What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-03-01 · 49 added, 69 removed, 283 unchanged (29% of the section changed)

12 unchanged sentences

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

We employ both direct and distributor-based sales models, with over 90% of our revenue generated in markets where we sell directly.

We employ both direct and distributor-based sales models, with over 96% of our revenue generated in markets where we sell directly for the year ended December 31, 2023.

In the United States, our solution is reimbursed based on established Category I Current Procedural Terminology (“CPT”) and ICD-10 Procedure Coding System (“PCS”) codes and associated APC and MS-DRG payment groupings.

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

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

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

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

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

We manufacture all our products at our headquarters located in Redwood City, California.

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

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has delayed clinical trials and FDA operations and adversely impacted the number of procedures performed using our products.

As a result, the COVID-19 pandemic and the measures taken by many countries in response have materially adversely affected, and could in the future materially adversely affect, our business, financial condition and results of operations, as well as the price of our common stock, from a decrease and delay of procedures involving our products.

While the Company has seen a recovery in procedure volumes in the U.S.

and some international markets, other international markets continue to be hampered by a slower recovery.

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

• continued opening of new accounts;

• strong physician participation in trainings;

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

• a resumption of elective procedures at hospitals and centers.

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

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

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

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

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

The extent of the impact of COVID-19, including the macroeconomic conditions, on our future operational and financial performance will depend on certain developments, which are highly uncertain and cannot be predicted,

including impact on employees, clinical trials and procedure volumes, new information which may emerge concerning the severity and spread of COVID-19 and variant strains, governmental and societal response to contain and treat COVID-19 and variant strains, and the availability and distribution of vaccines and public acceptance of vaccines, among others.

For additional information about risks, uncertainties and potential impacts related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, please refer to Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.

Factors Affecting our Business and Results of Operations

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These efforts require significant investment by our marketing and sales organization, and vary depending upon the physician’s practice specialization, and personal preferences and geographic location of physicians, pulmonary rehabilitation centers and patients.

In order to grow our business, we will need to continue to make significant investments in training and educating hospitals, physicians and patients on the advantages of our solution for the treatment of severe emphysema.

In order to grow our business, we will need to continue to make significant investments in training and

educating hospitals, physicians and patients on the advantages of our solution for the treatment of severe emphysema.

Third-Party Reimbursement

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

Commercial payors such as Aetna, Humana, and many of the largest Blue Cross Blue Shield plans including Anthem, Health Care Service Corporation, and BCBS Michigan have issued

positive coverage policies for the Zephyr Valve, and United Healthcare no longer considers the procedure unproven or experimental.

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

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

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

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

We have a dedicated patient reimbursement support team in the United States that works collaboratively with patients and providers to help secure the appropriate prior authorization approvals in advance of treatment.

We continue to educate private insurers in the United States on our clinical data and patient selection tools in an effort to continue to expand the number of positive coverage policies, in order to increase our revenue.

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

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

Our industry is highly competitive and subject to rapid change from the introduction of new products and technologies and other activities of industry participants.

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

Research and development expenses

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

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

Our clinical trial expenses, such as those related to our AeriSeal clinical development program, include costs associated with clinical trial design, clinical trial site development and study costs, data management costs, related travel expenses and the cost of products used for clinical activities.

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

Year Ended December 31,

Years Ended December 31,

2023 2022 $ Change % Change

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The sale of products in the United States increased by $13.4 million to $45.9 million during the year ended December 31, 2023, compared to $32.5 million for the year ended December 31, 2022.

The sale of products in international markets decreased by $2.2 million to $21.2 million during the year ended December 31, 2022, compared to $23.4 million for the year ended December 31, 2021.

The increase in U.S.

revenue reflects continued growth of Zephyr Valve procedure volumes in the United States, while the decrease in international revenue reflects the impact of foreign currency exchange rates.

The sale of products in international markets increased by $1.6 million to $22.8 million during the year ended December 31, 2023, compared to $21.2 million for the year ended December 31, 2022.

The increase in revenue reflects continued growth of Zephyr Valve procedure volumes in the United States and in international markets.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased by $4.1 million, or 29.9%, to $17.9 million during the year ended December 31, 2023, compared to $13.8 million during the year ended December 31, 2022.

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

Gross margin increased by 0.7% to 74.3% during the year ended December 31, 2022, compared to 73.6% during the year ended December 31, 2021.

The increase was primarily due to improved production efficiencies and lower scrap and reserve expense during the year ended December 31, 2022.

The increase was mainly due to an increase in the number of products sold and increased manufacturing costs as we invested to support anticipated growth.

Gross margin was 73.9% during the year ended December 31, 2023, compared to 74.3% during the year ended December 31, 2022.

Research and Development Expenses

Research and development expenses increased by $2.7 million, or 17.4%, to $18.1 million during the year ended December 31, 2023, compared to $15.4 million during the year ended December 31, 2022.

The increase in research and development expenses was primarily due to an increase of $1.7 million in personnel expenses including stock-based compensation as we expanded our research and development team and an increase of $1.1 million in

professional services, regulatory, facility and other expenses.

These increases were offset by a decrease of $0.5 million in costs associated with our clinical trials, including fees paid to contract research organizations and testing expenses.

The increase in research

and development expenses was primarily due to an increase of $0.9 million in costs associated with our clinical trials, including fees paid to contract research organizations and testing expenses, an increase of $0.8 million in payroll and personnel-related expenses including stock-based compensation, and an increase of $0.8 million in professional services and other expenses in support of product development.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $11.5 million, or 13.8%, to $94.6 million during the year ended December 31, 2023 compared to $83.1 million during the year ended December 31, 2022.

The increase in selling, general and administrative expenses was primarily due to an increase of $8.6 million of payroll and personnel-related expenses including stock based compensation as we expanded our sales and marketing and administrative function, an increase of $2.1 million in advertising and marketing related expenses, an increase of $1.2 million in travel expenses, and an increase of $1.3 million in facility, consulting, software and other expenses.

The increase in selling, general and administrative expenses was primarily due to an increase of $11.4 million in payroll and personnel-related expenses including stock-based compensation for our sales, marketing and administrative personnel, and an increase of $1.3 million in legal and other professional expenses, offset by a decrease of $1.4 million in advertising and marketing related expenses.

Interest Expense and Income

Interest expense increased by $0.2 million, or 28.6%, to $1.1 million during the year ended December 31, 2022, compared to $0.8 million during the year ended December 31, 2021 due to higher interest rates on our debt.

Interest expense increased by $2.2 million, or 203.2%, to $3.2 million during the year ended December 31, 2023, compared to $1.1 million during the year ended December 31, 2022 due to higher outstanding debt principal and higher interest rates.

Interest income increased by $4.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to higher returns on cash, cash equivalents and marketable securities balances.

Other Income (Expense), Net

Other income (expense), net increased by $0.2 million to ($0.4) million during the year ended December 31, 2022, compared to ($0.6) million during the year ended December 31, 2021, primarily due to foreign currency exchange losses driven by fluctuations in foreign exchange rates..

Other income (expense), net decreased by $0.3 million to ($0.7) million during the year ended December 31, 2023, compared to ($0.4) million during the year ended December 31, 2022, primarily due to foreign currency exchange losses driven by fluctuations in foreign exchange rates.

Liquidity and Capital Resources;

Plan of Operation

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

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

As of December 31, 2023, we had cash, cash equivalents and marketable securities of $131.5 million, an accumulated deficit of $411.2 million, and $37.2 million outstanding under the CIBC Loan and Credit Agreement, net of debt discount and debt issuance costs.

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

On October 31, 2022, we entered into a Third Amendment to the Amended and Restated CIBC Agreement (the “Third Amendment”), which, among other things, extended the maturity date to October 31, 2027;

In October 2022, we entered into a Third Amendment to the Amended and Restated CIBC Agreement (the “Third Amendment”), which, among other things, extended the maturity date to October 31, 2027;

provided a commitment for a new $20.0 million tranche of term loans that may be drawn at the Company’s option through October 31, 2023, subject to the satisfaction of certain conditions;

and provided for a new interest only period of 24 months from the signing date of the Third Amendment, with the possibility of an additional extension of such interest only period of up to 12 months, subject to satisfaction of certain conditions.

In February 2023, we drew $20.0 million of the Amended Tranche B of the CIBC Loan.

The Amended Tranche B bears interest at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate and has the same repayment terms as Tranche A.

The loans provided under the Amended and Restated CIBC Agreement bear interest at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate at any time.

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

We may prepay the loans without penalty.

If we borrow any of the $20.0 million tranche made available under the Third Amendment, we may prepay the loans, subject to certain conditions, including a prepayment fee equal to 2.0% of the principal amount repaid during the first year after the effective date of the Third Amendment or 1.0% of the principal amount prepaid during the second year after the effective date of the Third Amendment.

We may prepay the loans, subject to certain conditions, including a prepayment fee equal to 2.0% of the principal amount prepaid during the first year after the effective date of the Third Amendment or 1.0% of the principal amount prepaid during the second year after the effective date of the Third Amendment.

The Amended and Restated CIBC Agreement contains financial covenants that require the Company to maintain minimum cash and minimum revenue amounts, and the Amended and Restated CIBC Agreement contains other customary restrictive covenants, representations and warranties, events of default and other customary terms and conditions.

We paid $0.5 million fees to the lender and third parties which is reflected as a discount on the loans provided under the Amended and Restated CIBC Agreement and is being accreted over the life of the loan using the effective interest method.

During the years ended December 31, 2022 and December 31, 2021, we 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 $1.1 million and $0.8 million during the year ended December 31, 2022 and December 31, 2021, respectively.

During the years ended December 31, 2023 and December 31, 2022, we recorded interest expense related to debt discount and debt issuance costs of CIBC Loan of less than $0.1 million and $0.1 million, respectively.

Interest expense on the CIBC Loan amounted $3.2 million and $1.1 million during the years ended December 31, 2023 and December 31, 2022, respectively.

Credit Agreemen t

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

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 within 60 months after receipt of funds, in twelve equal installments, paid semi-annually, beginning in March of 2022.

As of December 31, 2022, Pulmonx International Sàrl repaid $0.1 million to the lender.

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

dollar equivalent) from a COVID-19 Credit Agreement under a Swiss Federal Government program designed to mitigate the economic impact of the spread of the coronavirus.

The COVID-19 Credit Agreement initially bore no interest through March 31, 2023.

Beginning April 1, 2023, the loan bears interest at a rate of 1.5% per year, payable at the end of each calendar quarter.

The loan principal is being repaid in twelve equal installments, paid semi-annually, which began in March of 2022.

Interest expense was immaterial during the year ended December 31, 2023.

Pulmonx International Sàrl repaid $0.1 million and $0.1 million to the lender during the years ended December 31, 2023 and December 31, 2022, respectively.

Summary Statement of Cash Flows

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Net cash used in operating activities was $37.6 million for the year ended December 31, 2023.

Cash used in operating activities was primarily a result of the net loss of $58.9 million, an increase in inventory of $3.6 million due to continued production to build inventory to meet projected increase in sales and to protect against potential supply interruptions, an increase in accounts receivable of $2.2 million, and a decrease in lease liabilities of $2.2 million due to lease payments, partially offset by an increase in accounts payable of $0.2 million due to timing of payments to our vendors, and a decrease in prepaid expenses and other current assets of $0.8 million, stock-based compensation expense of $16.4 million, non-cash lease expense of $2.5 million, depreciation and amortization expense of $1.5 million and write-down of inventory of $0.5 million.

Cash used in operating activities was primarily a result of the net loss of $60.8 million, a decrease in lease liabilities of $3.2 million due to lease payments, an increase in accounts receivable of $3.1 million due to revenue growth and the timing of payments from our customers, net accretion of discounts on marketable securities of $1.0 million, and a decrease in accounts payable of $0.3 million due to timing of payments to our vendors, partially offset by an increase in accrued liabilities of $3.2 million due to increased accrued incentive compensation expense associated with the achievement of performance objectives, a decrease in inventory of $0.9 million, stock-based compensation expense of $22.1 million, non-cash lease expense of $2.7 million, depreciation and amortization expense of $1.5 million and write-down of inventory of $0.5 million.

Net cash used in operating activities was $45.1 million for the year ended December 31, 2022.

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

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

Cash Flows from Investing Activities

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Cash Flows from Financing Activities

Net cash provided by financing activities in the year ended December 31, 2022 of $2.4 million primarily relates to proceeds from the exercise of stock options of 0.6 million and proceeds from issuance of common stock under the employee stock purchase plan of $1.9 million, offset by repayment of Credit Agreement of $0.1 million.

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

Net cash provided by financing activities in the year ended December 31, 2023 of $21.4 million primarily relates to proceeds of $20.0 million from borrowing under the Amended and Restated CIBC Agreement, proceeds from issuance of common stock under the employee stock purchase plan of $1.2 million and proceeds from exercise of

common stock options of $0.3 million, partially offset by repayment of debt under the Credit Agreement of $0.1 million.

Net cash provided by financing activities in the year ended December 31, 2022 of $2.4 million primarily relates to proceeds from the exercise of stock options of $0.6 million and proceeds from issuance of common stock under the employee stock purchase plan of $1.9 million, offset by repayment of debt under the Credit Agreement of $0.1 million.

Material Cash Requirements

Our net cash operating expenditures were $45.1 million in 2022 and $41.4 million in 2021, and we intend to continue to make investments in the development of our products, including ongoing research and development programs.

Our cash outflows for capital expenditures were $1.3 million in 2022 and $3.7 million in 2021, and we expect to maintain the level of expenditures in the future in support of our commercial infrastructure, sales force and other commercialization efforts.

Recent and expected working and other capital requirements include amounts related to future lease payments for operating lease obligations, which totaled $7.5 million at December 31, 2022, with $3.5 million expected to be paid within the next 12 months, and amounts related to future long-term debt which totaled $22.3 million, with $1.5 million expected to be paid within the next 12 months.

Our net cash operating expenditures were $37.6 million during the year ended December 31, 2023 and $45.1 million during the year ended December 31, 2022, and we intend to continue to make investments in the development of our products, including ongoing research and development programs.

Our cash outflows for capital expenditures were $0.8 million during the year ended December 31, 2023 and $1.3 million during the year ended December 31, 2022, and we expect to maintain the level of expenditures in the future in support of our commercial infrastructure, sales force and other commercialization efforts.

Recent and expected working and other capital requirements include amounts related to future lease payments for operating lease obligations, which totaled $4.3 million at December 31, 2023, with $3.2 million expected to be paid within the next 12 months, and amounts related to future short-term and long-term debt which totaled $45.7 million, with $5.7 million expected to be paid within the next 12 months.

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

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

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

• the impact of any public health crises, such as a resurgence of COVID-19 infections, on our business, financial condition and results of operations;

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

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Actual results may materially differ from these estimates under different assumptions or conditions.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

We believe that the accounting policies and estimates discussed below are critical to understanding our historical and future performance, as these relate to the more significant areas involving management’s judgments and estimates.

For more detail on our critical accounting policies, refer to Note 2 to the financial statements appearing elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

Our revenue is generated from the sale of our products to hospitals and distributors in the U.S.

Our revenue is generated primarily from the sale of our products to hospitals and distributors in the U.S.

and international markets.

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We exclude taxes assessed by governmental authorities on revenue-producing transactions from the measurement of the transaction price.

We accept product returns at our discretion or if the product is defective as manufactured.

accept product returns at our discretion or if the product is defective as manufactured.

We elected to treat shipping and handling costs as a fulfillment cost and include them in the cost of goods sold as incurred.

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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.

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.

• Expected Volatility.

The expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term for the options.

The expected volatility is derived from our historical volatility and the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term for the options.

In evaluating similarity, we considered factors such as stage of development, risk profile, enterprise value and position within the life sciences industry.

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As of December 31, 2023, there was $43.7 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 2.5 years.

Subsequent to our IPO, the fair value of our common stock is determined based on our closing market price.

Our major tax jurisdictions are the United States and California, Switzerland and Neuchâtel.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis