Pulmonx Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pulmonx Corporation INDEX TO THE FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (BDO USA, LLP, San Francisco , California, PCAOB ID# 243 ) F- 1 Financial Statements Consolidated Balance Sheets F- 3 Consolidated Statements of Operations and Comprehensive Loss F- 4 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit ) F- 5 Consolidated Statements of Cash Flows F- 6 Notes to Consolidated Financial Statements F- 8 136 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Pulmonx Corporation Redwood City, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Pulmonx Corporation (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2022 expressed an adverse opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Timing of Revenue Recognition As described in Note 2 to the consolidated financial statements, the Company’s revenue is generated from the sale of its products to distributors and hospitals in the United States and international markets. Revenue is recognized when there is an enforceable contract and the customer obtains control of promised goods or services, in an amount that reflects consideration which the entity expects to receive in exchange for those goods or services. Control is F-1 Table of Contents generally transferred upon either direct shipment or hand delivery of products. The Company’s consolidated revenue was $48.4 million for the year ended December 31, 2021. We identified the evaluation of when performance obligations have been met and the timing of revenue recognition as a critical matter. The timing of establishing a legally enforceable contract and transferring control varies depending on the fulfillment method and customary business practices. Auditing these elements involved especially challenging auditor judgment due to the manual nature of tracking these elements. The primary procedures we performed to address this critical audit matter included: • Reviewing the entity’s revenue recognition policies and evaluating whether those policies comply with the requirements of ASC 606. • Evaluating managements period end analysis of the timing and accuracy of transactions recognized as revenue during a short period before and after year end by tracing transactions from the general ledger into the analysis to test completeness and obtaining and inspecting underlying source documents for significant transactions. • Evaluating on a test basis, but with increased focus on a period deemed susceptible to revenue timing errors, the timing and accuracy of transactions recognized as revenue by obtaining and inspecting underlying source documents. /s/ BDO USA, LLP We have served as the Company's auditor since 2011. San Francisco, California March 1, 2022 F-2 Table of Contents Pulmonx Corporation Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 148,480 $ 231,561 Restricted cash 231 231 Short-term marketable securities 31,561 — Accounts receivable, net 6,562 4,228 Inventory 16,285 10,741 Prepaid expenses and other current assets 4,883 3,228 Total current assets 208,002 249,989 Long-term marketable securities 10,941 — Property and equipment, net 4,814 1,474 Goodwill 2,333 2,333 Intangible assets, net 277 400 Right of use assets 8,075 8,976 Other long-term assets 731 536 Total assets $ 235,173 $ 263,708 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 1,582 $ 1,472 Accrued liabilities 13,366 8,651 Income taxes payable 147 94 Deferred revenue 163 71 Credit Agreement, current 91 — Current lease liabilities 2,201 2,238 Total current liabilities 17,550 12,526 Deferred tax liability 37 62 Long-term lease liabilities 6,844 7,618 Credit agreement 455 564 Term loan 16,869 16,804 Other long-term liabilities 179 — Total liabilities 41,934 37,574 Commitments and contingencies (Note 8) Stockholders’ Equity Preferred stock, $ 0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2021 and December 31, 2020 — — Common stock, $ 0.001 par value, 200,000,000 shares authorized; 36,931,762 shares and 35,693,753 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 37 36 Additional paid-in capital 482,885 467,147 Accumulated other comprehensive income 1,712 1,685 Accumulated deficit ( 291,395 ) ( 242,734 ) Total stockholders’ equity 193,239 226,134 Total liabilities and stockholders’ equity $ 235,173 $ 263,708 The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents Pulmonx Corporation Consolidated Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts) Years Ended December 31, 2021 2020 Revenue $ 48,416 $ 32,733 Cost of goods sold 12,786 11,531 Gross profit 35,630 21,202 Operating expenses Research and development 13,063 7,460 Selling, general and administrative 69,871 46,074 Total operating expenses 82,934 53,534 Loss from operations ( 47,304 ) ( 32,332 ) Interest income 400 213 Interest expense ( 829 ) ( 3,181 ) Other income (expense), net ( 585 ) 3,282 Net loss before tax ( 48,318 ) ( 32,018 ) Income tax expense 343 213 Net loss ( 48,661 ) ( 32,231 ) Other comprehensive income Currency translation adjustment 51 318 Change in unrealized (losses) gains on marketable securities ( 24 ) ( 6 ) Total other comprehensive income 27 312 Comprehensive loss $ ( 48,634 ) $ ( 31,919 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 1.35 ) $ ( 3.16 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 36,129,409 10,184,841 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents Pulmonx Corporation Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except share amounts) Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balances at January 1, 2020 17,583,150 $ 205,339 2,100,203 $ 2 $ 21,750 $ 1,373 $ ( 210,503 ) $ ( 187,378 ) Issuance of Series C-1 convertible preferred stock upon exercise of warrants 213,876 2,260 — — — — — — Conversion of convertible preferred stock into common stock ( 17,797,026 ) ( 207,599 ) 17,797,026 18 207,581 — — 207,599 Conversion of 2020 Notes into common stock — — 2,561,484 3 30,589 — — 30,592 Issuance of common stock upon initial public offering, net of issuance costs and underwriting discount of $ 17,108 — — 11,500,000 11 201,381 — — 201,392 Issuance of common stock upon exercise of stock options — — 1,745,040 2 2,703 — — 2,705 Repurchase of early exercised common stock options — — ( 10,000 ) — — — — — Change in shares subject to repurchase — — — — ( 346 ) — — ( 346 ) Stock-based compensation expense — — — — 3,489 — — 3,489 Currency translation adjustment — — — — — 318 — 318 Change in unrealized losses on marketable securities — — — — — ( 6 ) — ( 6 ) Net loss — — — — — — ( 32,231 ) ( 32,231 ) Balances at December 31, 2020 — — 35,693,753 36 467,147 1,685 ( 242,734 ) 226,134 Issuance of common stock upon vesting of restricted stock unit — — 40,908 — — — — — Issuance of common stock upon exercise of stock options — — 1,065,567 1 1,880 — — 1,881 Repurchase of early exercised common stock options — — ( 12,945 ) — — — — — Change in shares subject to repurchase — — — — 204 — — 204 Issuance of shares pursuant to Employee Stock Purchase Plan — — 144,479 — 2,652 — — 2,652 Stock-based compensation expense — — — — 11,002 — — 11,002 Currency translation adjustment — — — — — 51 — 51 Change in unrealized losses on marketable securities — — — — — ( 24 ) — ( 24 ) Net loss — — — — — — ( 48,661 ) ( 48,661 ) Balances at December 31, 2021 — $ — 36,931,762 $ 37 $ 482,885 $ 1,712 $ ( 291,395 ) $ 193,239 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents Pulmonx Corporation Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2021 2020 Cash flows from operating activities Net loss $ ( 48,661 ) $ ( 32,231 ) Adjustments to reconcile net loss to net cash used in operating activities Stock-based compensation expense 10,530 3,197 Change in fair value of derivative liability — ( 3,190 ) Write-off of fixed assets 7 — Allowance for doubtful accounts 4 ( 7 ) Inventory write-downs 1,186 472 Depreciation and amortization expense 867 483 Amortization of debt discount and debt issuance costs 106 968 Write-off of deferred offering costs — 3,030 Amortization of premiums and discounts on short-term marketable securities 59 ( 35 ) Non-cash lease expense 2,360 1,467 Net changes in operating assets and liabilities: Accounts receivable ( 2,432 ) 1,457 Inventory ( 6,458 ) ( 5,047 ) Prepaid expenses and other current assets ( 1,214 ) ( 1,756 ) Other assets ( 221 ) 65 Accounts payable 87 592 Accrued liabilities 4,800 1,019 Income taxes payable 21 ( 155 ) Lease liabilities ( 2,517 ) ( 876 ) Deferred tax liability ( 6 ) 22 Deferred revenue 94 ( 108 ) Net cash used in operating activities ( 41,388 ) ( 30,633 ) Cash flows from investing activities Purchases of investments ( 52,584 ) — Maturities of investments 10,000 13,605 Purchases of property and equipment ( 3,671 ) ( 911 ) Net cash provided by (used in) investing activities ( 46,255 ) 12,694 Cash flows from financing activities Proceeds from borrowing under term loans, net of payment of lender fees and costs — 17,291 Repayment of term loans — ( 17,248 ) Payment of Success Fee — ( 1,875 ) Proceeds from the issuance of convertible note, net of payment of lender fees and costs (includes $ 0 and $ 0 from related party for the years ended December 31, 2021 and 2020, respectively) — 32,950 Proceeds from Paycheck Protection Program loan — 2,666 Repayment of Paycheck Protection Program loan — ( 2,666 ) Debt issuance cost ( 41 ) ( 162 ) Payments of deferred offering costs — ( 2,462 ) Proceeds from exercise of warrants for Series C-1 convertible preferred stock — 2,261 Proceeds from exercise of common stock options 1,871 2,705 Proceeds from issuance of common stock under the employee stock purchase plan 2,652 — Proceeds from initial public offering, net of offering costs — 201,392 Payments for the repurchase of early exercised common stock options ( 26 ) ( 21 ) Net cash provided by financing activities 4,456 234,831 F-6 Table of Contents Effect of exchange rate changes on cash and cash equivalents 106 133 Net (decrease) increase in cash and cash equivalents ( 83,081 ) 217,025 Cash and cash equivalents at beginning of year 231,792 14,767 Cash, cash equivalents and restricted cash at end of year $ 148,711 $ 231,792 Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets: Cash and cash equivalents $ 148,480 $ 231,561 Restricted cash 231 231 Cash, cash equivalents and restricted cash in consolidated balance sheets $ 148,711 $ 231,792 Supplemental non-cash items: Lapse (increase) in repurchase rights of common stock $ 204 $ ( 346 ) Purchases of property and equipment in accounts payable and accrued liabilities $ 584 $ 65 Issuance of derivative instrument related to convertible notes $ — $ 3,900 Operating lease right of use assets obtained in exchange for new lease liabilities $ 1,460 $ 3,935 Amount receivable from exercise of Options $ 10 $ — Supplemental disclosure of cash flow information: Cash paid for income taxes $ 322 $ 259 Cash paid for interest $ 722 $ 3,059 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements 1. Formation and Business of the Company The Company Pulmonx Corporation (the “Company”) was incorporated in the state of California in December 1995 as Pulmonx and reincorporated in the state of Delaware in December 2013. The Company is 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”). The Company’s solution, which is comprised of the Zephyr Endobronchial Valve (“Zephyr Valve”), the Chartis Pulmonary Assessment System (“Chartis System”) and the StratX Lung Analysis Platform (“StratX Platform”), is designed to treat a broad pool of patients for whom medical management has reached its limits and either do not want or are ineligible for surgical approaches. The Company has subsidiaries in Germany, Switzerland, Australia, the United Kingdom, the Netherlands, Italy, France and Hong Kong. Initial Public Offering On September 30, 2020, the Company’s registration statement on Form S-1 (File No. 333-248635) relating to its initial public offering (“IPO”) of common stock became effective. The IPO closed on October 5, 2020 at which time the Company issued 11,500,000 shares of its common stock at a price of $ 19.00 per share, which included the issuance of shares in connection with the exercise by the underwriters of their option to purchase up to 1,500,000 additional shares. The Company received an aggregate of $ 218.5 million gross proceeds, before underwriting discounts, commissions and offering costs, and approximately $ 201.4 million in net proceeds after deducting underwriting discounts and commissions and offering costs. In addition, upon closing the IPO, all outstanding shares of the Company’s convertible preferred stock converted into 17,797,026 shares of common stock. Additionally, 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 at a conversion price of $ 13.20 per share. In connection with the completion of its IPO, on October 5, 2020, the Company’s certificate of incorporation was amended and restated to provide for 200,000,000 authorized shares of common stock with a par value of $ 0.001 per share and 10,000,000 authorized shares of preferred stock with a par value of $ 0.001 per share. Liquidity and Going Concern The Company has incurred operating losses and negative cash flows from operations to date and has an accumulated deficit of $ 291.4 million as of December 31, 2021. During the years ended December 31, 2021, and 2020, the Company used $ 41.4 million, and $ 30.6 million of cash in its operating activities, respectively. As of December 31, 2021, the Company had cash, cash equivalents and marketable securities of $ 191.0 million. Historically, the Company’s activities have been financed through private placements of equity securities, debt and sale of common stock in the IPO. The Company’s consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for the next 12 months. Management believes that the Company’s existing cash, cash equivalents and marketable securities will allow the Company to continue its planned operations for at least the next 12 months from the date of the issuance of these consolidated financial statements. Impact of the COVID-19 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. As a result, we have F-8 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements 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 throughout 2021. At the start of 2021, procedure volumes in our U.S. and international markets were adversely impacted by a winter COVID surge. 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, procedure volumes were again adversely impacted in certain regions of the U.S. and Europe by the Delta and Omicron variants; however, we experienced some recovery in certain of our other U.S. markets. We may continue to see regional variations in procedure volumes in our US and international markets from the COVID-19 pandemic and its variants. The Company’s consolidated financial statements reflect judgments and estimates that could change in the future as a result of the COVID-19 pandemic. The COVID-19 pandemic has adversely impacted the Company’s business, financial condition and results of operations by decreasing and delaying procedures performed using its products. While many regions begin to stabilize with improvements in procedure volumes, there continues to be variability and uncertainty as variants of the virus emerge. The Company can make no assurance regarding any future level of demand for the Company’s products, and COVID-19 may adversely impact the results of operations and financial condition. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Reverse Stock Split On September 22, 2020, the Company effected a 1-for-10 reverse stock split of the Company’s common stock and convertible preferred stock. The par value and authorized shares of common stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, convertible preferred stock, stock options and per share amounts contained in the accompanying financial statements and notes to the financial statements have been retroactively adjusted to give effect to the reverse stock split for all periods presented. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions. Significant estimates and assumptions include reserves and write-downs related to inventories, the recoverability of long-term assets, valuation of equity instruments and equity-linked instruments, valuation of common stock, stock- F-9 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements based compensation, derivative liabilities, intangible assets, goodwill, debt and related features, deferred tax assets and related valuation allowances and impact of contingencies. Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. The derivative liabilities were carried at fair value based on unobservable market inputs. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the term loan approximates their fair value. The fair value of marketable debt securities is estimated using Level 2 inputs based on their quoted market values (Note 4). Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents, which include money market funds, commercial paper and corporate bonds. Restricted Cash Restricted cash is comprised of cash that is restricted as to withdrawal or use under the terms of certain contractual agreements. Restricted cash for years ended December 31, 2021 and December 31, 2020 consists of collateral for letters of credit issued in connection with the real estate lease in Redwood City, California. Marketable Securities The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable securities as available-for-sale. After consideration of the Company’s risk versus reward objectives and liquidity requirements, the Company may sell these securities prior to their stated maturities. As the Company views these securities as available to support current operations, the Company classifies highly liquid securities with original maturities greater than three months at the time of purchase as short-term marketable securities and those with original maturities greater than twelve months at the time of purchase as long-term marketable securities on the balance sheet. These securities are carried at fair value as determined based upon quoted market prices or pricing models for similar securities. Unrealized gains and losses on available for sale debt securities, if any, are excluded from earnings and are reported as a component of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the statements of operations and comprehensive loss. Realized gains and losses, if any, on available-for-sale securities are included in other income (expense), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. There were $ 31.6 million and $ 10.9 million short-term and long-term marketable securities as of December 31, 2021, respectively. The Company did not identify any of its marketable securities as other-than-temporarily impaired as of December 31, 2021. There were no marketable securities as of December 31, 2020. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents balances with established financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insured limits. As of December 31, 2021 and 2020, the Company also had cash on deposit with foreign banks of approximately $ 4.6 million and $ 5.6 million, respectively, that was not federally insured. The Company earns revenue from the sale of its products to distributors and other customers such as hospitals. Sales of Zephyr Valves and delivery catheters accounted for most of our revenue for the years ended December 31, 2021, F-10 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements and 2020. The Company’s accounts receivable are derived from revenue earned from distributors and customers. The Company performs ongoing credit evaluations of its customers’ and distributors’ financial condition and generally requires no collateral from its customers and distributors. At December 31, 2021 and 2020, no customer or distributor accounted for more than 10% of accounts receivable. For the years ended December 31, 2021 and 2020, no customer or distributor accounted for more than 10% of revenue. The Company relies on single source suppliers for components, sub-assemblies and materials for its products. These components, sub-assemblies and materials are critical and there are no or relatively few alternative sources of supply. The Company’s suppliers have generally met the Company’s demand for their products and services on a timely basis. Deferred Offering Costs Deferred offering costs, consisting of legal, accounting and other fees and costs relating to the Company’s IPO, are capitalized and recorded on the balance sheet. As of December 31, 2019, $ 1.6 million of deferred offering costs were recorded on the consolidated balance sheet. During the year ended December 31, 2020, the Company wrote off deferred offering costs of $ 3.0 million as, in May 2020, the Company withdrew its registration statement that was filed with the SEC in February 2020. After the registration statement was withdrawn in May 2020, an additional $ 1.8 million in deferred offering costs were incurred related to the Company’s October 2020 IPO. In connection with the IPO, all deferred offering costs incurred after May 2020 were recorded as reduction of the gross proceeds from the IPO in the additional paid-in capital on the accompanying balance sheet as of December 31, 2020.There were no deferred offering costs capitalized as of December 31, 2021 and December 31, 2020. Accounts Receivable and Allowances Accounts receivable are recorded at the amounts billed less estimated allowances for doubtful accounts. The Company continually monitors customer payments and maintains an allowance for estimated losses resulting from a customer’s inability to make required payments. Company considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic related risks and economic conditions that may affect a customer’s ability to pay. As of December 31, 2021 and December 31, 2020, accounts receivable is presented net of an allowance for doubtful accounts of less than $ 0.1 million and $ 0 , respectively. Inventories Inventories are valued at the lower of cost to purchase or manufacture the inventory or net realizable value. Cost is determined using the first-in, first-out method (“FIFO”) for all inventories. Net realizable value is determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company records write-downs of inventories which are obsolete or in excess of anticipated demand or market value based on consideration of product lifecycle stage, technology trends, product development plans and assumptions about future demand and market conditions. Inventory write-downs reduce the carrying value of inventory to its net realizable value. Property and Equipment, Net Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally between three to five years . Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or useful economic life of the asset. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is reflected in operations in the period realized. F-11 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Impairment of Long-lived Assets The Company evaluates its long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows. The Company has not identified any such impairment losses to date. Goodwill Goodwill represents the excess of the purchase price over the fair value of net tangible and identified intangible assets acquired in a business combination. Goodwill is not amortized but is evaluated at least annually for impairment or when a change in facts and circumstances indicate that the fair value of the goodwill may be below its carrying value. The Company tests goodwill for impairment at the reporting unit level (“Reporting Unit”). The Company has determined that it has one operating segment and one Reporting Unit. The operating results are reviewed only on a consolidated basis to make decisions about resources to be allocated and assess performance. Prior to performing the impairment test, the Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the Reporting Unit was less than the carrying amount. If after assessing the totality of events or circumstances, the Company were to determine that it is more likely than not that the fair value of the Reporting Unit is less than the carrying amount, then the Company would perform a quantitative impairment test. The quantitative impairment test involves comparing the fair value of the Reporting Unit to the carrying value. If the fair value of the Reporting Unit exceeds the carrying value of the net assets, goodwill is not impaired, and no further testing is required. If the fair value of the Reporting Unit is less than the carrying value, the Company measures the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the Reporting Unit. Estimations and assumptions regarding the future performance and results of the Company’s operations, including estimates related to future sales growth, gross margin and operating expenses, and the fair value of the Company’s common stock are used in the impairment assessment. Circumstances that could reasonably be expected to negatively affect the key assumptions related to the impairment assessment include but are not limited to, (1) a significant adverse change in legal factors affecting our existing and future products or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, or (4) an adverse change in market conditions that are indicative of a decline in the fair value of the assets. Intangible Assets Intangible assets consist of developed technology and trademarks. Intangible assets were recorded at their fair values at the date of acquisition and are amortized using the straight-line method over a 15-year useful life (Note 5). Leases The Company leases its facilities and vehicles and meets the requirements to account for these leases as operating leases. The Company recognizes rent expense on a straight-line basis over the non-cancelable lease term. Where leases contain escalation clauses, rent abatements or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them in the determination of straight-line rent expense over the lease term. Upon adoption of ASC 842, Leases, on January 1, 2019, the Company determined if an arrangement is a lease, or contains a lease, at inception. The asset component of the Company’s operating leases is recorded as right-of-use assets, and the liability component is recorded as current lease liabilities and long-term lease liabilities in the Company’s consolidated balance sheets. As of December 31, 2021 and 2020, the Company did not record any finance leases. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which is the estimated rate the Company would be F-12 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements required to pay for a fully collateralized borrowing equal to the total lease payments over the term of the lease, to determine the present value of future minimum lease payments. The ROU asset also includes any lease payments made to the lessor at or before the commencement date, minus lease incentives received, and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of ASC 842, the Company combines lease and non-lease components. Variable lease payments are expenses as incurred. Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. Revenue Recognition The Company’s revenue is generated from the sale of its products to distributors and hospitals in the United States and international markets. Under ASC 606, revenue is recognized when the customer obtains controls of promised goods or services, in an amount that reflects consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies performance obligations. A contract with a customer exists when (i) the Company enters into a legally enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company identifies performance obligations in contracts with customers, which may include its products and implied promises to provide free products and analysis services for patient scans. The transaction price is determined based on the amount expected to be entitled to in exchange for transferring the promised services or product to the customer. The Company is entitled to the total consideration for the products ordered by customers, net of early pay discounts, volume rebate adjustments and other transaction price adjustments. The Company’s payment terms to customers generally range from 30 to 60 days. Payment terms fall within the one-year guidance for the practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a significant financing component. The Company excludes taxes assessed by governmental authorities on revenue-producing transactions from the measurement of the transaction price. Assuming all other revenue recognition criteria are met, revenue is recognized when control of the Company’s products transfers to the customer. For sales where the Company’s sales representative hand delivers product directly to the hospital or medical center, control transfers to the customer upon this delivery. For sales where products are shipped, control is transferred either upon shipment or delivery of the products to the customer, depending on the shipping terms and conditions. For consignment sales, control is transferred when the products are F-13 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements used by the customer in procedures. The Company defers revenue relating to any remaining performance obligations by the Company to the customer after delivery, such as free products and free analysis services of patient scans to determine suitability of the patients for the treatment using the Company’s Zephyr Valves. As permitted under the practical expedient, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The Company accepts product returns at its discretion or if the product is defective as manufactured. Historically, the actual product returns have been immaterial to the Company’s financial statements. The Company elected to treat shipping and handling costs as a fulfillment cost and include them in the cost of goods sold as incurred. In those cases where the Company bills shipping and handling costs to customers, it will classify the amounts billed within revenue. The Company disaggregates its revenue by major geographic region, which is disclosed in Note 12, “Segment Information”. Costs associated with product sales include commissions. The Company applies the practical expedient and recognizes commissions as expense when incurred because the expense is incurred at a point in time and the amortization period is less than one year. Commissions are recorded as selling expense. Cost of Goods Sold The Company manufactures certain products at its facility and purchases other products from third party manufacturers. Cost of goods sold consists primarily of costs related to materials, components and subassemblies, third-party costs, manufacturing overhead costs, direct labor, reserves for excess, obsolete and non-sellable inventories and distribution-related expenses. A significant portion of the Company’s cost of goods sold currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of goods sold also includes depreciation expense for production equipment and certain direct costs such as shipping costs. Research and Development Research and development expenses consist of compensation costs, stock-based compensation, engineering and research expenses, clinical trials and related expenses, regulatory expenses, manufacturing expenses incurred to build products for testing, allocated facilities costs, consulting fees and other expenses incurred to sustain the Company’s overall research and development programs. All research and development costs are expensed as incurred. Clinical trial costs are a significant component of the Company’s research and development expenses. The Company has a history of contracting with third parties that perform various clinical trial activities on the Company’s behalf in the ongoing development of its product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. The Company accrues and expenses costs for its clinical trial activities performed by third parties, including clinical research organizations and other service providers, based upon estimates of the work completed over the life of the individual study in accordance with associated agreements. The Company determines these estimates through discussion with internal personnel and outside service providers as to progress or stage of completion of trials or services pursuant to contracts with clinical research organizations and other service providers and the agreed-upon fee to be paid for such services. Advertising Costs The Company expenses the costs of advertising as incurred. Advertising expenses were $ 5.1 million and $ 1.5 million for the years ended December 31, 2021 and 2020, respectively. F-14 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Foreign Currency Translation and Transaction Gains and Losses The functional currencies of the Company’s wholly owned subsidiaries in Switzerland, Germany, Australia, the United Kingdom, France and Hong Kong are the Swiss franc. The functional currency of the Company’s subsidiary in Italy is the Euro. Accordingly, asset and liability accounts of Switzerland, Germany, Australia, the United Kingdom, Italy and Hong Kong operations are translated into U.S. dollars using the current exchange rate in effect at the balance sheet date and equity accounts are translated into U.S. dollars using historical rates. The revenues and expenses are translated using the average exchange rates in effect during the period, and gains and losses from foreign currency translation adjustments are included as a component of accumulated other comprehensive income in the consolidated balance sheet. Foreign currency translation adjustments are recorded in other comprehensive income (loss) in the consolidated statements of operations and comprehensive loss and was $ 0.1 million and $ 0.3 million during the years ended December 31, 2021 and 2020, respectively. Foreign currency transaction gains and losses are included in other income (expense), net in the consolidated statements of operations and comprehensive loss and was $( 0.6 ) million and $ 0.1 million during the years ended December 31, 2021 and 2020, respectively. Stock-Based Compensation The Company accounts for stock-based compensation arrangements with employees and non-employees in accordance with ASC 718, Compensation—Stock Compensation , using a fair-value based method. The Company determines the fair value of all stock options and the 2020 Employee Share Purchase Plan (“ESPP”) awards on the date of grant using the Black-Scholes option pricing model. The Company’s determination of the fair value is impacted by its common stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. The fair value of time-based awards is recognized over the period during which an option holder is required to provide services in exchange for the option award, known as the requisite service period, which is typically the vesting period using the straight-line method. The fair value of performance-based awards, if applicable, is recognized over the requisite service period using the graded vesting method. The Company accounts for forfeitures as they occur. The Company issued stock options in exchange for the receipt of goods or services from non-employees. Costs for such equity instruments are measured at the fair value of the equity instruments issued on the measurement date as the Company believes that the fair value of the equity instrument is more reliably measured than the fair value of the services received. Fair Value of Common Stock Prior to the Company’s IPO, the fair value of the Company’s common stock was determined by the board of directors with assistance from management and external appraisers. Management’s approach to estimate the fair value of the Company’s common stock was consistent with the methods outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (“Practice Aid”). Management considered several factors to estimate enterprise value, including significant milestones that would generally contribute to increases in the value of the common stock. Subsequent to the Company’s IPO, the fair value of the Company’s common stock is determined based on its closing market price. F-15 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Income Taxes The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets. The Company also follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes . ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded on the consolidated financial statements. It is the Company’s policy to include penalties and interest expense related to income taxes as part of the provision for income taxes. Net Loss per Share Attributable to Common Stockholders Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, convertible preferred stock, stock options, common stock subject to repurchase related to early exercise of stock options and convertible preferred stock warrants are considered to be potentially dilutive securities. Basic and diluted net loss attributable to common stockholders per share is presented in conformity with the two-class method required for participating securities as the convertible preferred stock is considered a participating security because it participates in dividends with common stock. The Company also considers the shares issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of all series of convertible preferred stock and the holders of the shares issued upon early exercise of stock options subject to repurchase do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods. Comprehensive Loss The Company is required to report all components of comprehensive loss, including net loss, in the financial statements in the period in which they are recognized. Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from non-owner sources. The Company’s currency translation adjustment and unrealized gains and losses from marketable securities are the components of other comprehensive loss that are excluded from the reported net loss for all periods presented. 3. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted ASU 2019-12 as of January 1, 2021 and the adoption did not have a material impact on the Company’s consolidated financial statements. F-16 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Recent Accounting Pronouncements Not Yet Adopted In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning an interim period that includes or is subsequent to March 12, 2020, or prospectively from the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company may elect to apply ASU 2020-04 as its contracts referenced in London Interbank Offered Rate (“LIBOR”) are impacted by reference rate reform. The Company is currently evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. This ASU is effective for the Company for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses . This new guidance will require financial instruments to be measured at amortized cost, and trade accounts receivable to be presented at the net amount expected to be collected. The new model requires an entity to estimate credit losses based on historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. In November 2019, the FASB issued ASU 2019-10, according to which, the new standard is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies (“SRC”) as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, including the Company, the new standard is effective for fiscal years beginning after December 15, 2022, and interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on the Company’s consolidated financial statements. All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable. 4. Fair Value Measurements Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows: Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that F-17 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Level 3—Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis —Financial assets and liabilities held by the Company measured at fair value on a recurring basis include money market funds, marketable securities and derivative liabilities. Assets and Liabilities Measured and Recorded at Fair Value on a Nonrecurring Basis —The Company determines the fair value of long-lived assets held and used, such as intangible assets, by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors. An impairment charge is recorded when the carrying value of the asset exceeds its fair value. As noted above, there have been no impairment charges recorded to date. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the term loan approximates the fair value and is classified as a Level 2 liability. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The following tables summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Money market funds $ 831 $ — $ — $ 831 Commercial paper — 2,000 — 2,000 Corporate bonds — 4,410 — 4,410 Cash equivalents 831 6,410 — 7,241 U.S. Government agency bonds 14,977 5,504 — 20,481 Commercial paper — 19,107 — 19,107 Corporate bonds — 2,914 — 2,914 Marketable securities 14,977 27,525 — 42,502 Total financial assets $ 15,808 $ 33,935 $ — $ 49,743 December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Money market funds $ 10,533 $ — $ — $ 10,533 Cash equivalents 10,533 — — 10,533 Total financial assets $ 10,533 $ — $ — $ 10,533 There were no liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2021 and December 31, 2020. F-18 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements The following table summarizes the cost, unrealized gains and losses and fair value of marketable securities (in thousands): December 31, 2021 Amortized Cost Unrealized Losses Unrealized Gains Fair Value U.S. Government agency bonds $ 20,509 $ ( 28 ) $ — $ 20,481 Corporate bonds 2,915 ( 1 ) — 2,914 Commercial paper 19,102 — 5 19,107 Marketable securities $ 42,526 $ ( 29 ) $ 5 $ 42,502 Amounts recognized on the consolidated balance sheet Short-term marketable securities 31,561 Long-term marketable securities 10,941 Marketable securities $ 42,502 As of December 31, 2021, all of the marketable securities are classified as available for sale, in which short-term marketable securities mature within one year and long-term marketable securities mature in one to two years . At December 31, 2021, accrued interest on marketable securities of $ 0.1 million was included in prepaid expenses and other current assets on the consolidated balance sheet. The Company did no t have marketable securities as of December 31, 2020. Derivative liabilities include derivatives associated with the Company’s Success Fee Agreement with Oxford Finance LLC (Note 6) and the 2020 Notes derivative liability (Note 6). The Company valued Success Fee derivative liability based on the Success Fee amount of $ 1.9 million and the probability and estimated timing of a liquidity event. The probability of occurrence of a Liquidity Event was estimated to be up to 65 % before the expiration of the agreement as of December 31, 2019. Changes in the estimated probability may result in an increase or decrease in the fair value of the derivative liability. On October 5, 2020, the Success Fee derivative liability was settled upon the Company paying $ 1.9 million pursuant to the Success Fee Agreement to Oxford Finance LLC. The Company valued the 2020 Notes derivative liability using the “with and without” methodology. The “with and without” methodology involves valuing the convertible note on an as is basis and then valuing the 2020 Notes without each individual embedded derivative. The difference between the value of the 2020 Notes with the embedded derivatives and the value without each individual embedded derivative equals the fair value of that embedded derivative. In April 2020, the Company valued the embedded derivatives using a Monte Carlo Simulation (“MCS”). The first step of each simulation was to forecast the Company’s Series G-1 convertible preferred stock price through the expiration of the 2020 Notes. In order to estimate the future share price of the Series G-1 convertible preferred stock, the Company applied a “random walk” model based upon a Geometric Brownian Motion process with a constant drift. The fair value of the 2020 Notes derivative liability was determined using the following assumptions: April 17, 2020 Risk-free interest rate 0.2 % Current Series G-1 convertible preferred stock value per share $ 0.84 Series G-1 convertible preferred stock volatility 34.4 % F-19 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Upon the closing of the IPO in October 2020, the 2020 Notes converted pursuant to a qualified initial public offering (Note 6). As a result, the Company concluded that the 2020 Notes derivative had no value upon the closing of the IPO, because value of the notes with and without the such derivative was the same. The change in fair value of the derivative liabilities is summarized below (in thousands): Success Fee Derivative Liability 2020 Notes Derivative Liability Beginning fair value, January 1, 2020 $ 1,165 $ — Fair value at inception — 3,900 Change in fair value 710 ( 3,900 ) Payment of Success Fee ( 1,875 ) — Ending fair value, December 31, 2020 $ — $ — 5. Balance Sheet Components Cash and Cash Equivalents The Company’s cash and cash equivalents consist of the following (in thousands): December 31, 2021 2020 Cash $ 141,239 $ 221,028 Cash equivalents: Money market funds 831 10,533 Commercial paper 2,000 — Corporate bonds 4,410 — Total cash and cash equivalents $ 148,480 $ 231,561 Inventory Inventory consists of the following (in thousands): December 31, 2021 2020 Raw materials $ 3,738 $ 3,342 Work in process 518 227 Finished goods 12,029 7,172 Total inventory $ 16,285 $ 10,741 F-20 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2021 2020 Prepaid expenses $ 1,869 $ 381 Prepaid insurance 2,305 2,131 VAT receivable 362 339 Other current assets 347 377 Total prepaid expenses and other current assets $ 4,883 $ 3,228 Property and Equipment, Net Property and equipment, net consist of the following (in thousands): December 31, 2021 2020 Machinery and equipment $ 1,635 $ 1,447 Computer equipment and software 1,561 1,062 Furniture and fixtures 252 229 Leasehold improvements 2,277 57 Construction in progress 1,332 452 Total 7,057 3,247 Less: accumulated depreciation ( 2,243 ) ( 1,773 ) Property and equipment, net $ 4,814 $ 1,474 Depreciation expense for the years ended December 31, 2021 and December 31, 2020 was $ 0.7 million and $ 0.3 million, respectively. Goodwill Goodwill was $ 2.3 million as of December 31, 2021 and December 31, 2020 arising from the Company’s acquisition of Emphasys Medical, Inc, in March 2009. No goodwill impairment losses have been recognized since the acquisition. There were no acquisitions or dispositions of goodwill in 2021 and 2020. The Company performed an annual test for goodwill impairment in the fourth quarter of the fiscal years ended December 31, 2021 and December 31, 2020 and determined that goodwill was no t impaired. F-21 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Intangible Assets Intangible assets consist of the following (in thousands): December 31, 2021 Gross Carrying Value Accumulated Amortization Net Carrying Value Developed technology $ 1,658 $ ( 1,410 ) $ 248 Trademarks 191 ( 162 ) 29 Total intangible assets $ 1,849 $ ( 1,572 ) $ 277 December 31, 2020 Gross Carrying Value Accumulated Amortization Net Carrying Value Developed technology $ 1,658 $ ( 1,299 ) $ 359 Trademarks 191 ( 150 ) 41 Total intangible assets $ 1,849 $ ( 1,449 ) $ 400 Amortization expense relating to the intangibles totaled $ 0.1 million during each of the years ended on December 31, 2021 and 2020. Future amortization expense is as follows (in thousands): Year Ending December 31, 2022 $ 123 2023 123 2024 31 Total amortization expense $ 277 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2021 2020 Accrued employee bonuses $ 4,741 $ 2,374 Accrued vacation 1,850 1,810 Other accrued personnel related expenses 2,145 1,368 Accrued professional fees 2,420 1,313 Sales taxes, franchise tax and VAT 730 521 Liability for early exercise of stock options 399 629 Accrued inventory purchases 258 57 Other 823 579 Total accrued liabilities $ 13,366 $ 8,651 F-22 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements 6. Long Term Debt and Convertible Notes Term Loan 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 (“Success Fee”) 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. CIBC Loan 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 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 F-23 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements equal to 1.5 % above the Wall Street Journal Prime Rate at any time. 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 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 an 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 the 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. F-24 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements The CIBC Loan consists of the following (in thousands): December 31, December 31, 2021 2020 Term loan $ 17,000 $ 17,000 Less: debt issuance costs ( 131 ) ( 196 ) Term loan $ 16,869 $ 16,804 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 to $ 0.8 million and $ 0.7 million during the year ended December 31, 2021 and December 31, 2020, respectively. Credit Agreement 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. In May 2020, Pulmonx International Sàrl 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 will be repaid in twelve equal installments, paid semi-annually, beginning in March of 2022. 2020 Notes 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. 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 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 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 F-25 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Qualified IPO conversion at the $ 13.20 per share fixed price. The Company determined that the 2020 Notes derivative 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. Contractual Maturities of Financing Obligations As of December 31, 2021, the aggregate future payments under the CIBC Loan and Credit Agreement (including interest payments) are as follows (in thousands): 2022 $ 814 2023 7,783 2024 8,847 2025 1,514 2026 91 2027 91 Total $ 19,140 Less: unamortized debt discount ( 131 ) Less: interest ( 1,594 ) Term loan and credit agreement $ 17,415 7. Revenue Recognition The Company’s contract liabilities consist of deferred revenue for remaining performance obligations by the Company to the customer after delivery, which was $ 0.2 million as of December 31, 2021, which is expected to be recognized as revenue in 2022. The deferred revenue as of December 31, 2020 was $ 0.1 million, which was recognized as revenue during the year ended December 31, 2021. The Company disaggregates its revenue by major geographic region, which has been disclosed in Note 12, “Segment Information”. 8. Leases, Lease Commitments and Contingencies The Company has a lease for its headquarters location in Redwood City, California. In October 2019, the Company renewed its lease for the headquarters location in Redwood City, California for an additional five years commencing in August 2020 and expiring in July 2025. The monthly base rent during the renewed term is $ 0.1 million and is subject to an annual increase of 3.5 %. The Company is responsible for its share of real estate taxes, common area maintenance and management fees. The Company is eligible to receive a tenant improvement allowance of $ 0.2 million on commencement of the renewal term in August 2020. F-26 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements During 2013, the Company entered into a five-year lease for office facilities in Switzerland. The Company had an option to extend the lease through January 2022, which was not exercised by the Company. Per the lease terms, in the event the option to extend is not exercised, the lease remains in force and can be terminated with 12-month s’ notice. In April 2020, the Company 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 by providing the other party at least 180 days prior written notice. The early termination may only occur on or after the expiration of the 18 th full calendar month of the sublease term. The monthly base rent during the term is less than $ 0.1 million and is subject to an annual increase of 3.5 %. The Company is responsible for its share of real estate taxes, common area maintenance and management fees. In September 2020, the Company amended a sublease agreement entered into in April 2020, to include additional facility space in Redwood City, California for a four-year term. The amendment was accounted as a separate sublease agreement. The sublease agreement contained a rent-free period through February 14, 2021, after which rent is approximately $ 0.1 million per month and is subject to an annual increase of 3.5 %. The Company is responsible for its share of real estate taxes, common area maintenance and management fees. The Company is eligible to receive a tenant improvement allowance of $ 0.7 million to fund facility enhancements. The sublease agreement can be extended for an additional twelve-month period, at the Company’s option. For accounting purposes, the lease term is 4 years as it is not reasonably certain that the Company will exercise the renewal option. The amendment also changed the lease term entered into in April 2020, which was extended until May 31, 2024, but left the early termination clause unchanged. In September 2021, the Company became reasonably certain that the early termination clause would not be exercised as capital expenditures on the facility build-out created sufficient disincentive to terminate the lease early. The lease term was reevaluated and extended from November 30, 2021 to May 31, 2024. The Company has leases on four vehicles with an average lease term of 3 years. Operating lease cost consists of the following (in thousands): Years Ended December 31, 2021 2020 Operating lease cost $ 2,878 $ 2,078 Short-term lease cost 19 12 Variable lease cost 598 337 Total lease cost $ 3,495 $ 2,427 The following table summarizes a maturity analysis of the Company’s lease liabilities showing the aggregate lease payments as of December 31, 2021 (in thousands): 2022 $ 2,666 2023 3,407 2024 2,884 2025 1,008 Total minimum lease payments 9,965 Less: Amount of lease payments representing interest 920 Present value of future minimum lease payments $ 9,045 Less: Current lease liabilities 2,201 Long-term lease liabilities $ 6,844 F-27 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements The following table summarizes additional information related to the Company’s operating leases (in thousands, except weighted average data): December 31, 2021 2020 Right of use asset $ 8,075 $ 8,976 Weighted average remaining lease term (years) 3.17 4.13 Weighted average discount rate (percent) 6.0 6.1 The following table summarizes other supplemental information related to the Company’s operating leases (in thousands): Years Ended December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities included in cash flows used in operating activities $ 2,805 $ 1,494 Right-of-use assets obtained in exchange for lease liabilities $ 1,460 $ 3,935 Contingencies From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable. F-28 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements 9. Income Taxes Income before the provision for income taxes consists of the following (in thousands): Years Ended December 31, 2021 2020 Domestic $ ( 49,176 ) $ ( 28,029 ) Foreign 858 ( 3,989 ) Total loss before provision for taxes $ ( 48,318 ) $ ( 32,018 ) The components of income tax expense are as follows (in thousands): Years Ended December 31, 2021 2020 Current: Federal $ — $ — State 46 9 Foreign 321 185 Total current expense 367 194 Deferred: Federal ( 18 ) 6 State ( 1 ) 6 Foreign ( 5 ) 7 Total deferred expense ( 24 ) 19 Total income tax expense $ 343 $ 213 The reconciliation between the federal statutory rate and the Company’s effective tax rate is summarized below: Years Ended December 31, 2021 2020 Federal statutory rate 21.0 % 21.0 % State taxes, net of federal benefit ( 0.1 ) % 10.2 % Foreign earnings at different rates ( 0.1 ) % ( 3.9 ) % Tax credits 0.4 % 0.6 % Permanent differences 4.4 % ( 0.3 ) % Prior year true-up 0.0 % 0.3 % Change in valuation allowance ( 26.3 ) % ( 40.5 ) % Entity restructuring 0.0 % 11.9 % Effective tax rate ( 0.7 ) % ( 0.7 ) % Deferred income taxes arise from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, as well as operating losses and F-29 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements tax credit carryforwards. Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 43,804 $ 30,400 Tax credit carryforwards 5,579 5,240 Accruals and Reserves 1,638 939 Intangible Assets 4,952 5,287 Other 1,057 449 Gross deferred tax assets 57,030 42,315 Less: valuation allowance ( 56,551 ) ( 41,922 ) Deferred tax assets 479 393 Deferred tax liabilities: Depreciation ( 43 ) ( 27 ) Goodwill ( 473 ) ( 428 ) Net deferred tax liabilities $ ( 37 ) $ ( 62 ) The Company has established a full valuation allowance against its U.S. net deferred tax assets due to the uncertainty surrounding the realization of such assets. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the U.S. net deferred tax assets have been fully offset by a valuation allowance of $ 56.6 million as of December 31, 2021. The valuation allowance increased by $ 14.6 million and $ 13.0 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had total net operating loss carryforwards for federal income tax purposes of approximately $ 181.5 million, of which $ 71.9 million was generated before 2018. If not utilized, these pre-2018 net federal operating loss carryforwards will begin to expire at the end of the year. The Company also had a state net operating loss carryforward of approximately $ 325.5 million which will expire beginning in the year 2022. For tax years in January 1, 2018 onwards, any federal net operating losses generated will be allowable for carry forward indefinitely, as opposed to the original expiration of 20 years. As of December 31, 2021, the Company had $ 109.7 million of post-2017 federal net operating losses that can be carryforward indefinitely. The Company also had federal and state research and development (“R&D”) tax credit carryforwards of approximately $ 3.0 million and $ 4.5 million, respectively. The federal tax R&D credit carryforwards will expire beginning in 2030 while the state tax R&D credit carryforwards have no expiration date. Utilization of the net operating loss carryforwards and R&D tax credit carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code, as defined in Section 382, and other similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. During the year ended December 31, 2018, the Company completed a formal 382 study for which the Company wrote off deferred tax assets for NOLs and credits of $ 3.1 million and $ 1.2 million, respectively. Since the Company had a full valuation allowance on these assets, there was no material impact to the tax provision. The Company completed another section 382 study for the year ended December 31, 2020 for which the Company had a change in ownership. No additional NOLs or credits will expire unused due to the 2020 annual limitation. Management determined that there was no ownership change in 2021. Annually, the Company determines whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities in considering whether any tax benefit can be recorded in the F-30 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements consolidated financial statements. As of December 31, 2021, the Company had unrecognized tax benefits of approximately $ 8.5 million, none of which will affect the tax rate if recognized. It is unlikely that the amount of liability for unrecognized tax benefits will significantly change over the next 12 months. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in thousands): Balance at January 1, 2020 $ 989 Additions for tax positions related to current year 7,259 Balance at December 31, 2020 $ 8,248 Additions for tax positions related to prior year 173 Additions for tax positions related to current year 68 Balance at December 31, 2021 $ 8,489 It is the Company’s policy to include penalties and interest expense related to income taxes as part of the provision for income taxes. The Company’s major tax jurisdictions are the United States and California, Switzerland and Neuchâtel. All of the Company’s tax years will remain open for examination by the federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or R&D Credits. The Company does not have any tax audits or other issues pending. 10. Stockholders’ Equity Common Stock As of December 31, 2021 and December 31, 2020, the Company’s certificate of incorporation authorized the Company to issue up to 200,000,000 and 200,000,000 shares of common stock, respectively. Common stockholders are entitled to dividends as and when declared by the Board of Directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote. Shares Reserved for Future Issuance The Company has reserved shares of common stock for future issuances as follows: December 31, 2021 2020 Common stock options issued and outstanding 2,145,131 2,923,403 Common stock restricted stock units issued and outstanding 442,428 — Common stock available for future grants 3,751,115 3,233,794 Common stock available for ESPP 932,458 720,000 Total 7,271,132 6,877,197 Stock Option Plan As of December 31, 2021, the Company reserved 11,269,901 shares of its common stock under its 2000 Stock Plan (the “2000 Stock Plan”), the 2010 Stock Plan (the “2010 Stock Plan”), the 2020 Stock Plan (the “2020 Stock Plan”), and the 2020 Equity Incentive Plan (the “2020 Equity Incentive Plan” and, together with the 2000 Stock Plan, the F-31 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements 2010 Stock Plan and the 2020 Stock Plan, the “Stock Plans”). Options granted under the Stock Plans may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be granted only to the Company employees (including officers and directors). Nonqualified stock options (“NSO”) may be granted to the Company employees and consultants. As of December 31, 2021 and December 31, 2020, no shares of common stock remain available for issuance to officers, directors, employees and consultants pursuant to the 2000 Stock Plan. Options to purchase the Company’s common stock may be granted at a price not less than 100 % of the fair market value in the case of ISO or NSO, except for an employee or non-employee with options who owns more than 10% of the voting power of all classes of stock of the Company in which case the exercise price shall be no less than 110 % of the fair market value per share on the grant date. Fair market value is determined by the Board of Directors. Options are immediately exercisable and vest as determined by the Board of Directors ranging from immediately upon grant to a rate of 25 % per annum over four years from the grant date. Options expire as determined by the Board of Directors but not more than ten years after the date of grant. Activity under the Stock Plans is set forth below: Outstanding Options Number of Shares Weighted Average Exercise Price Balance, December 31, 2019 3,279,324 $ 1.66 Options granted 1,466,071 7.73 Options exercised ( 1,745,040 ) 1.55 Options canceled ( 76,952 ) 3.55 Balance, December 31, 2020 2,923,403 $ 4.72 Options granted 421,200 43.79 Options exercised ( 1,065,567 ) 1.77 Options canceled ( 133,905 ) 11.44 Balance, December 31, 2021 2,145,131 $ 13.44 The aggregate intrinsic value of options exercised during the years ended December 31, 2021, December 31, 2020 was $ 43.8 million, $ 2.0 million, respectively. The weighted average exercise price and aggregate intrinsic value of options outstanding at December 31, 2021 was $ 13.44 per share and $ 45.3 million, respectively. The weighted average exercise price and aggregate intrinsic value of options outstanding at December 31, 2020 was $ 4.72 per share and $ 188.0 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money as of December 31, 2021 and December 31, 2020. December 31, 2021 Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life (in Years) Options vested 751,752 $ 7.91 7.13 Options vested and expected to vest 2,145,131 $ 13.44 8.15 Total intrinsic value of options vested as of December 31, 2021 and December 31, 2020 was $ 18.9 million and $ 81.7 million, respectively. F-32 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Early Exercise of Stock Options Under the terms of the individual option grants, options granted from the 2000 Stock Plan, the 2010 Stock Plan and the 2020 Stock Plan are fully exercisable on the grant date, subject to the Company’s repurchase right at the original exercise price. Accordingly, options may be exercised prior to vesting. The shares are subject to the Company’s lapsing repurchase right upon termination of employment or over the options’ vesting period of generally four years at the original purchase price. The proceeds initially are recorded in other liabilities from the early exercise of stock options and are reclassified to additional paid-in capital as the Company’s repurchase right lapses. During the year ended December 31, 2021 and 2020, the Company repurchased 12,945 and 10,000 shares of common stock for less than $ 0.1 million and less than $ 0.1 million, respectively. As of December 31, 2021 and December 31, 2020, 223,195 and 355,677 shares were subject to repurchase, with an aggregate exercise price of $ 0.4 million and $ 0.6 million, respectively, and were recorded in other current liabilities. Restricted Stock Units Activity with respect to restricted stock units was as follows: Number of Shares Underlying Outstanding Restricted Stock Weighted Average Grant Date Fair Value Unvested, January 1, 2021 — $ — Granted 503,110 42.49 Vested ( 40,908 ) 43.40 Canceled ( 19,774 ) 43.60 Unvested, December 31, 2021 442,428 $ 42.36 The aggregate intrinsic value of restricted stock units outstanding as of December 31, 2021 was $ 14.2 million. Stock-Based Compensation for Employees and Non-Employees The weighted average grant-date fair value of the stock options granted during the years ended December 31, 2021, December 31, 2020 was $ 18.81 and $ 3.78 per share, respectively. The Company uses the Black-Scholes Merton option-pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The estimated grant date fair values of employee stock options were calculated using the following assumptions: Years Ended December 31, 2021 2020 Weighted average expected term (in years) 5.0 - 6.3 5.0 - 6.1 Volatility 44.0 % - 44.5 % 40.0 % - 44.7 % Risk-free interest rate 0.6 % - 1.0 % 0.2 % - 1.7 % Dividend yield — — Expected Term The expected term is calculated using the simplified method, which is available where there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on F-33 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the periods from grant until the mid-point for each of the tranches are averaged to provide an overall expected term. Volatility The expected stock price volatility assumptions for the Company’s stock options for the years ended December 31, 2021 and December 31, 2020 was determined by examining the historical volatilities for industry peers, referred to as “guideline” companies, as the Company did not have any trading history for the Company’s common stock. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size. Risk-Free Rate The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. Dividend Yield The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. Fair Value of Common Stock Prior to the IPO the fair value of the Company’s common stock is determined by the board of directors with assistance from management and, in part, on input from an independent third-party valuation firm. The board of directors determines the fair value of common stock by considering a number of objective and subjective factors, including valuations of comparable companies, sales of convertible preferred stock, operating and financial performance, the lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Subsequent to the Company’s IPO, the fair value of the Company’s common stock is determined based on its closing market price. 2020 Employee Share Purchase Plan In September 2020, the Company adopted the ESPP, which became effective on the business day prior to the effectiveness of the registration statement relating to the IPO. A total of 720,000 shares of common stock were initially reserved for issuance under the ESPP. The ESPP permits eligible employees to acquire shares of the Company’s common stock through periodic payroll deductions of up to 15% of base compensation. No employee may purchase more than 2,500 shares during an offering period. In addition, no employee may purchase more than $25,000 worth of stock, determined by the fair market value of the shares at the time such option is granted, in one calendar year. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. The first offering period started on September 30, 2020 and ended on May 24, 2021, and the second offering period started on June 1, 2021 and ended on August 15, 2021. Beginning August 16, 2021, the ESPP provides for six-month offering periods, with the purchase date being the last date of the offering period. The Company issued 144,479 shares under the ESPP for the year ended December 31, 2021. As of December 31, 2021, there are 932,458 shares authorized for future purchase under the ESPP. In January 2022, the number of shares of common stock available for issuance under the ESPP was increased by 369,317 shares as a result of the automatic increase provision in the ESPP. F-34 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Compensation expense is calculated using the fair value of the employees' purchase rights under the Black-Scholes model. Year Ended Year Ended December 31, 2021 December 31, 2020 Weighted average expected term (in years) 0.5 0.6 Volatility 36.1 % - 42 % 67.7 % - 68.2 % Risk-free interest rate 0.1 % 0.1 % Dividend yield — — Total Stock-Based Compensation Stock-based compensation expense is reflected in the statements of operations and comprehensive loss as follows (in thousands): Years Ended December 31, 2021 2020 Cost of goods sold $ 587 $ 39 Research and development 1,278 398 Selling, general and administrative 8,665 2,760 Total $ 10,530 $ 3,197 The above stock-based compensation expense related to the following equity-based awards: Years Ended December 31, 2021 2020 Stock options and restricted stock units $ 7,959 $ 2,055 ESPP 2,571 1,142 Total $ 10,530 $ 3,197 Stock-based compensation of $ 1.0 million and $ 0.3 million was capitalized into inventory for the years ended December 31, 2021 and 2020, respectively. Capitalized stock-based compensation is recognized as cost of sales when the related product is sold. As of December 31, 2021, there was $ 33.7 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 3.15 years, respectively. The total grant date fair value of shares vested during the years ended December 31, 2021 and December 31, 2020 was $ 8.3 million and $ 1.9 million, respectively. As of December 31, 2021, the Company had unrecognized employee stock-based compensation relating to ESPP awards of approximately $ 0.1 million, which is expected to be recognized over a weighted-average period of 0.1 years. F-35 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements 11. Net Loss per Share Attributable to Common Stockholders The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders which excludes shares which are legally outstanding, but subject to repurchase by the Company (in thousands, except share and per share amounts): Years Ended December 31, 2021 2020 Numerator Net loss attributable to common stockholders $ ( 48,661 ) $ ( 32,231 ) Denominator Weighted-average common stock outstanding 36,406,507 10,341,809 Less: weighted-average common shares subject to repurchase ( 277,098 ) ( 156,968 ) Weighted-average common shares used to compute basic and diluted net loss per share 36,129,409 10,184,841 Net loss per share attributable to common stockholders, basic and diluted $ ( 1.35 ) $ ( 3.16 ) The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company’s net loss, in common stock equivalent shares: Years Ended December 31, 2021 2020 Options to purchase common stock 2,145,131 2,923,403 Unvested restricted stock units 442,428 — Unvested early exercised common stock options 223,195 355,677 Shares committed under ESPP 27,327 47,174 12. Segment Information The chief operating decision maker for the Company is the Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure. The Company’s Chief Executive Officer evaluates performance based primarily on revenue in the geographic locations in which the Company operates. Revenue by geographic area is based on the billing address of the customer. The following table sets forth our revenue by geographic area (in thousands): Year Ended December 31, 2021 2020 United States $ 24,991 $ 16,189 Europe, Middle-East and Africa (“EMEA”) 19,883 13,808 Asia Pacific 3,414 2,687 Other International 128 49 Total $ 48,416 $ 32,733 F-36 Table of Contents Pulmonx Corporation Notes to Consolidated Financial Statements Revenue from Germany represented 12 %, and 17 % of total revenue for the years ended December 31, 2021 and 2020, respectively. Long-lived assets by geographic area are based on physical location of those assets. The following table sets forth our long-lived assets by geographic area (in thousands): December 31, 2021 2020 United States $ 4,767 $ 1,437 Europe, Middle-East and Africa 42 29 Asia Pacific 5 8 Total $ 4,814 $ 1,474 13. Employee Benefit Plan Effective October 1997, the Company implemented a retirement savings plan (the “Savings Plan”) which is intended to qualify as a deferred savings plan under Section 401(k) of the Internal Revenue Code. Participants are allowed to contribute up to 100 % of the total compensation, not to exceed the amount allowed by the applicable statutory prescribed limit. There have been no contributions made to the Savings Plan by the Company since inception. 14. Related Parties From 2013 to 2020, the Company received services from the chairman of a subsidiary of the Company. During 2014, this person served as Interim CEO and was appointed to the Board of Directors of the Company. Amounts paid related to consulting services for the years ended December 31, 2020 was less than $ 0.1 million . 15. Subsequent Events Subsequent to December 31, 2021, the Company granted 701,250 restricted stock units and options to purchase 655,200 shares of common stock to employees, subject to service-based vesting conditions. The options have an exercise price equal to the closing price of our common stock on March 1, 2022. F-37 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.