meaning investment returns depend on stock price appreciation[476] - As an 'emerging growth company' and 'smaller reporting company,' the company benefits from reduced reporting requirements but incurs increased costs and management time as a public company[477][478] - Failure to maintain adequate internal controls over financial reporting could adversely affect investor confidence and the value of common stock[480][481] - Anti-takeover provisions in charter documents and Delaware law could make an acquisition of the company more difficult and limit attempts by stockholders to influence management[482][484] - Exclusive forum provisions in the certificate of incorporation could limit stockholders' ability to obtain a favorable judicial forum for disputes[485][488] Item 2. Unregistered Sales of Securities and Use of Proceeds This item reports that there were no unregistered sales of equity securities during the three months ended March 31, 2021. It also details the net proceeds from the company's Initial Public Offering (IPO) in October 2020, which amounted to $201.4 million, and confirms that the planned use of these proceeds has not materially changed Unregistered Sales of Equity Securities This section confirms that there were no unregistered sales of equity securities during the three months ended March 31, 2021 - There were no unregistered sales of equity securities during the three months ended March 31, 2021[490] Use of Proceeds This section details the net proceeds from the company's IPO in October 2020 and confirms no material change in their planned use - The company closed its IPO in October 2020, issuing 11,500,000 shares of common stock at $19.00 per share[491] IPO Proceeds (in millions) | Metric | Amount | | :-------------------------------- | :----- | | Gross proceeds | $218.5 | | Underwriting discounts and commissions | $(15.3) | | Net offering expenses | $(1.8) | | Net proceeds | $201.4 | - There has been no material change in the planned use of proceeds from the IPO[492] Item 3. Defaults Upon Senior Securities This item is not applicable to Pulmonx Corporation for the reporting period, indicating no defaults upon senior securities - This item is not applicable[4