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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-15 · 187 added, 291 removed, 312 unchanged (61% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with Part II, Item 6, “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections.

Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

For the discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 15, 2021.

We are a commercial-stage medical technology company that provides a minimally invasive treatment for patients with severe emphysema, a form of chronic obstructive pulmonary disease (“COPD”).

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Food and Drug Administration (“FDA”) as a result of our breakthrough technology designation.

The Zephyr Valve is now commercially available in more than 25 countries, with over 80,000 valves used to treat more than 20,000 patients through December 31, 2020.

The Zephyr Valve is now commercially available in more than 25 countries, with over 100,000 valves used to treat more than 25,000 patients.

We have established reimbursement in major markets in North America, Europe and Asia Pacific and the Zephyr Valve has been included in treatment guidelines for COPD worldwide.

We market and sell our products in the United States through a direct sales organization consisting of 45 sales territory managers as of December 31, 2020.

Our sales territory managers are focused on promoting awareness and increasing adoption of our solution primarily among the approximately 800 pulmonologists performing interventional pulmonary procedures and across approximately 500 high volume hospitals in the United States.

We market and sell our products in the United States through a direct sales organization.

Our sales territory managers are focused on promoting awareness and increasing adoption of our solution primarily among the pulmonologists performing interventional pulmonary procedures across approximately 500 high volume hospitals in the United States.

We are expanding our commercial operations in the United States while continuing to foster our international growth.

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Current reimbursement in the United States is believed to cover the hospital costs of the procedure and related inpatient care.

Commercial payors such as Aetna, Humana, Health Care Service Corporation have issued positive coverage policies for the Zephyr Valve, and United Healthcare no longer considers the procedure unproven or experimental.

Medicare covers our solution for patients when medically necessary, and other commercial insurers are approving pre-authorization requests on a case-by-case basis.

Commercial payors such as Aetna, Humana, and many of the largest Blue Cross Blue Shield plans including Anthem, Health Care Service Corporation, and BCBS Michigan have issued positive coverage policies for the Zephyr Valve, and United Healthcare no longer considers the procedure unproven or experimental.

Medicare covers our solution for patients when medically necessary, and other commercial insurers are approving

pre-authorization requests on a case-by-case basis.

Outside the United States, our solution is covered by major health systems across much of Europe, Australia and South Korea.

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We have devoted substantially all of our resources to research and development activities related to our solution, including clinical and regulatory initiatives to obtain marketing approval, sales and marketing activities, and investing in general and administrative infrastructure.

We generated revenue of $32.7 million, with a gross margin of 64.8% and a net loss of $32.2 million, for the year ended December 31, 2020 compared to revenue of $32.6 million and $20.0 million, with a gross margin of 68.8% and 61.4% and a net loss of $20.7 million and $18.5 million, for the years ended December 31, 2019 and December 31, 2018, respectively.

As of December 31, 2020, we had an accumulated deficit of $242.7 million, cash and cash equivalents of $231.6 million, and $17.4 million of outstanding term loans and credit agreements, net of debt discount and debt issuance costs.

On September 30, 2020, our Registration Statement on Form S-1 (File No.

333-248635) relating to our initial public offering (IPO), was declared effective by the Securities Exchange Commission, or SEC.

Pursuant to the Registration Statement, we issued and sold an aggregate of 11,500,000 shares of common stock (inclusive of 1,500,000 shares pursuant to the exercise by the underwriters of their option) at a price of $19.00 per share for aggregate cash proceeds of $201.4 million, net of underwriting discounts, commissions and offering costs.

The sale and issuance of 11,500,000 shares in the IPO closed on October 5, 2020.

Upon the closing of the IPO on October 5, 2020, all outstanding shares of convertible preferred stock automatically converted into 17,797,026 shares of common stock.

Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding.

We generated revenue of $48.4 million, with a gross margin of 73.6% and a net loss of $48.7 million, for the year ended December 31, 2021 compared to revenue of $32.7 million, with a gross margin of 64.8% and a net loss of $32.2 million, for the year ended December 31, 2020.

As of December 31, 2021, we had an accumulated deficit of $291.4 million, cash and cash equivalents and marketable securities of $191.0 million, and $17.4 million of outstanding term loans and credit agreements, net of debt discount and debt issuance costs.

We have invested heavily in product development.

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Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require substantial additional funding, which may include future equity and debt financings.

Management believes that the Company’s existing cash and cash equivalents will allow the Company to continue its operations for at least the next 12 months from the issuance of our consolidated financial statements as of and for the year ended December 31, 2020.

Management believes that the Company’s existing cash, cash equivalents and marketable securities will allow the Company to continue its operations for at least the next 12 months from the date of the issuance of our consolidated financial statements.

Impact of the COVID-19 Pandemic

Since it was reported to have surfaced in December 2019, a novel strain of coronavirus (COVID-19) has spread across the world and has been declared a pandemic by the World Health Organization.

Efforts to contain the spread of COVID-19 have been significant and governments around the world, including in the United States, Europe and Asia, have implemented travel restrictions, social distancing requirements, quarantines, stay-at-home orders and other significant measures which have also resulted in delay of clinical trials and FDA operations.

Currently, the COVID-19 pandemic presents a substantial public health and economic challenge around the world and is adversely affecting our employees, including our sales force, hospitals, physicians, patients, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S.

and world economy and in financial markets.

The COVID-19 pandemic has had a material adverse impact on our business, financial condition and results of operations by decreasing and delaying substantially all procedures performed using our products, and we expect the pandemic to continue to have a material adverse impact on our business, financial condition and results of operations for the foreseeable future.

Similar to the general trend in elective and other surgical procedures, the number of procedures performed using our products has decreased substantially as healthcare organizations across the globe have prioritized the treatment of patients with COVID-19 or have altered their operations to prepare for and respond to the pandemic.

The COVID-19 pandemic has resulted in public health responses including travel bans, social distancing requirements, quarantines, stay-at-home orders and other significant measures, which have delayed clinical trials and FDA operations and adversely impacted the number of procedures performed using our products.

In the markets in which we operate, elective, specialty and other procedures and appointments have been suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with COVID-19 and to focus limited resources and personnel capacity toward the treatment of COVID-19 patients.

In response to the COVID-19 pandemic, we have implemented a variety of measures intended to help us manage through its impact and position us to resume operations quickly and efficiently as restrictions, recommendations, and best practices evolve.

These measures include:

As a result, we have experienced a material adverse impact on our business, financial condition and results of operations from a decrease and delay of procedures involving our products.

The COVID-19-driven impact on procedure volumes, which began in 2020, extended into the first quarter of 2021.

Beginning in March 2021, we observed indicators of recovery in our U.S.

markets which continued through the second quarter.

During the third quarter of 2021, procedure volumes were adversely impacted by the Delta variant of COVID-19 in certain regions of the U.S.

During the fourth quarter of 2021, sales increased in regions of the U.S.

less affected by COVID-19, which were partially offset by decreased sales in U.S.

regions significantly impacted by the Delta and Omicron variants of COVID-19.

In international markets, our business faced continued pressure in the fourth quarter of 2021 as a result of the COVID-19 surge that led to lockdowns across a number of markets in Europe.

We may continue to see regional variations in procedure volumes in our U.S.

and international markets

from the COVID-19 pandemic and its variants.

We are encouraged for the longer term, and we believe the following key indicators are contributing to the stabilization of our business:

• continued opening of new accounts;

• strong physician participation in virtual trainings;

• a strong patient pipeline evidenced by an increase in StratX report activity, a rebound in patient calls into hospitals inquiring about our procedure, and a resumption of patient calls to our reimbursement support service;

• hospitals and centers accepting patients for elective procedures.

In response to the COVID-19 pandemic, we implemented a variety of measures intended to help us manage through the impact of the pandemic and position us to resume operations quickly and efficiently as restrictions, recommendations, and best practices evolve.

These measures have included, and continue to include:

• establishing safety protocols, facility enhancements, and work-from-home strategies to protect our employees;

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• accelerating our physician education programs and direct-to-patient marketing efforts through social media or other virtual forums;

• Increasing our capital base by $201.4 million through an initial public offering of our common stock in October 2020;

• increasing our capital base by $201.4 million through our IPO in October 2020;

• continuing to invest in research and development activities in order to advance our AeriSeal clinical programs.

The COVID-19 pandemic has also adversely impacted the number of procedures using the Zephyr Valve as hospitals have had to, and continue to, focus on COVID-19 and as patients generally sought to postpone healthcare visits and treatments.

Specifically, beginning in the second half of March 2020, procedures using our products were temporarily postponed or cancelled as COVID-19 spread to the various regions across the globe where we conduct our business and sell our products.

Beginning in May 2020, we began to see signs of a recovery in our business, and by September 30, 2020 the total number of Zephyr Valves sold in the third quarter exceeded the total number of Zephyr Valves sold during the first quarter of 2020.

In November and December 2020, a resurgence of COVID-19 led to a decrease in procedure volumes and our revenues in the fourth quarter of 2020 declined compared to revenues in the third quarter of 2020.

The COVID-19 driven impact on procedure volumes extended through the first two months of 2021.

We have seen initial indicators in March 2021 that the resurgence of COVID-19 is diminishing and we anticipate improving sales during 2021, assuming the efficacy, availability and delivery of vaccines as well as other societal responses to the pandemic.

We are encouraged for the longer term, and we believe the following key indicators are contributing to the stabilization of our business:

• Continued opening of new accounts;

• Strong physician participation in virtual trainings;

• A strong patient pipeline evidenced by an increase in StratX report activity near to pre-COVID-19 levels, a rebound in patient calls into hospitals inquiring about our procedure, and a resumption of patient calls to our reimbursement support service;

• Hospitals and centers beginning to accept patients for elective procedures.

Despite these signs of recovery of our business, we cannot be certain that any recovery will be sustained, or that a further resurgence of COVID-19 will not occur in 2021.

We believe many of the measures adopted in response to, and challenges resulting, from COVID-19 will likely continue for the duration of the pandemic, which is uncertain, and are expected to continue to significantly reduce our revenue and adversely impact our business, financial condition and results of operations for the duration of the pandemic.

As a result, we cannot assure you that our recent volume of Zephyr Valves sold are indicative of future results or that we will not experience additional adverse or materially adverse impacts associated with the COVID-19 pandemic.

In particular, we believe the reduction in the backlog of patients who cancelled or postponed their procedures in the second quarter of 2020 contributed to the number of procedures and Zephyr Valves sold in the third and fourth quarters of 2020 as hospitals and centers resumed accepting patients for elective procedures.

However, the number of Zephyr Valves sold in the future may decrease as the backlog of patients who have cancelled or postponed their procedures due to the COVID-19 pandemic is reduced.

Further, once the COVID-19 pandemic subsides, there may be a substantial backlog of patients seeking appointments with physicians and surgeries to be performed at hospitals relating to a variety of medical conditions, and as a result, patients seeking treatment with Zephyr Valves may have to navigate limited provider capacity.

We believe this limited provider and hospital capacity could have a material adverse effect on our business, financial condition and results of operations once the pandemic subsides and following the end of the pandemic.

The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and variant strains, governmental and societal response to contain and treat COVID-19 and variant strains, and vaccination efforts, among others.

Despite signs of recovery of our business, we cannot be certain that any recovery will be sustained, or that a further resurgence of COVID-19 or variants of the virus will not occur.

The measures adopted in response to, and challenges resulting from, the COVID-19 pandemic may continue to adversely affect our employees, including our sales force, hospitals, physicians, patients, communities and business operations, and may continue to contribute to significant volatility and negative pressure on the U.S.

and world economy and financial markets.

Further, we cannot assure you that our recent volume of Zephyr Valves sold are indicative of future results.

The number of Zephyr Valves sold in the future may decrease due to a resurgence of the COVID-19 pandemic.

In addition, there may be limited provider capacity due to labor shortages, or for other reasons, which could limit the ability of patients to receive treatment with Zephyr Valves.

Limited provider and hospital capacity has had a material adverse effect on our business, financial condition and results of operations and may continue to materially adversely affect us even as the pandemic subsides.

The extent to which the COVID-19 pandemic impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and variant strains, governmental and societal response to contain and treat COVID-19 and variant strains, and the availability and distribution of vaccines and public acceptance of vaccines, among others.

Our consolidated financial statements reflect judgments and estimates that could change in the future as a result of the COVID-19 pandemic.

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A key element of our strategy remains to broaden our coverage by private third-party payor policies.

Commercial payors such as Aetna, Humana, Health Care Service Corporation, and Highmark have issued positive coverage policies for the Zephyr Valve, and United Healthcare no longer considers the procedure unproven or experimental.

Other commercial payors, such as many plans in the Blue Cross Blue Shield family of plans, do not yet consider our solution medically necessary, but these same plans are approving pre-authorization requests on a case-by-case basis.

Some commercial payors do not yet consider our solution medically necessary, but these same plans are approving pre-authorization requests on a case-by-case basis.

Medicare, currently without a public coverage policy, covers our solution for patients when medically necessary on a case-by-case basis and other commercial insurers not described above are approving pre-authorization requests on a case-by-case basis.

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Existing treatments include medical management, lung volume reduction surgery (“LVRS”), lung transplantation as well as other minimally invasive treatments.

Some of our competitors have several competitive advantages, including established relationships with pulmonologists who commonly treat patients with emphysema, significantly greater name recognition and significantly greater sales and marketing resources.

Some of our competitors have several competitive advantages, including more established operating histories, established relationships with pulmonologists who commonly treat patients with emphysema, significantly greater name recognition, widespread distribution channel, and significantly greater sales and marketing resources.

In addition to competing for market share, we also compete against these companies for personnel, including qualified sales and other personnel that are necessary to grow our business.

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In addition, we are continuing to invest in the accuracy and features of our patient assessment tools.

Moreover, we plan to conduct clinical research of AeriSeal, a potential product in development for the treatment of severe emphysema patients who are not qualified for Zephyr Valve treatment due to excessive collateral ventilation.

Moreover, we are conducting clinical research of AeriSeal, a potential product in development for the treatment of severe emphysema patients who are not qualified for Zephyr Valve treatment due to excessive collateral ventilation.

While research and development and clinical testing are time consuming and costly, we believe that a pipeline of new products and product enhancements that improve efficacy, safety and cost effectiveness is critical to increasing the adoption of our solution.

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Cost of goods sold consists primarily of payroll and personnel-related expenses for our manufacturing and quality assurance employees, costs related to materials, components and subassemblies, third-party costs, manufacturing overhead, equipment depreciation, charges for excess, obsolete and non-sellable inventories.

Overhead costs include the cost of quality assurance, testing, material procurement, inventory control, operations supervision and

management and an allocation facilities overhead cost, including rent and utilities.

Overhead costs include the cost of quality assurance, testing, material procurement, inventory control, operations supervision and management and an allocation of facilities overhead cost, including rent and utilities.

Cost of goods sold also includes certain direct costs such as those incurred for shipping our products and costs related to providing analysis services for patient scans.

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Our research and development activities primarily consist of engineering and research programs associated with our products under development and improvements to our existing products.

Research and development expenses include payroll and personnel-related costs for our research and development employees, including expenses related to stock-based compensation for employees engaged in research and development, consulting services, clinical trial expenses, regulatory expenses, prototyping, testing, laboratory supplies, and an allocation of facility overhead costs.

Research and development expenses

include payroll and personnel-related costs for our research and development employees, including expenses related to stock-based compensation for employees engaged in research and development, consulting services, clinical trial expenses, regulatory expenses, prototyping, testing, laboratory supplies, and an allocation of facility overhead costs.

Our clinical trial expenses include costs associated with clinical trial design, clinical trial site development and study costs, data management costs, related travel expenses, the cost of products used for clinical activities, and internal and external costs associated with our regulatory compliance.

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Selling, general and administrative expenses also include costs attributable to professional fees for legal and accounting services, insurance, consulting fees, recruiting fees, travel expense, bad debt expense and depreciation.

We intend to continue to increase the size of our sales force and our marketing spending to generate sales opportunities.

We expect our sales and marketing expenses to increase in absolute dollars as we hire additional sales personnel and increase our sales support infrastructure and add additional marketing programs in order to more fully penetrate the global opportunity.

We intend to continue to increase our sales and marketing spending to generate sales opportunities.

We expect expenses to increase in absolute dollars as we increase our sales support infrastructure and add additional marketing programs in order to more fully penetrate the global opportunity.

We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and information technology to support our operations as a public company.

Additionally, we anticipate increased expenses related to audit, legal, regulatory

and tax-related services associated with being a public company, compliance with exchange listing and Securities and Exchange Commission (SEC) requirements, director and officer insurance premiums and investor relations costs.

Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs.

We also saw an increase in our stock-based compensation expense with the establishment of our new equity plan and related grants either in the form of restricted stock units or options.

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Interest Expense and Income

Interest expense consists primarily of interest expense related to our term loan facilities and convertible notes, including amortization of debt discount and issuance costs.

Interest income is predominantly derived from investing surplus cash in money market funds and short-term marketable securities.

Interest expense consists primarily of interest expense related to our term loan facilities, including amortization of debt discount and issuance costs.

Interest income is predominantly derived from investing surplus cash in money market funds and marketable securities.

Other Income (Expense), Net

Other income (expense), net primarily consists of changes in the fair value of our derivative liabilities, changes in the fair value of our outstanding preferred stock warrants and foreign currency exchange gains and losses.

Other income (expense), net primarily consists of changes in the fair value of our derivative liabilities, changes in the fair value of preferred stock warrants and foreign currency exchange gains and losses.

In February 2020, the warrants were partly exercised and partly expired.

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All of our derivative liabilities were settled during 2020.

Upon the closing of our initial public offering on October 5, 2020, we paid $1.9 million pursuant to the Success Fee Agreement to Oxford Finance LLC.

In connection with the closing of the IPO, the 2020 Notes were converted into 2,561,484 shares of common stock.

Upon the closing of our IPO on October 5, 2020, we paid $1.9 million pursuant to the Success Fee Agreement to Oxford Finance LLC.

In connection with the closing of our IPO, the 2020 Notes were converted into 2,561,484 shares of common stock.

Results of Operations:

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Revenue increased by $15.7 million, or 47.9%, to $48.4 million during the year ended December 31, 2021, compared to $32.7 million during the year ended December 31, 2020.

The increase in revenue was due to an increase in the sale of products in the United States of $5.5 million to $16.2 million during the year ended December 31, 2020, compared to $10.7 million during year ended December 31, 2019.

The increase in United States revenue was driven by increased sales of the Zephyr Valve as we expanded commercialization efforts.

The gains in the US were offset by a decrease in the sale of products due to lower procedure volumes in international markets of $5.4 million to $16.5 million during the year ended December 31, 2020, compared to $21.9 million during the year ended December 31, 2019.

Revenue in both the United States and international markets were unfavorably impacted by the COVID-19 pandemic, which decreased and delayed procedures performed using our products for much of the second quarter of 2020 before beginning to recover in the second half of the year.

Revenue from the sale of products in the United States increased by $8.8 million, to $25.0 million, during the year ended December 31, 2021, compared to $16.2 million during the year ended December 31, 2020 and an increase in the sale of products in the international markets of $6.9 million, to $23.4 million, compared to $16.5 million during the year ended December 31, 2020.

The increase in revenue was driven by increased sales of the Zephyr Valve as we gradually recovered from the global COVID-19 pandemic and continued to expand commercialization efforts.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased by $1.3 million, or 10.9%, to $12.8 million during the year ended December 31, 2021, compared to $11.5 million during the year ended December 31, 2020.

The increase was mainly due to lower manufacturing utilization in the second quarter of 2020 resulting from the response to the COVID-19 pandemic combined with increased manufacturing costs as we expanded headcount and invested in operational infrastructure to support anticipated future growth.

The increase in cost of goods sold caused gross margin to decrease from 69% during the year ended December 31, 2019 to 65% during the year ended December 31, 2020.

The increase was mainly due to increased number of products sold, increased manufacturing costs as we expanded headcount and invested in operational infrastructure to support anticipated future growth.

Cost of goods sold for the year ended December 31, 2020 was also impacted by lower manufacturing utilization in the second quarter of 2020 resulting from the response to the COVID-19 pandemic.

The increase in procedure volumes and improved operating leverage caused gross margin to increase from 65% during the year ended December 31, 2020 to 74% during the year ended December 31, 2021.

Research and Development Expenses

Research and development expenses increased by $5.6 million, or 75.1%, to $13.1 million during the year ended December 31, 2021, compared to $7.5 million during the year ended December 31, 2020.

The increase in research

and development expenses was primarily due to an increase of $1.2 million in personnel expenses including stock based compensation as we expanded our research and development team and $0.4 million of professional services and other expenses, offset by a $0.2 million decrease in costs associated with our clinical trials, including fees paid to contract research organizations due to reduced clinical trial activity during the year ended December 31, 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $11.9 million, or 34.7%, to $46.1 million during the year ended December 31, compared to $34.2 million during the year ended December 31, 2019.

This increase in selling, general and administrative expenses was primarily due to an increase of $3.0 million resulting from the write-off of deferred initial public offering costs in the second quarter of 2020, $5.6 million of payroll and personnel-related expenses including stock based compensation as we expanded our sales and marketing function, an increase of $2.6 million of payroll and personnel-related expenses including stock based compensation for our administrative personnel due to increased headcount, an increase of $0.9 million in advertising expenses, an increase of $0.7 million in insurance costs associated with being a public company, and an increase of $1.0 million in facility and other expenses.

These increases were offset by a decrease of $1.9 million in global travel and conference related expenses which were impacted by the COVID-19 pandemic.

Interest Expense and Income

Interest expense increased by $0.9 million, or 37.3%, to $3.2 million during the year ended December 31, 2020, compared to $2.3 million during the year ended December 31, 2019 primarily due to an increase in borrowings under the CIBC Term Loan and the 2020 Notes partially offset by the repayment of the Oxford Term Loan.

Interest income decreased by $0.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, which was primarily due to decreased marketable securities balances throughout most of the year.

Other Income (Expense), Net

Other income (expense), net increased by $3.9 million to $3.3 million during the year ended December 31, 2020, compared to ($0.6) million during the year ended December 31, 2019, primarily attributable to the closing of our IPO leading to favorable fair value adjustments of derivative liabilities.

Comparison of the Years Ended December 31, 2019 and December 31, 2018

The following table summarizes our results of operations for the period indicated:

Years Ended December 31,

2019 2018 $ Change % Change

(in thousands)

Revenue $ 32,595 $ 20,004 $ 12,591 62.9 %

Costs of goods sold 10,181 7,718 2,463 31.9 %

Gross profit 22,414 12,286 10,128 82.4 %

Operating expenses:

Research and development 6,049 6,991 (942) (13.5) %

Selling, general and administrative 34,203 20,347 13,856 68.1 %

Total operating expenses 40,252 27,338 12,914 47.2 %

Loss from operations (17,838) (15,052) (2,786) 18.5 %

Interest income 432 21 411 —

Interest expense (2,317) (2,520) 203 (8.1) %

Other income (expense), net (617) (916) 299 (32.6) %

Net loss before tax (20,340) (18,467) (1,873) 10.1 %

Income tax expense 363 12 351 —

Net loss $ (20,703) $ (18,479) $ (2,224) 12.0 %

Revenue increased by $12.6 million, or 62.9%, to $32.6 million during the year ended December 31, 2019, compared to $20.0 million during the year ended December 31, 2018.

The increase in revenue was due to an increase in the sale of products in the United States by $10.1 million from $0.6 million for the year ended December 31, 2018 to $10.7 million for the year ended December 31, 2019 and an increase in the sale of products in international markets by $2.5 million from $19.4 million for the year ended December 31, 2018 to $21.9 million for the year ended December 31, 2019.

We obtained FDA approval for the Zephyr Valves in the United States in June 2018 and began generating revenue in the United States in the third quarter of 2018.

Overall, there was an increase in the number of units of products sold for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Unit growth paralleled the growth in revenue dollars for 2019 while average selling prices maintained their 2018 levels showing a small improvement.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased by $2.5 million, or 31.9%, to $10.2 million during the year ended December 31, 2019, compared to $7.7 million during the year ended December 31, 2018.

The increase was primarily due to growth in sales volume and additional manufacturing overhead costs as we invested in our operational infrastructure to support anticipated future growth.

Our gross margin increased from 61.4% for the year ended December 31, 2018 to 68.8% for the year ended December 31, 2019.

The increase in gross margin was primarily due to lower fixed costs per unit from the increased sales volume of our products.

Research and Development Expenses

Research and development expenses decreased by $0.9 million, or 13.5%, to $6.0 million during the year ended December 31, 2019, compared to $7.0 million during the year ended December 31, 2018.

The decrease in research and development expenses was primarily due to a decrease of $0.7 million of costs associated with our clinical trials,

including fees paid to contract research organizations (CROs) and consulting costs due to lower clinical trial activity during the year ended December 31, 2019.

The increase in research and development expenses was primarily due to an increase of $1.7 million in personnel expenses including stock-based compensation as we expanded our research and development team, an increase of $2.8 million in costs

associated with our clinical trials, including fees paid to contract research organizations and testing expenses, and an increase of $1.1 million in professional services, regulatory, facility and other expenses during the year ended December 31, 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $23.8 million, or 51.6%, to $69.9 million during the year ended December 31, 2021 compared to $46.1 million during the year ended December 31, 2020.

This increase in selling, general and administrative expenses was primarily due to an increase of $8.8 million of payroll and personnel-related expenses for our sales personnel, an increase of $1.0 million of payroll and personnel-related expenses for our administrative personnel, an increase of $2.0 million of professional fees for legal, consulting, accounting, tax and other services, an increase of $1.2 million of travel related expenses and $0.4 million of advertising and marketing materials.

This increase in selling, general and administrative expenses was primarily due to an increase of $16.7 million of payroll and personnel-related expenses including stock based compensation as we expanded our sales and marketing and administrative function, an increase of $4.0 million in advertising expenses, an increase of $2.1 million in insurance costs associated with being a public company, an increase of $1.9 million in consulting expenses, and an increase of $2.1 million in facility and other expenses, offset by a decrease of $3.0 million resulting from the write-off of deferred initial public offering costs in the second quarter of 2020.

Interest Expense and Income

Interest expense decreased by $0.2 million, or 8.1%, to $2.3 million during the year ended December 31, 2019, compared to $2.5 million during the year ended December 31, 2018 primarily due to lower interest on convertible note payable to a related party because our convertible debt from Boston Scientific Corporation (BSC) converted into shares of our Series G-1 preferred stock in April 2019.

Interest income increased by $0.4 million from the year ended December 31, 2018 to the year ended December 31, 2019 primarily due to interest income on proceeds from issuance of Series G-1 preferred stock invested in cash equivalents and short-term marketable securities.

Interest expense decreased by $2.4 million, or 73.9%, to $0.8 million during the year ended December 31, 2021, compared to $3.2 million during the year ended December 31, 2020 primarily due to payoff of the Oxford Term Loan, conversion of the 2020 Notes into common shares upon IPO in 2020, offset by borrowings under the CIBC Loan.

Interest income increased by $0.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, which was primarily due to increased marketable securities balances in 2021 compared to 2020.

Other Income (Expense), Net

Other income (expense), net decreased by $0.3 million, or 32.6%, to $0.6 million during the year ended December 31, 2019, compared to $0.9 million during the year ended December 31, 2018, primarily due to lower net foreign exchange losses of $0.1 million.

Other income (expense), net decreased by $3.9 million to ($0.6) million during the year ended December 31, 2021, compared to $3.3 million during the year ended December 31, 2020, primarily related to the closing of our IPO in 2020 leading to favorable fair value adjustments of derivative liabilities in 2020.

Liquidity and Capital Resources;

Plan of Operation

To date, we have financed our operations primarily through private placements of equity securities, debt financing arrangements and sales of our products.

As of December 31, 2020, we had cash and cash equivalents of $231.6 million, an accumulated deficit of $242.7 million, and $16.8 million outstanding under the CIBC Term Loan, net of debt discount.

Oxford Term Loan

From August 2014 until February 2020, we were party to a Loan and Security Agreement with Oxford (Oxford Agreement), which provided us with the ability to borrow up to $20.0 million in term loans.

The Oxford Agreement included a floating interest rate tied to LIBOR and included customary representations and warranties, restrictive covenants, events of default and other customary terms and conditions.

As of December 31, 2019, the Company was in default with a covenant in the Oxford Agreement resulting from its failure to maintain cash balances outside the United States within the levels set forth in the Oxford Agreement.

This event of default was waived by Oxford.

The loan was collateralized by a first-priority lien on substantially all of our assets, including cash and cash equivalents, accounts receivable, intellectual property and equipment.

In May 2017, we entered into an amendment to the Oxford Agreement, and in May 2018 we entered into two additional amendments.

Each of the amendments extended the “interest only period” under the loan, during which the loan accrued interest, but were not required to make principal payments.

In connection with the closing of the Oxford Agreement in August 2014, we also entered into a Success Fee Agreement, which requires us to pay up to $2.5 million (the Success Fee) in the event of a sale or other disposition by us of all or substantially all of our assets, a merger or consolidation or an initial public offering (a Liquidity Event), in each case before August 28, 2021.

We borrowed a total of $15.0 million principal amount of term loans

under the Oxford Agreement, which based on the formula in the Success Fee Agreement, obligated us to pay a Success Fee of $1.9 million on the closing of our IPO in October 2020.

In 2020, 2019 and 2018, we recorded interest expense on the term loan of $0.4 million, $1.7 million and $1.7 million, respectively.

We incurred fees and legal expenses of $0.1 million in connection with the Oxford Agreement and related Amendments, which were recorded as deferred financing costs and amortized to interest expense.

We also paid $0.2 million in fees to Oxford which is reflected as a discount on the debt and was being accreted over the life of the term loan.

In 2020, 2019 and 2018, we recorded interest expense related to deferred financing and debt issuance costs of less than $0.1 million, respectively.

In February 2020, we terminated and paid off in full $17.3 million, including the outstanding loan amount of $15.0 million, final payment of $1.3 million, amendment fees of $0.9 million and accrued interest of $0.1 million, outstanding under the Oxford Agreement.

The repayment of the loans under the Oxford Agreement was accounted as extinguishment and the Company recorded a loss on debt extinguishment of $0.4 million.

All of our obligations under the Oxford Agreement have been terminated except the indemnity obligation thereunder, which by their terms survive the facility.

On October 5, 2020, upon the closing of our IPO, we paid $1.9 million pursuant to the Success Fee Agreement to Oxford Finance LLC.

Loan and Security Agreement with Boston Scientific Corp (BSC)

From May 2017 until January 2020, we were party to a Second Lien Loan and Security Agreement with Boston Scientific Corp (BSC Agreement), which provided us with the ability to borrow up to $30.0 million in term loans.

The BSC Agreement included a fixed interest rate of 8.96% and included customary representations and warranties, restrictive covenants, events of default and other customary terms and conditions.

The BSC Agreement provided for principal and accrued interest on the loans to convert into our stock at BSC’s option upon completion by us of any Qualified Equity or Debt Financing, or the occurrence of any Change of Control or Liquidation (each term as defined in the BSC Agreement).

In conjunction with the BSC Agreement, we and BSC entered into a No Shop Agreement such that from the date of execution of the agreement through the earlier of ten days following receipt by BSC of a letter confirming our submission of the final module of our PMA application to the FDA and March 31, 2018, we would not sign a term sheet or engage in discussions to sell our company.

The No Shop Agreement terminated in 2018.

In addition, BSC’s Right of First Negotiation, originally received as part of BSC’s investment in our Series F-1 Preferred Stock, was amended to shorten the period it has to exercise its Right of First Negotiation from ten to five business days, and to shorten the exclusive negotiation period from 75 to 45 days with respect to the initial notice from us that we intend to pursue a change in control or an initial public offering.

For subsequent notices from us, BSC has ten days to exercise its right of first negotiation, and 75 days to enter into definitive agreements for a change in control transaction.

We provided an initial notice to BSC of our intention to pursue our initial public offering and BSC declined to exercise its Right of First Negotiation.

BSC’s Right of First Negotiation terminated in connection with the closing of our IPO in October 2020.

We borrowed $6.0 million in 2017, $12.0 million in 2018 and $6.0 million in January 2019 under the BSC Agreement.

We incurred fees and legal expenses of $0.1 million in connection with the BSC Agreement, which are reported on the balance sheet as a direct deduction from the face amount of the convertible note.

Amortization of the issuance costs are calculated using the effective interest rate method over the term of the note and recorded as a non-cash interest expense.

In 2018, we recorded interest expense of $0.8 million.

In April 2019, all outstanding indebtedness and accrued interest under the BSC Agreement converted into shares of our Series G-1 preferred stock.

At December 31, 2019, we retained the ability to draw up to an additional $6.0 million under the BSC Agreement until the maturity date in May 2022.

We terminated the BSC Agreement in January 2020, which terminated all of our obligations under the BSC Agreement except the indemnity obligation thereunder, which by their terms survive the facility.

CIBC Term Loan

On February 20, 2020, we executed a Loan and Security Agreement with Canadian Imperial Bank of Commerce (CIBC), which we subsequently amended on April 17, 2020 and December 28, 2020 (as amended, the CIBC Agreement).

The CIBC Agreement provided us with the ability to borrow up to $32.0 million in debt financing consisting of $17.0 million advanced at the closing of the agreement (Tranche A), with the option to draw up to an additional $8.0 million (Tranche B) on or before February 20, 2022 and an additional $7.0 million (Tranche C) on or before February 20, 2022.

Tranche B is conditioned upon achieving a trailing six-month revenue of at least $15.0 million as of the date of any Tranche B Borrowing, and Tranche C is conditioned upon achieving a trailing six-month revenue of at least $20.0 million as of the date of any Tranche C borrowing.

To date, we have financed our operations primarily through initial public offering, private placements of equity securities, debt financing arrangements and sales of our products.

As of December 31, 2021, we had cash and cash equivalents and marketable securities of $191.0 million, an accumulated deficit of $291.4 million, and $16.9 million outstanding under the CIBC Loan, net of debt discount.

Oxford Finance Loan

From August 2014 until February 2020, the Company was party to a Loan and Security Agreement with Oxford Finance LLC, which provided the ability to borrow up to $20.0 million in term loans (“Oxford Finance Loan”).

In 2014, the Company borrowed $15.0 million.

The term loan bore interest at 8.96% and had a five-year term.

The first 36 months were interest only payments followed by 24 months of equal payments of principal and interest.

A final payment of 8.5% of the term loan amount was due at maturity and was being accreted using the effective interest rate method.

The term loan was collateralized by assets, including cash and cash equivalents, accounts receivable and property and equipment.

The Oxford Finance Loan was subsequently amended in 2017 and 2018 to extend the interest only period and to extend the maturity date to July 1, 2020, and at the Company’s option, further extend the maturity date to May 1, 2021.

In 2019, the Company elected to extend the maturity date to May 2021.

In connection with the original agreement in August 2014, the Company also entered into the Success Fee Agreement.

In the event of a sale or other disposition by the Company of all or substantially all of its assets, a merger or consolidation, or an initial public offering (a “Liquidity Event”), before the termination of the agreement on August 28, 2021, the Company was required to pay up to $2.5 million (the “Success Fee”) to Oxford Finance

LLC, the amount of which would be based on actual borrowings, up to $20.0 million.

This agreement was identified as a freestanding derivative under ASC 815, Derivatives and was remeasured to its fair value at the end of each reporting period and any change in fair value is recognized as change in other income (expense), net in the statements of operations and comprehensive loss (Note 4).

On October 5, 2020, in connection with the IPO, the Company paid $1.9 million pursuant to the Success Fee Agreement to Oxford Finance LLC based on the $15.0 million borrowed.

On February 20, 2020, the Company repaid its entire obligation under the term loan agreement with Oxford Finance LLC amounting to $17.3 million, including outstanding loan amount of $15.0 million, final payment of $1.3 million, amendment fees of $0.9 million and accrued interest of $0.1 million.

The repayment of the obligation under the term loan agreement with Oxford Finance LLC was accounted as extinguishment and the Company recorded a loss on extinguishment of $0.4 million included in interest expense in the consolidated statements of operations and comprehensive loss.

In 2020, the Company recorded interest expense related to deferred financing and debt issuance costs of less than $0.1 million, respectively.

Interest expense on the term loan amounted to $0.4 million during the years ended December 31, 2020.

On February 20, 2020, the Company executed a Loan and Security Agreement (the “CIBC Agreement”) with Canadian Imperial Bank of Commerce (“CIBC”) to raise up to $32.0 million in debt financing (“CIBC Loan”) consisting of $17.0 million advanced at the closing of the agreement (“Tranche A”), with the option to drawing up to an additional $8.0 million (“Tranche B”) on or before February 20, 2022.

The term loan also provides for an additional financing tranche (“Tranche C”) of up to $7.0 million on or prior to February 20, 2022, which was conditioned upon achieving a trailing six-month revenue of at least $20.0 million as of the date of any Tranche C borrowing.

The availability of Tranche B and Tranche C is further conditioned upon the joining of Pulmonx International Sàrl to the CIBC Agreement and the execution by Pulmonx International Sàrl of Swiss-law collateral documentation in favor of CIBC.

The loan will mature on March 15, 2022.

However, the loan’s maturity will automatically be extended to February 20, 2025 if we amend the 2020 Notes such that the 2020 Notes mature on May 21, 2025 or later or if all of the convertible notes are converted to preferred stock, in each case prior to March 1, 2022 and if no event of default exists under the CIBC Agreement.

If the loan’s maturity is extended to 2025, equal monthly principal payments will begin after a 24-month interest only grace period.

The interest only grace period can extend to 36 months if we achieve three-month trailing revenue of at least $20.0 million as of February 20, 2022.

The loan bears interest at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate at any time.

The CIBC Loan originally had a five-year term maturing on February 20, 2025, which included 24 months of interest only payments followed by 36 months of equal payments of principal and interest.

The interest only period can be extended to 36 months if the Company achieves three-month trailing revenue of at least $20.0 million as of February 20, 2022.

The CIBC Loan bears interest at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate at any time.

The Tranche C loan will bear interest at a floating rate equal to 1.5% above the Wall Street Journal Prime Rate at any time.

The loan is collateralized by substantially all of our assets, including cash and cash equivalents, accounts receivable, intellectual property and equipment.

We may prepay the loan, subject to certain requirements.

The CIBC Loan is collateralized by substantially all of the Company’s assets, including cash and cash equivalents, accounts receivable, intellectual property and equipment.

The Company may prepay the loan, subject to certain requirements.

The CIBC Agreement includes customary restrictive covenants, financial covenants, events of default and other customary terms and conditions.

In December 2020, to address certain post-close covenants for which we were not in compliance, we entered into a Second Amendment to the CIBC Agreement that extended the compliance date for certain post-close covenants to June 30, 2021.

We paid $0.3 million fees to the lender and third parties which is reflected as a discount on the CIBC Loan and is being accreted over the life of the term loan using the effective interest method.

During the year ended December 31, 2020, we recorded interest expense related to debt discount and debt issuance costs of CIBC Loan of $0.1 million.

Interest expense on the CIBC Loan amounted $0.7 million during the year ended December 31, 2020.

In April 2020, we issued and sold the 2020 Notes in the aggregate principal amount of $33.0 million.

We have the option to call up to an additional $33.0 million for a maximum aggregate amount of $66.0 million, subject to customary closing conditions, provided that any such call be for no less than $5.0 million on or prior to April 17, 2022.

The 2020 Notes accrue interest at a rate equal to 2.0% above the Wall Street Journal Prime Rate.

In April 2020, the Company entered into a First Amendment to CIBC Agreement that changed the maturity date to March 15, 2022, which would be automatically extended to February 20, 2025 if the maturity of all outstanding convertible notes was extended to a date no earlier than May 21, 2025 or all convertible notes converted into convertible preferred stock of the Company.

An amendment fee of $0.2 million was paid.

The Tranche B drawing is conditioned to achieving a trailing six-month revenue of at least $15.0 million as of the date of any Tranche B borrowing.

On the date of drawing Tranche B Loan or Tranche C Loan, the Company will pay a structuring fee in an amount equal to 1.0% of the amount of Tranche B Loan or Tranche C Loan.

The amendment was accounted for as a debt modification and no gain or loss was recognized.

In December 2020, to address certain post-close covenants for which the Company was not in compliance, the Company entered into a Second Amendment to the CIBC Agreement that extended the compliance date for certain post-close covenants to June 30, 2021.

In March 2021, the Company entered into an Amended and Restated Agreement which extended the maturity date from March 15, 2022 to February 20, 2025, and modified certain financial covenants.

Per the amended terms, 36 equal payments of principal plus accrued interest will be due beginning March 31, 2022.

The beginning of principal repayment can be extended to March 31, 2023 if the Company achieves three-month trailing revenue of at least $20.0 million as of February 20, 2022.

In connection with the Amended and Restated Agreement, the Company paid fees to CIBC of less than $0.1 million which were recorded as a discount on the CIBC Loan and are being accreted over the life of the term loan using the effective interest method.

The amendment was accounted for as a debt modification and no gain or loss was recognized.

In June 2021, the Company entered into a First Amendment to Amended and Restated Loan and Security Agreement with CIBC that extended the compliance of certain post-close covenants to March 31, 2022.

In October 2021, the Company entered into a Second Amendment to the Amended and Restated Loan and Security Agreement with CIBC, which extended the interest only period of the loan from 24 months to 36 months.

Under the amended terms, principal repayment will begin in February 2023.

There was no change to the loan interest rate or maturity date.

As of December 31, 2021, the CIBC Loan had an annual effective interest rate of 4.71% per year.

The financial covenants in the CIBC Agreement require that, when the cash and cash equivalents of the Company is less than $100.0 million, the Company have revenue for the trailing three-month period ending on the last day of each fiscal quarter of not less than 80.0% of the revenue for the trailing three-month period, as set forth in the annual projections delivered to the CIBC.

Further, the Company is required to maintain unrestricted cash in an aggregate amount equal to or greater than the Adjusted EBITDA loss as defined in the CIBC Agreement for the four-month period ending on any date of determination.

As of December 31, 2021, the Company was in compliance with all covenants contained in CIBC Agreement.

The Company paid $0.4 million fees to the lender and third parties, which is reflected as a discount on the CIBC Loan and is being accreted over the life of the term loan using the effective interest method.

During the year ended December 31, 2021 and December 31, 2020, the Company recorded interest expense related to debt discount and debt issuance costs of CIBC Loan of $0.1 million and $0.1 million, respectively.

Interest expense on the CIBC Loan amounted $0.8 million and $0.7 million during the year ended December 31, 2021 and December 31, 2020, respectively.

In April 2020, the Company entered into a Note Purchase Agreement and Convertible Promissory Notes (collectively the “2020 Notes Agreement”) with certain investors (the “Lenders”) to issue convertible promissory notes (the “2020 Notes”) for a maximum aggregate amount of $66.0 million.

In April 2020, the Company received $33.0 million in gross proceeds from issuance of the 2020 Notes.

Upon meeting customary closing conditions, the Company can draw up to an additional $33.0 million, provided that any such draw be for no less than $5.0 million on or prior to April 17, 2022.

All unpaid interest and principal will be due and payable upon request of the majority of Lenders (“Majority Holders”) on or after the earlier of April 17, 2022 or an event of default.

The 2020 Notes accrue interest at a rate equal to 2.0% above the Wall Street Journal Prime Rate.

The Company may prepay the 2020 Notes prior to April 17, 2022 only with the consent of the Majority Holders.

Upon an initial public offering which results in net proceeds of not less than $30.0 million (a Qualified IPO), the outstanding 2020 Notes and any unpaid accrued interest shall automatically convert in whole into shares of our common stock at a conversion price equal to the lesser of (i) price per share paid for common stock in the Qualified

IPO multiplied by either 85% if the conversion takes place within 18 months of the Initial Closing, or 80% otherwise, and (ii) $13.20 per share.

At any other time upon the election of the Majority Holders or a Significant Holder, the outstanding principal amount of the 2020 Notes and any unpaid accrued interest will convert in whole into our Series G-1 preferred stock at the Series G-1 conversion price of $13.20 per share.

If there is an event of default prior to selection of such option, the 2020 Notes will be converted at a conversion price equal to the Series G-1 preferred stock conversion price of $13.20 per share multiplied by 75%.

Upon any event of default, the Majority Holders can, by providing us with a written notice, declare the principal and unpaid accrued interest under the 2020 Notes immediately due and payable.

The 2020 Notes include embedded derivatives that are required to be bifurcated from the 2020 Notes and accounted for separately as a single, compound embedded derivative instrument under ASC 815, Derivatives (2020 Notes derivative liability).

We determined that the share settled redemption in the case of a financing or an IPO discussed above represents an embedded derivative that is not clearly and closely related to the debt host and have accounted for these settlement alternatives as separate embedded derivative liability.

The fair value of the 2020 derivative liability of $3.9 million was recorded on the issuance date of the 2020 Notes resulting in a debt discount, which is reported as a direct deduction from the face amount of the 2020 Notes.

The 2020 derivative liability is remeasured to its fair value at the end of each reporting period and any change in fair value is recognized in other income (expense), net in the statements of operations and comprehensive loss.

The fair value of the 2020 derivative liability upon the effectiveness of the IPO was recognized in the consolidated statements of operations and comprehensive loss and the derivative liability was extinguished.

We incurred debt issuance costs of $0.1 million in connection with the 2020 Notes Agreement, which are reported on the balance sheet as a direct deduction from the face amount of the 2020 Notes.

Debt discount of $4.0 million is being amortized using the effective interest rate method over the term of the note and recorded as a non-cash interest expense.

During the year ended December 31, 2020, we recorded interest expense of $1.6 million on the 2020 Notes.

Our obligations with respect to the 2020 Notes are unsecured and subordinated to our obligations with respect to the CIBC Loan.

The 2020 Notes include customary events of default.

Upon the closing of our IPO in October 2020, the 2020 Notes, including accrued interest thereon, automatically converted into 2,561,484 shares of our common stock at a conversion price of $13.20 per share.

The 2020 Notes included embedded derivatives that were required to be bifurcated from the 2020 Notes and accounted for separately as a single, compound embedded derivative instrument under ASC 815, Derivatives (“2020 Notes derivative liability”).

The Company determined that a share settled redemption in the case of a financing or an IPO as described in the 2020 Notes represented an embedded derivative that was not clearly and closely related to the debt host and had accounted for these settlement alternatives as separate embedded derivative liability.

The fair value of the 2020 Notes derivative liability of $3.9 million was recorded on the issuance date of the 2020 Notes

resulting in a debt discount, which was reported as a direct deduction from the face amount of the 2020 Notes.

The 2020 Notes derivative liability was remeasured to its fair value at the end of each reporting period and any change in fair value is recognized in other income (expense), net in the statements of operations and comprehensive loss (Note 4).

The change in fair value of $3.9 million during the year ended December 31, 2020 was recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.

Upon the closing of the IPO in October 2020, the $33.0 million aggregate outstanding principal amount and $0.8 million accrued interest of the 2020 Notes converted into 2,561,484 shares of common stock pursuant to the Qualified IPO conversion at the $13.20 per share fixed price.

The Company determined that the 2020 Notes derivative liability had no value upon the closing of the IPO, because value of the notes with and without such derivative was the same.

The Company incurred debt issuance costs of $0.1 million in connection with the 2020 Notes Agreement, which were reported on the balance sheet as a direct deduction from the face amount of the 2020 Notes.

During the year ended December 31, 2020, the Company recorded interest expense of $1.6 million on the 2020 Notes, consisting of $0.8 million of contractual interest expense and $0.8 million amortization of debt discount and debt issuance costs.

Before the conversion upon the IPO, the 2020 Notes had an annual effective interest rate of 12.33% per year.

At December 31, 2021, the Company retained the ability to draw up to an additional $33.0 million under the 2020 Notes Agreement until the maturity date in April 2022.

The Company’s obligations with respect to the 2020 Notes are unsecured and subordinated to its obligations with respect to the CIBC Loan.

The 2020 Notes have customary events of default.

Credit Agreemen t

In April 2020, Pulmonx International Sàrl, our wholly-owned subsidiary, entered into a COVID-19 Credit Agreement with UBS Switzerland AG to receive up to 0.5 million Swiss Francs ($0.5 million U.S.

In April 2020, Pulmonx International Sàrl, a wholly owned subsidiary of the Company, entered into a COVID-19 Credit Agreement with UBS Switzerland AG to receive up to 0.5 million Swiss Francs ($0.5 million U.S.

dollar equivalent) under Swiss Federal Government program to mitigate the economic impact of the spread of the coronavirus.

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As of December 31, 2021, Pulmonx International Sàrl did not make any repayment of credit agreement.

Paycheck Protection Program

On April 16, 2020, the Company received $2.7 million in support from the Paycheck Protection Program (the “PPP”) established by the U.S.

federal government as part of the CARES Act for the PPP.

Because the U.S.

government subsequently changed its position and guidelines related to the PPP and publicly traded companies, the Company repaid the loan on May 1, 2020.

Funding Requirements

We expect to incur continued expenditures in the future in support of our commercial infrastructure, sales force and other commercialization efforts.

In addition, we intend to continue to make investments in the development of our products, including ongoing research and development programs.

We also expect to incur additional costs associated with operating as a public company.

Lastly, we may also undertake additional expenses to further expand our commercial organization and efforts, enhance our research and development efforts and pursue product expansion opportunities.

As of December 31, 2020, we had cash and cash equivalents of $231.6 million.

Based on our current planned operations, we expect that our cash and cash equivalents will enable us to fund our operating expenses for at least 12 months from the issuance of our financial statements as of and for the year ended December 31, 2020.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

Because of the numerous risks and uncertainties associated with research, development and commercialization of medical devices, we are unable to estimate the exact amount of our working capital requirements.

Our future funding requirements will depend on many factors, including:

• the costs of commercialization activities related to commercializing our products in the United States and elsewhere, including expanding territories, increasing sales and marketing personnel, actual and anticipated product sales, marketing programs, manufacturing and distribution costs;

• the impact of the COVID-19 pandemic on our business;

• the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

• the research and development activities we intend to undertake, product enhancements that we intend to pursue;

• whether or not we pursue acquisitions or investments in businesses, products or technologies that are complementary to our current business;

• the degree and rate of market acceptance of our products in the United States and elsewhere;

• changes or fluctuations in our inventory supply needs and forecasts of our supply needs;

• our need to implement additional infrastructure and internal systems;

• our ability to hire additional personnel to support our operations as a public company;

• the emergence of competing technologies or other adverse market developments.

Until such time, if ever, as we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings and collaborations or licensing arrangements.

There can be no assurance that our efforts to procure additional financing will be successful or that, if they are successful, the terms and conditions of such financing will be favorable to us or our stockholders.

If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights.

If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional capital through collaborations agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable

rights to our technologies, future revenue streams, research programs or product candidates or grant licenses that may not be favorable to us.

If we are unable to raise capital when needed, we will need to delay, limit, reduce or terminate planned commercialization or product development activities, or grant rights to develop and commercialize products or product candidates that we would otherwise prefer to develop and market ourselves in order to reduce costs.

The COVID-19 Credit Agreement bears no interest and will be repaid in twelve equal installments, paid semi-annually, beginning in March of 2022.

Summary Statement of Cash Flows

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Years Ended December 31,

2020 2019 2018

(in thousands) (in thousands)

(in thousands)

Net cash (used in) provided by:

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Net cash used in operating activities was $41.4 million for the year ended December 31, 2021.

Cash used in operating activities was primarily a result of the net loss of $32.2 million, an increase in inventory of $5.0 million primarily due to higher inventory levels required to support projected increase in sales, an increase in prepaid and other current assets of $1.8 million, a decrease in income taxes payable of $0.2 million, a decrease in lease liabilities of $0.9 million, and a non-cash credit resulting from the change in the fair value of derivative liabilities of $3.2 million due to extinguishment of derivative liability upon IPO partially offset by a decrease in accounts receivable of $1.5 million, an increase in accrued liabilities of $1.0 million, an increase in accounts payable of $0.6 million, stock based compensation expense of $3.2 million, write-down of inventory due to obsolescence of $0.5 million, depreciation and amortization expense of $0.5 million, amortization of debt discount and debt issuance costs of $1.0 million, non-cash lease expense of $1.5 million and non-cash charges for write-off of deferred offering costs of $3.0 million as we withdrew our registration statement for our initial public offering in May 2020.

Cash used in operating activities was primarily a result of the net loss of $48.7 million, an increase in accounts receivable of $2.4 million, an increase in inventory of $6.4 million primarily due to higher inventory levels required to support projected increase in sales, an increase in prepaid and other current assets of $1.2 million, an increase in other assets of $0.2 million, a decrease in lease liabilities of $2.5 million, offset by an increase in accrued liabilities of $4.8 million, stock based compensation expense of $7.9 million, employee stock purchase plan expense of $2.6 million, write-down of inventory due to obsolescence of $1.2 million, depreciation and amortization expense of $0.9 million, amortization of debt discount and debt issuance costs of $0.1 million, non-cash lease expense of $2.4 million, and decrease of deferred revenue of $0.1 million.

The increase in prepaid expenses, accrued liabilities and accounts payable is primarily due to increases in inventory and expenses related to operating as a public company and timing of payments to our vendors.

Net cash used in operating activities was $30.6 million for the year ended December 31, 2020.

Cash used in operating activities was primarily a result of the net loss of $20.7 million, an increase in accounts receivable of $2.5 million primarily due an increase in sales, an increase in inventory of $2.6 million primarily due to higher inventory levels required to support higher sales and projected increase in sales and an increase in prepaid and other current assets of $0.7 million partially offset by, an increase in accrued liabilities of $3.4 million, an increase in accounts payable of $0.5 million, a change in the fair value of the derivative liability of $0.5 million, depreciation and amortization expense of $0.4 million, stock-based compensation expense of $0.4 million and a write down of inventory due to obsolescence of $0.3 million.

The increases in prepaid expenses and other current assets, accrued liabilities and accounts payable is primarily due to increases in inventory, an increase in manufacturing, selling, general and administrative expenses and timing of payments to our vendors.

Net cash used in operating activities was $18.4 million for the year ended December 31, 2018.

Cash used in operating activities was primarily a result of the net loss of $18.5 million, an increase in accounts receivable of $0.3 million due to an increase in sales, an increase in inventory of $1.2 million to support projected increases in sales, a

decrease in accounts payable of $0.6 million due to timing of payments to vendors, a decrease in deferred tax liability of $0.2 million, a decrease of $0.1 million in deferred rent liability partially offset by, an increase in accrued liabilities of $0.9 million due to timing of payments to vendors, change in the fair value of the derivative liability of $0.6 million, depreciation and amortization expense of $0.3 million, stock-based compensation expense of $0.4 million and write down of inventory due to obsolescence of $0.3 million.

Cash Flows from Investing Activities

Net cash provided by investing activities in the year ended December 31, 2021 was $46.3 million primarily consisting of maturities of investments of $10.0 million, offset by the purchases of investments of $52.6 million, and purchases of property and equipment of $3.7 million.

Net cash provided by investing activities for the year ended December 31, 2020 was $12.7 million primarily consisting of maturities of short-term investments of $13.6 million offset by purchased of property and equipment of $0.9 million.

Net cash used in investing activities in the year ended December 31, 2019 was $14.2 million primarily consisting of purchases of short-term marketable securities of $21.5 million and purchases of property and equipment of $0.7 million offset by maturities of investments of $7.9 million.

Net cash provided by investing activities in the year ended December 31, 2018 was $0.2 million primarily consisting of maturities of investments of $0.5 million, offset by the purchases of property and equipment of $0.3 million.

Cash Flows from Financing Activities

Net cash provided by financing activities in the year ended December 31, 2021 of $4.5 million primarily relates to proceeds of $2.6 million from issuance of common stock under the employee stock purchase plan, and proceeds of $1.9 million from exercise of common stock options.

Net cash provided by financing activities in the year ended December 31, 2020 of $234.8 million primarily relates to net proceeds from our initial public offering of $201.4 million, proceeds of $17.3 million from borrowing under the CIBC Agreement and COVID-19 Credit Agreement, net of lender fees and costs, proceeds of $33.0 million from the issuance of 2020 Notes, net of lender fees and costs, proceeds of $2.3 million from the exercise of warrants for Series C-1 preferred stock, and $2.7 million proceeds from the exercise of stock options, partially offset by repayment of debt obligations of $17.2 million under the Oxford Agreement, payment of Success Fee of $1.9 million, payment of deferred offering costs of $2.5 million and payment of debt issuance cost of $0.2 million.

Net cash provided by financing activities in the year ended December 31, 2019 of $45.6 million primarily relates to proceeds of $6.0 million from the issuance of the convertible note to BSC, proceeds of $39.7 million from issuance of Series G-1 preferred stock, net of issuance costs and $0.5 million proceeds from the exercise of stock options offset by payment of deferred offering costs of $0.6 million.

Net cash provided by financing activities in the year ended December 31, 2018 of $12.1 million primarily relates to proceeds of $12.0 million from additional borrowings under the BSC Agreement and proceeds of $0.1 million from the exercise of stock options and preferred stock warrants.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020:

Payments Due by Period (in thousands)

Less than 1 year 1-3 years 3-5 years More than 5 years Total

Lease obligations (1)

$ 2,769 $ 7,453 $ 1,007 $ — $ 11,229

Long-term debt obligations (2)

723 17,146 564 — 18,433

$ 3,492 $ 24,599 $ 1,571 $ — $ 29,662

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(1) We lease our laboratory and office facilities in Redwood City, California, which expires in July 2025, and Neuchâtel, Switzerland, which can be cancelled with 12 months notice.

In April 2020, we executed a sublease for another office facility in Redwood City, California for a three-year term commencing on June 1, 2020.

The lease agreement provides for early termination if the Company or Sublandlord elects to terminate the lease, which may only occur on or after the expiration of the 18th full calendar month of the sublease term.

The lease term for this lease is 18 months as it is not reasonably certain that we will not exercise early termination option.

In September 2020, we amended a

sublease agreement entered in April 2020, to include additional facility space in Redwood City, California for a four-year term.

The sublease agreement can be extended for an additional twelve month period, at our option.

The lease term for this lease is 4 years as it is not reasonably certain that we will exercise the renewal option.

The amendment also changed the lease term of sublease agreement entered in April 2020, which was extended until May 31, 2024, but left the early termination clause unchanged.

(2) In February 2020, we received $17.0 million gross proceeds from the CIBC Loan.

In April 2020, we received $33.0 million in gross proceeds from the issuance of the 2020 Notes.

We have the option to draw up to an additional $33.0 million of 2020 Notes, provided that any such draw be for no less than $5.0 million on or prior to April 17, 2022.

In May 2020, Pulmonx International Sàrl, our wholly-owned subsidiary, received 0.5 million Swiss Francs ($0.5 million U.S.

dollar equivalent) under the COVID-19 Credit Agreement.

The COVID-19 Credit Agreement bears no interest and is payable within 60 months after receipt of funds.

We enter into contracts in the normal course of business with third-party contract organizations for pre-clinical studies and testing, manufacture and supply of our pre-clinical materials and providing other services and products for operating purposes.

These contracts generally provide for termination following a certain period after notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our financial statements have been prepared in accordance with GAAP.

Material Cash Requirements

Our net cash operating expenditures were $41.4 million in 2021 and $30.6 million in 2020, and we intend to continue to make investments in the development of our products, including ongoing research and development programs.

Our cash outflows for capital expenditures were $3.7 million in 2021 and $0.9 million in 2020, and we expect to incur continued expenditures in the future in support of our commercial infrastructure, sales force and other commercialization efforts.

Recent and expected working and other capital requirements include amounts related to future lease payments for operating lease obligations, which totaled $10.0 million at December 31, 2021, with $2.7 million expected to be paid within the next 12 months, and amounts related to future long-term debt which total $19.1 million, with $0.8 million expected to be paid within the next 12 months.

Lastly, we may undertake additional expenses to further expand our commercial organization and efforts, enhance our research and development efforts and pursue product expansion opportunities.

As of December 31, 2021, we had cash, cash equivalents and marketable securities of $191.0 million.

Based on our current planned operations, we expect that our cash, cash equivalents and marketable securities will enable us to fund our operating expenses for at least 12 months from the issuance of our financial statements as of and for the year ended December 31, 2021.

We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and marketable securities, debt financings, and access to other public or private equity offerings.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

The adequacy of our available funds and our ability to raise any necessary additional capital to meet longer-term operating and capital requirements will depend on many factors, including: