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, P.C., 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 Stockholders’ Equity F- 5 Consolidated Statements of Cash Flows F- 6 Notes to Consolidated Financial Statements F- 8 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, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended , in conformity with accounting principles generally accepted in the United States of America. 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 Public Company Accounting Oversight Board (United States) (“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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 the 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. Inventory Classification Inventory totaled approximately $19.3 million at December 31, 2023, including approximately $2.6 million classified as long-term inventory. As described in Note 2 to the Company’s financial statements, the value of inventories not expected to be realized in cash, sold or consumed during the next 12 months are classified as long- F-1 Table of Contents term inventory. Management considers forecasted demand and other expected usage of inventory on hand when estimating long-term inventory. We identified management’s estimation of forecasted demand for products used in the determination of long-term inventory classification to be a critical audit matter. Management is required to make significant judgments and assumptions with respect to future demand for the Company’s products that affect the estimation of long-term inventory. Auditing these elements involved especially challenging and subjective auditor judgment and an increased extent of effort. The primary procedures we performed to address this critical audit matter included: • Evaluating management’s ability to accurately forecast the future demand for products by performing a retrospective comparison of the Company’s prior forecasts to actual results for the same period. • Evaluating the reasonableness of management’s forecasted demand for products, by comparing forecasts to (i) historical sales of the Company’s products, and (ii) forecasted information included in Company’s press releases. • Evaluating whether forecasted demand for products is consistent with evidence obtained in other areas of the audit. • Assessing whether any known or knowable factors occurred subsequent to year end that impact management’s forecast of future inventory usage. /s/ BDO USA, P.C. We have served as the Company's auditor since 2011. San Francisco, California February 27, 2024 F-2 Table of Contents Pulmonx Corporation Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 83,547 $ 101,736 Restricted cash 237 231 Short-term marketable securities 33,555 39,402 Accounts receivable, net 12,105 8,677 Inventory 16,743 14,564 Prepaid expenses and other current assets 4,235 4,343 Total current assets 150,422 168,953 Long-term marketable securities 14,390 5,924 Long-term inventory 2,580 5,283 Property and equipment, net 4,028 4,694 Goodwill 2,333 2,333 Intangible assets, net 31 154 Right of use assets 3,406 5,806 Other long-term assets 591 529 Total assets $ 177,781 $ 193,676 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 1,497 $ 1,758 Accrued liabilities 16,234 13,276 Income taxes payable 93 19 Deferred revenue 104 120 Short-term debt 2,155 90 Current lease liabilities 3,074 3,229 Total current liabilities 23,157 18,492 Deferred tax liability 114 94 Long-term lease liabilities 1,106 3,849 Long-term debt 35,089 17,234 Total liabilities 59,466 39,669 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, 2023 and December 31, 2022 — — Common stock, $ 0.001 par value, 200,000,000 shares authorized; 38,516,383 shares and 37,555,565 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively 39 38 Additional paid-in capital 526,797 502,712 Accumulated other comprehensive income 2,640 1,575 Accumulated deficit ( 411,161 ) ( 350,318 ) Total stockholders’ equity 118,315 154,007 Total liabilities and stockholders’ equity $ 177,781 $ 193,676 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, 2023 2022 Revenue $ 68,675 $ 53,662 Cost of goods sold 17,923 13,797 Gross profit 50,752 39,865 Operating expenses Research and development 18,080 15,397 Selling, general and administrative 94,607 83,105 Total operating expenses 112,687 98,502 Loss from operations ( 61,935 ) ( 58,637 ) Interest income 5,568 1,529 Interest expense ( 3,232 ) ( 1,066 ) Other income (expense), net ( 673 ) ( 396 ) Net loss before tax ( 60,272 ) ( 58,570 ) Income tax expense 571 353 Net loss ( 60,843 ) ( 58,923 ) Other comprehensive income (loss) Currency translation adjustment 671 150 Change in unrealized gain (losses) on marketable securities 394 ( 287 ) Total other comprehensive income (loss) 1,065 ( 137 ) Comprehensive loss $ ( 59,778 ) $ ( 59,060 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 1.60 ) $ ( 1.59 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 37,974,567 37,096,541 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents Pulmonx Corporation Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances at December 31, 2021 36,931,762 $ 37 $ 482,885 $ 1,712 $ ( 291,395 ) $ 193,239 Issuance of common stock upon vesting of restricted stock units 251,133 — — — — — Issuance of common stock upon exercise of stock options 297,463 1 634 — — 635 Issuance of shares pursuant to Employee Stock Purchase Plan 89,666 — 1,942 — — 1,942 Repurchase of early exercised common stock options ( 14,459 ) — — — — — Change in shares subject to repurchase — — 227 — — 227 Stock-based compensation expense — — 17,024 — — 17,024 Currency translation adjustment — — — 150 — 150 Change in unrealized losses on marketable securities — — — ( 287 ) — ( 287 ) Net loss — — — — ( 58,923 ) ( 58,923 ) Balances at December 31, 2022 37,555,565 38 502,712 1,575 ( 350,318 ) 154,007 Issuance of common stock upon vesting of restricted stock units 672,180 1 ( 1 ) — — — Issuance of common stock upon exercise of stock options 137,902 — 314 — — 314 Issuance of shares pursuant to Employee Stock Purchase Plan 150,842 — 1,184 — — 1,184 Repurchase of early exercised common stock options ( 106 ) — — — — — Change in shares subject to repurchase — — 144 — — 144 Stock-based compensation expense — — 22,444 — — 22,444 Currency translation adjustment — — — 671 — 671 Change in unrealized gains on marketable securities — — — 394 — 394 Net loss — — — — ( 60,843 ) ( 60,843 ) Balances at December 31, 2023 38,516,383 $ 39 $ 526,797 $ 2,640 $ ( 411,161 ) $ 118,315 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, 2023 2022 Cash flows from operating activities Net loss $ ( 60,843 ) $ ( 58,923 ) Adjustments to reconcile net loss to net cash used in operating activities Stock-based compensation expense 22,101 16,445 (Gain) loss on disposal of fixed assets ( 15 ) 7 Change in allowance for credit losses ( 59 ) 54 Inventory write-downs 507 485 Depreciation and amortization expense 1,548 1,513 Amortization of debt discount and debt issuance costs 48 56 Net accretion of discounts on marketable securities ( 1,025 ) ( 204 ) Non-cash lease expense 2,686 2,498 Net changes in operating assets and liabilities: Accounts receivable ( 3,104 ) ( 2,190 ) Inventory 918 ( 3,638 ) Prepaid expenses and other current assets ( 57 ) 780 Other assets ( 36 ) ( 49 ) Accounts payable ( 345 ) 247 Accrued liabilities 3,176 149 Income taxes payable 68 ( 124 ) Lease liabilities ( 3,182 ) ( 2,197 ) Deferred tax liability 24 49 Deferred revenue ( 20 ) ( 41 ) Net cash used in operating activities ( 37,610 ) ( 45,083 ) Cash flows from investing activities Purchases of investments ( 46,200 ) ( 47,187 ) Maturities of investments 45,000 44,280 Purchases of property and equipment ( 807 ) ( 1,318 ) Net cash used in investing activities ( 2,007 ) ( 4,225 ) Cash flows from financing activities Proceeds from borrowing under term loan 20,000 — Repayment of credit agreement ( 94 ) ( 87 ) Payments of debt issuance cost — ( 53 ) Proceeds from exercise of common stock options 310 644 Proceeds from issuance of common stock under the employee stock purchase plan 1,184 1,942 Payments for the repurchase of early exercised common stock options — ( 27 ) Net cash provided by financing activities 21,400 2,419 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 34 145 Net decrease in cash, cash equivalents, and restricted cash ( 18,183 ) ( 46,744 ) Cash, cash equivalents, and restricted cash at beginning of year 101,967 148,711 Cash, cash equivalents, and restricted cash at end of year $ 83,784 $ 101,967 Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets: Cash and cash equivalents $ 83,547 $ 101,736 Restricted cash 237 231 Cash, cash equivalents, and restricted cash in consolidated balance sheets $ 83,784 $ 101,967 Supplemental non-cash items: F-6 Table of Contents Lapse in repurchase rights of common stock $ 144 $ 227 Purchases of property and equipment in accounts payable and accrued liabilities $ 109 $ 425 Amount receivable from exercise of common stock options $ 3 $ — Supplemental disclosure of cash flow information: Cash paid for income taxes $ 471 $ 398 Cash paid for interest $ 2,984 $ 847 The accompanying notes are an integral part of these consolidated financial statements. F-7 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, Italy, France, Hong Kong and Japan. Liquidity and Going Concern The Company has incurred operating losses and negative cash flows from operations to date and has an accumulated deficit of $ 411.2 million as of December 31, 2023. During the years ended December 31, 2023 and 2022, the Company used $ 37.6 million and $ 45.1 million of cash in its operating activities, respectively. As of December 31, 2023, the Company had cash, cash equivalents and marketable securities of $ 131.5 million. Historically, the Company’s activities have been financed through the sale of equity securities, debt financing arrangements and sales of its products. 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. 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 (“U.S. 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”). 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 U.S. 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, classification of short-term and long-term inventories, the recoverability of long term assets, stock-based compensation, intangible assets, goodwill, deferred tax assets and related valuation allowances, and impact of contingencies. F-8 Pulmonx Corporation Notes to Consolidated Financial Statements 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. 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 1 and Level 2 inputs (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, 2023 and December 31, 2022 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, and remaining maturities of less than one year, as short-term marketable securities and those with remaining maturities greater than twelve months as long-term marketable securities on the consolidated balance sheets. 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 marketable securities, which consist of debt securities, if any, are excluded from earnings and are reported as a component of 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 consolidated 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. For marketable securities in an unrealized loss position, the Company periodically assesses its portfolio for impairment. The assessment first considers the intent or requirement to sell the marketable security. If either of these criteria are met, the amortized cost basis is written down to fair value through earnings. Upon the adoption of ASU 2016-13, Financial Instruments – Credit Losses , on January 1, 2023, if the criteria above are not met, the Company evaluates whether the decline resulted from credit losses or other factors by considering the extent to which fair value is less than amortized cost, any changes to the rating of the marketable security by a rating agency, and any adverse conditions specifically related to the marketable security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the marketable security is compared to the amortized cost basis of the marketable security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive loss. F-9 Pulmonx Corporation Notes to Consolidated Financial Statements 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, 2023 and December 31, 2022, the Company also had cash on deposit with foreign banks of approximately $ 4.7 million and $ 4.5 million, respectively, that was not federally insured. The Company earns revenue primarily from the sale of its products to hospitals and other customers such as distributors. Sales of Zephyr Valves and delivery catheters accounted for most of the Company’s revenue for the years ended December 31, 2023 and December 31, 2022. The Company’s accounts receivable are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers’ financial conditions and generally requires no collateral from its customers. As of December 31, 2023 and December 31, 2022, no customer accounted for more than 10% of accounts receivable. For the years ended December 31, 2023 and December 31, 2022, no customer accounted for more than 10% of revenue. The Company relies on single source suppliers for the 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 in the past. Accounts Receivable and Allowances Accounts receivable are recorded at the amounts billed less estimated allowances for credit losses for any potential uncollectible amounts. The Company continually monitors customer payments and maintains an allowance for estimated losses resulting from a customer’s inability to make required payments. The 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. Accounts receivable are written-off and charged against an allowance for credit losses when the Company has exhausted collection efforts without success. As of December 31, 2023 and December 31, 2022, accounts receivable is presented net of an allowance for credit losses of $ 0 and $ 0.1 million, 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. The Company reviews its inventories for classification purposes. The value of inventories not expected to be realized in cash, sold or consumed during the next 12 months are classified as long-term inventory. Internal-Use Software The Company capitalizes certain costs in connection with obtaining or developing software for internal use. Amortization of such costs begins when the project is substantially complete and ready for its intended use. F-10 Pulmonx Corporation Notes to Consolidated Financial Statements Capitalized software development costs are classified as property and equipment, net on the consolidated balance sheets and are amortized using the straight-line method over the estimated useful life of the applicable software. 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. 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). F-11 Pulmonx Corporation Notes to Consolidated Financial Statements Leases The Company leases 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. 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, 2023 and 2022, 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 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. The Company does not recognize lease liabilities and ROU assets for short-term leases with terms of twelve months or less. 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 primarily from the sale of its products to hospitals and distributors 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. The Company determines revenue recognition by applying 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 F-12 Pulmonx Corporation Notes to Consolidated Financial Statements 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 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 F-13 Pulmonx Corporation Notes to Consolidated Financial Statements 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 $ 4.8 million and $ 6.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. 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 subsidiaries in Italy and Japan is the Euro and Yen, respectively. Accordingly, asset and liability accounts of Switzerland, France, Germany, Australia, the United Kingdom, Italy, Hong Kong and Japan 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 $ 0.7 million and $ 0.2 million during the years ended December 31, 2023 and December 31, 2022, 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 $( 0.8 ) million and $( 0.4 ) million during the years ended December 31, 2023 and December 31, 2022, 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. F-14 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, stock options and common stock subject to repurchase related to early exercise of stock options 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. The Company 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 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 gain or 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 income (loss) that are excluded from the reported net loss for all periods presented. 3. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements 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. The Company adopted F-15 Pulmonx Corporation Notes to Consolidated Financial Statements ASU 2016-13 as of January 1, 2023 and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures. Recent Accounting Pronouncements Not Yet Adopted In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (CODM), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. This ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss. Public entities will be required to provide all annual disclosures currently required by Topic 280 in interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments in the update and existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that this update will have on its disclosures in the consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the disclosure requirements related to the new standard. 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 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 and marketable securities. 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 F-16 Pulmonx Corporation Notes to Consolidated Financial Statements 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. The fair value of the term loan is estimated using Level 2 inputs. 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, 2023 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 25,129 $ — $ — $ 25,129 Total cash equivalents 25,129 — — 25,129 Marketable securities: U.S. Government agency bonds 5,798 29,466 — 35,264 Commercial paper — 12,681 — 12,681 Total marketable securities 5,798 42,147 — 47,945 Total financial assets $ 30,927 $ 42,147 $ — $ 73,074 December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 4,647 $ — $ — $ 4,647 Total cash equivalents 4,647 — — 4,647 Marketable securities: U.S. Government agency bonds 14,743 15,872 — 30,615 Commercial paper — 14,711 — 14,711 Total marketable securities 14,743 30,583 — 45,326 Total financial assets $ 19,390 $ 30,583 $ — $ 49,973 There were no liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2023 and December 31, 2022. F-17 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, 2023 Amortized Cost Unrealized Losses Unrealized Gains Fair Value U.S. Government agency bonds $ 35,194 $ ( 26 ) $ 96 $ 35,264 Commercial paper 12,667 ( 1 ) 15 12,681 Total $ 47,861 $ ( 27 ) $ 111 $ 47,945 December 31, 2022 Amortized Cost Unrealized Losses Unrealized Gains Fair Value U.S. Government agency bonds $ 30,897 $ ( 282 ) $ — $ 30,615 Commercial paper 14,740 ( 31 ) 2 14,711 Total $ 45,637 $ ( 313 ) $ 2 $ 45,326 The following table summarizes the marketable securities with unrealized losses as of December 31, 2023 and December 31, 2022, aggregated by major security type and the length of time that individual securities have been in a continuous loss position (in thousands): December 31, 2023 Less than 12 months 12 months or greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government agency bonds $ 11,888 $ ( 23 ) $ 1,745 $ ( 3 ) $ 13,633 $ ( 26 ) Commercial paper 996 ( 1 ) — — 996 ( 1 ) Total $ 12,884 $ ( 24 ) $ 1,745 $ ( 3 ) $ 14,629 $ ( 27 ) December 31, 2022 Less than 12 months 12 months or greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government agency bonds $ 19,768 $ ( 139 ) $ 10,847 $ ( 143 ) $ 30,615 $ ( 282 ) Commercial paper 11,818 ( 31 ) — — 11,818 ( 31 ) Total $ 31,586 $ ( 170 ) $ 10,847 $ ( 143 ) $ 42,433 $ ( 313 ) The unrealized losses for marketable securities relate to changes in interest rates. During the years ended December 31, 2023 and December 31, 2022, the Company did not consider any of its marketable securities to be other-than-temporarily impaired. No allowance for credit losses was recorded as of December 31, 2023 and December 31, 2022, and no impairment losses were recognized for the years ended December 31, 2023 and December 31, 2022. At December 31, 2023 and December 31, 2022, accrued interest receivable on marketable securities of $ 0.4 million and $ 0.1 million was included in prepaid expenses and other current assets on the consolidated balance sheets, respectively. The Company elected to exclude accrued interest receivable from the estimation of expected credit losses on its marketable securities and reverse accrued interest receivable through interest income (expense) when F-18 Pulmonx Corporation Notes to Consolidated Financial Statements amounts are determined to be uncollectible. The Company did no t write off any accrued interest receivable during the years ended December 31, 2023 and December 31, 2022. The following table summarizes the contractual maturities of the Company’s marketable securities (in thousands): December 31, 2023 Amortized Cost Fair Value Due within one year $ 33,551 $ 33,555 Due in one year to five years $ 14,310 $ 14,390 Total $ 47,861 $ 47,945 5. Balance Sheet Components Cash and Cash Equivalents The Company’s cash and cash equivalents consist of the following (in thousands): December 31, 2023 2022 Cash $ 58,418 $ 97,089 Cash equivalents: Money market funds 25,129 4,647 Total cash and cash equivalents $ 83,547 $ 101,736 Inventory Inventory consists of the following (in thousands): December 31, 2023 2022 Raw materials $ 2,924 $ 3,820 Work in process 427 386 Finished goods 15,972 15,641 Total inventory $ 19,323 $ 19,847 Reported as: Inventory $ 16,743 $ 14,564 Long-term inventory 2,580 5,283 Total inventory $ 19,323 $ 19,847 F-19 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, 2023 2022 Prepaid expenses $ 1,910 $ 2,044 Prepaid insurance 906 1,407 VAT and other receivable 915 602 Other current assets 504 290 Total prepaid expenses and other current assets $ 4,235 $ 4,343 Capitalized Implementation Costs of a Hosting Arrangement The Company has several software systems that are cloud-based hosting arrangements with service contracts. The Company accounts for costs incurred in connection with the implementation of these various software systems under ASU 2018-15, Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350–40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract . The Company expenses all costs (internal and external) that are incurred in the planning and post-implementation operation stages. As of December 31, 2023 and December 31, 2022, the Company has capitalized approximately $ 0.1 million and $ 0.5 million in implementation costs, net of amortization, respectively. The capitalized costs are amortized on a straight-line basis over the non-cancelable contract terms, which are generally three years . As of December 31, 2023, the capitalized costs of $ 0.1 million were included in prepaid expenses and other current assets. Amortization expense, which was included in selling, general and administrative expenses, was $ 0.4 million and $ 0.2 million for the years ended December 31, 2023 and December 31, 2022, respectively. Property and Equipment, Net Property and equipment, net consist of the following (in thousands): December 31, 2023 2022 Machinery and equipment $ 2,271 $ 2,112 Computer equipment and software 1,872 1,773 Furniture and fixtures 264 263 Leasehold improvements 2,277 2,277 Construction in progress 2,199 1,825 Total 8,883 8,250 Less: accumulated depreciation ( 4,855 ) ( 3,556 ) Property and equipment, net $ 4,028 $ 4,694 Depreciation expense for both the years ended December 31, 2023 and December 31, 2022 was $ 1.4 million. Goodwill Goodwill was $ 2.3 million as of December 31, 2023 and December 31, 2022. No goodwill impairment losses have been recognized since the acquisition. There were no acquisitions or dispositions of goodwill for the years ended December 31, 2023 or December 31, 2022. The Company performed an annual test for goodwill impairment in the F-20 Pulmonx Corporation Notes to Consolidated Financial Statements fourth quarter of the fiscal years ended December 31, 2023 and December 31, 2022 and determined that goodwill was no t impaired. Intangible Assets Intangible assets consist of the following (in thousands): December 31, 2023 Gross Carrying Value Accumulated Amortization Net Carrying Value Developed technology $ 1,658 $ ( 1,630 ) $ 28 Trademarks 191 ( 188 ) 3 Total intangible assets $ 1,849 $ ( 1,818 ) $ 31 December 31, 2022 Gross Carrying Value Accumulated Amortization Net Carrying Value Developed technology $ 1,658 $ ( 1,520 ) $ 138 Trademarks 191 ( 175 ) 16 Total intangible assets $ 1,849 $ ( 1,695 ) $ 154 Amortization expense relating to the intangibles totaled $ 0.1 million during each of the years ended on December 31, 2023 and December 31, 2022. Future amortization expense is as follows as of December 31, 2023 (in thousands): Fiscal Year Ending December 31, Amortization 2024 $ 31 Total amortization expense $ 31 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2023 2022 Accrued employee bonuses and commissions $ 7,875 $ 4,973 Accrued vacation 2,400 2,113 Other accrued personnel related expenses 2,859 2,513 Accrued professional fees 1,705 2,366 Sales taxes, franchise tax and VAT 763 627 Liability for early exercise of stock options 37 145 Accrued inventory purchases 170 167 Other 425 372 Total accrued liabilities $ 16,234 $ 13,276 F-21 Pulmonx Corporation Notes to Consolidated Financial Statements 6. Long Term Debt CIBC Loan On February 20, 2020, the Company executed a Loan and Security Agreement with Canadian Imperial Bank of Commerce (“CIBC”), which the Company subsequently amended on April 17, 2020 and December 28, 2020 (as amended, the “CIBC Agreement”). The CIBC Agreement originally provided the Company with the ability to borrow 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 draw up to an additional $ 8.0 million (“Tranche B”) and an additional financing tranche (“Tranche C”) of up to $ 7.0 million on or prior to February 20, 2022. Neither Tranche B nor Tranche C was drawn before the option expired. 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. 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 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 of such covenants to June 30, 2021. In March 2021, the Company entered into an Amended and Restated Loan and Security Agreement with CIBC (as amended, the “Amended and Restated CIBC Agreement”) which, among other things, extended the loan maturity date of the CIBC Loan 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 would be due beginning March 31, 2022. In connection with the Amended and Restated CIBC 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 CIBC Agreement 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 CIBC Agreement, 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. In October 2022, the Company entered into a Third Amendment to the Amended and Restated CIBC Agreement (the “Third Amendment”) with CIBC, which amended certain provisions of the CIBC Loan. The amendment provided the option to draw up to an additional $ 20.0 million (“Amended Tranche B”) on or prior to October 31, 2023, which can be drawn in increments of at least $ 5.0 million. Upon request by the Company, CIBC may, in its sole discretion, make additional term loans of up to $ 10.0 million (“Amended Tranche C”) at any time. The Third Amendment extended the maturity date of the CIBC Loan from February 20, 2025 to October 31, 2027 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 set forth in the Third Amendment. The Company paid a commitment fee of less than $ 0.1 million in connection with the Third Amendment. The amendment was accounted for as a debt modification and no gain or loss was recognized. In February 2023, the Company 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 the Tranche A. F-22 Pulmonx Corporation Notes to Consolidated Financial Statements Upon draw of the Amended Tranche B, the financial covenants in the Amended and Restated CIBC Agreement require that, when the cash and cash equivalents of the Company as defined in the Amended and Restated CIBC Agreement 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 the greater of $ 20.0 million and the Adjusted EBITDA loss as defined in the Amended and Restated CIBC Agreement for the six-month period ending on any date of determination. As of December 31, 2023, the Company was in compliance with all covenants contained in Amended and Restated CIBC Agreement. The CIBC Loan bears interest at a floating rate equal to 1.0 % 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 borrowings under the Amended and Restated CIBC Agreement, 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. As of December 31, 2023 and December 31, 2022, the CIBC Loan had an annual effective interest rate of 10.1 % and 9.1 % per year. The CIBC Loan consists of the following (in thousands): December 31, 2023 2022 Term loan $ 37,000 $ 17,000 Less: debt issuance costs ( 152 ) ( 127 ) Term loan $ 36,848 $ 16,873 Reported as: Short-term debt $ 2,056 $ — Long-term debt 34,792 16,873 Total term loan $ 36,848 $ 16,873 The Company paid $ 0.5 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 years ended December 31, 2023 and December 31, 2022, the Company 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 to $ 3.2 million and $ 1.1 million during the years ended December 31, 2023 and December 31, 2022, respectively. Credit Agreement In May 2020, Pulmonx International Sàrl, a wholly owned subsidiary of the Company, 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 COVID-19 Credit Agreement 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. F-23 Pulmonx Corporation Notes to Consolidated Financial Statements Contractual Maturities of Financing Obligations As of December 31, 2023, the aggregate future payments under the CIBC Loan and Credit Agreement (including interest payments) are as follows (in thousands): Fiscal Year Ending December 31, Amount 2024 $ 5,666 2025 15,217 2026 14,043 2027 10,823 Total $ 45,749 Less: unamortized debt discount ( 152 ) Less: interest ( 8,353 ) Term loan and credit agreement $ 37,244 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 $ 0.1 million as of December 31, 2023, which is expected to be recognized as revenue in fiscal year 2024. The deferred revenue as of December 31, 2022 was $ 0.1 million, which was recognized as revenue during the year ended December 31, 2023. The deferred revenue as of December 31, 2021 was $ 0.2 million, which was recognized as revenue during the year ended December 31, 2022. 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. 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 “Sublease Agreement”). The Sublease 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 the Sublease Agreement to include additional facility space in Redwood City, California for a four-year term (the “First Amendment to Sublease Agreement”). The First Amendment to Sublease Agreement was accounted as a separate sublease agreement. The First Amendment to Sublease Agreement contained a rent-free period through February 14, 2021, after which rent is approximately $ 0.1 million per month F-24 Pulmonx Corporation Notes to Consolidated Financial Statements 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 First Amendment to 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 First Amendment to Sublease Agreement 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. In April 2023, the Company entered into a Second Amendment to Sublease Agreement (the “Second Amendment to Sublease Agreement”) to remove the early termination clause and extend the lease term by four months to expire contemporaneously with the expiration date as defined in Sublease Agreement. The amendment was accounted for as a modification that resulted in additional right of use assets in exchange for lease liabilities of $ 0.2 million. As of December 31, 2023, the Company has leases on 14 vehicles with an average lease term of 3.0 years. Operating lease cost consists of the following (in thousands): Years Ended December 31, 2023 2022 Operating lease cost $ 2,884 $ 2,893 Short-term lease cost 38 35 Variable lease cost 652 599 Total lease cost $ 3,574 $ 3,527 The following table summarizes a maturity analysis of the Company’s lease liabilities showing the aggregate lease payments as of December 31, 2023 (in thousands): Fiscal Year Ending December 31, Amount 2024 $ 3,219 2025 1,098 2026 30 Total minimum lease payments 4,347 Less: Amount of lease payments representing interest 167 Present value of future minimum lease payments $ 4,180 Less: Current lease liabilities 3,074 Long-term lease liabilities $ 1,106 The following table summarizes additional information related to the Company’s operating leases (in thousands, except weighted average data): December 31, 2023 2022 Right of use asset $ 3,406 $ 5,806 Weighted average remaining lease term (years) 1.35 2.08 Weighted average discount rate 6.7 % 6.0 % F-25 Pulmonx Corporation Notes to Consolidated Financial Statements The following table summarizes other supplemental information related to the Company’s operating leases (in thousands): Years Ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities included in cash flows used in operating activities $ 3,563 $ 2,701 Right-of-use assets obtained in exchange for lease liabilities $ 284 $ 229 Service Agreement In April 2022, the Company entered into an agreement with a service provider, which requires total minimum purchases of $ 0.6 million, $ 0.4 million, and $ 0.4 million over a three-year period. From inception of the agreement through December 31, 2023, the Company recorded $ 0.9 million of expense for services related to this agreement in cost of goods sold. 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. In December 2022, the Company received a civil investigative demand (“CID”) from the U.S. Department of Justice, Civil Division in connection with an investigation under the Anti-Kickback Statute and False Claims Act (the “Investigation”). The CID requests information and documents regarding the Company’s relationships with certain health care providers, medical practices, and hospitals in connection with the sales and marketing of the Zephyr Valves and related products and services. The Company is fully cooperating with the Investigation. The Company is unable to express a view at this time regarding the ultimate outcome of the Investigation or estimate an amount or range of reasonably possible loss. Depending on the outcome of the Investigation, there could be a material impact on the Company’s business, results of operations and financial condition. F-26 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, 2023 2022 Domestic $ ( 60,503 ) $ ( 59,361 ) Foreign 231 791 Total loss before provision for taxes $ ( 60,272 ) $ ( 58,570 ) The components of income tax expense are as follows (in thousands): Years Ended December 31, 2023 2022 Current: Federal $ — $ — State 62 66 Foreign 483 232 Total current expense $ 545 $ 298 Deferred: Federal $ 7 $ 32 State 10 14 Foreign 9 9 Total deferred expense 26 55 Total income tax expense $ 571 $ 353 The reconciliation between the federal statutory rate and the Company’s effective tax rate is summarized below: Years Ended December 31, 2023 2022 Federal statutory rate 21.0 % 21.0 % State taxes, net of federal benefit ( 0.1 ) % ( 0.1 ) % Foreign earnings at different rates ( 0.5 ) % ( 0.1 ) % Tax credits ( 0.9 ) % 1.8 % Permanent differences ( 4.6 ) % ( 4.6 ) % Prior year true-up 0.6 % ( 0.8 ) % Change in valuation allowance ( 16.4 ) % ( 17.8 ) % Effective tax rate ( 0.9 ) % ( 0.6 ) % F-27 Pulmonx Corporation Notes to Consolidated Financial Statements 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 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, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 57,420 $ 50,316 Tax credit carryforwards 6,493 7,169 Accruals and reserves 2,287 1,900 Depreciation 243 183 Intangible assets 4,049 4,394 Right of use liability 920 1,443 Capitalized research costs 5,749 2,838 Other 3,371 1,739 Gross deferred tax assets 80,532 69,982 Less: valuation allowance ( 79,362 ) ( 68,427 ) Deferred tax assets $ 1,170 $ 1,555 Deferred tax liabilities: Right of use asset $ ( 739 ) $ ( 1,147 ) Goodwill ( 545 ) ( 502 ) Net deferred tax liabilities $ ( 114 ) $ ( 94 ) 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 $ 79.4 million as of December 31, 2023. The valuation allowance increased by $ 10.9 million and $ 11.9 million for the years ended December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023, the Company had a total net operating loss carryforwards for federal income tax purposes of approximately $ 245.8 million. If not utilized, these net federal operating loss carryforwards will begin to expire in 2024. The Company also had a state net operating loss carryforward of approximately $ 155.4 million which will begin to expire in 2024. 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, 2023, the Company had $ 173.9 million of 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 $ 3.6 million and $ 5.1 million, respectively. The federal tax R&D credit carryforwards will expire beginning in the year 2030 while the state tax 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 section 382 study for which the Company wrote off deferred tax assets for net operating losses and credits of $ 3.1 million and $ 1.2 F-28 Pulmonx Corporation Notes to Consolidated Financial Statements 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 net operating losses or credits will expire unused due to the 2020 annual limitation. The Company completed another section 382 study for the year ended December 31, 2022 for which the Company had no change in ownership. Additionally, based on the Company’s analysis, no further material net operating losses or credits have expired unused due to the section 382 limitations as of December 31, 2023. 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 consolidated financial statements. As of December 31, 2023, the Company had unrecognized tax benefits of approximately $ 8.7 million, none of which will affect the effective 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 December 31, 2021 $ 8,489 Additions for tax positions related to prior year 106 Decreases for tax positions related to prior year ( 153 ) Additions for tax positions related to current year 200 Balance at December 31, 2022 $ 8,642 Additions for tax positions related to prior year 144 Decreases for tax positions related to prior year ( 162 ) Additions for tax positions related to current year 38 Balance at December 31, 2023 $ 8,662 It is the Company's policy to include penalties and interest expense related to income taxes as a component of other income (expense), net and interest expense, respectively, as necessary. The Company’s major tax jurisdictions are the United States and California, and 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 losses or R&D Credits. The Company does not have any tax audits or other issues pending. As currently enacted, the Tax Cuts and Jobs Act (the "Tax Act") requires taxpayers to capitalize research and development expenses with amortization periods over five and fifteen years, which is expected to decrease the amount of the Company's generated net operating losses during the year. 10. Stockholders’ Equity Common Stock As of December 31, 2023 and December 31, 2022, the Company’s certificate of incorporation authorized the Company to issue up to 200,000,000 shares of common stock. 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. F-29 Pulmonx Corporation Notes to Consolidated Financial Statements Shares Reserved for Future Issuance The Company has reserved shares of common stock for future issuances as follows: December 31, 2023 2022 Common stock options issued and outstanding 3,142,981 2,495,528 Common stock restricted stock units issued and outstanding 2,244,903 998,473 Common stock available for future grants 2,541,438 3,765,706 Common stock available for ESPP 1,436,823 1,212,109 Total 9,366,145 8,471,816 Stock Option Plan As of December 31, 2023, the Company reserved 14,249,394 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 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, 2023 and December 31, 2022, no shares of common stock remain available for issuance to officers, directors, employees and consultants pursuant to the 2000 Stock Plan. In January 2024, the number of shares of common stock available for issuance under the 2020 Equity Incentive Plan was increased by 1,540,655 shares as a result of the automatic increase provision in the 2020 Equity Incentive 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. Options vest ranging from immediately upon grant to a rate of 25 % per annum over four years from the grant date. Options expire 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, 2021 2,145,131 $ 13.44 Options granted 765,900 24.09 Options exercised ( 297,463 ) 2.13 Options canceled ( 118,040 ) 28.30 Balance, December 31, 2022 2,495,528 $ 17.35 Options granted 835,400 11.48 Options exercised ( 137,902 ) 2.27 Options canceled ( 50,045 ) 20.62 Balance, December 31, 2023 3,142,981 $ 16.40 F-30 Pulmonx Corporation Notes to Consolidated Financial Statements The aggregate intrinsic value of options exercised during the years ended December 31, 2023 and December 31, 2022 was $ 1.3 million and $ 4.6 million, respectively. The aggregate intrinsic value of options outstanding as of December 31, 2023 and December 31, 2022 was $ 11.1 million and $ 6.9 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, 2023 and December 31, 2022. December 31, 2023 Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life (in Years) Options vested 1,751,674 $ 15.34 6.70 Options vested and expected to vest 3,142,981 $ 16.40 7.47 The aggregate intrinsic value of options exercisable as of December 31, 2023 and December 31, 2022 was $ 8.6 million and $ 4.1 million, respectively. 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 granted under these plans 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 years ended December 31, 2023 and December 31, 2022, the Company repurchased 106 and 14,459 shares of common stock for less than $ 0.1 million and less than $ 0.1 million, respectively. As of December 31, 2023 and December 31, 2022, 109 and 77,782 shares were subject to repurchase, with an aggregate exercise price of less than $ 0.1 million and $ 0.1 million, respectively, and were recorded in accrued liabilities on the consolidated balance sheets. 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, December 31, 2021 442,428 $ 42.36 Granted 937,400 23.63 Vested ( 251,133 ) 35.09 Canceled ( 130,222 ) 33.85 Unvested, December 31, 2022 998,473 27.72 Granted 2,042,593 11.48 Vested ( 672,180 ) 19.93 Canceled ( 123,983 ) 19.29 Unvested, December 31, 2023 2,244,903 $ 15.74 The fair value as of the respective vesting dates of restricted stock units that vested during the years ended December 31, 2023 and December 31, 2022 was $ 7.5 million and $ 3.9 million, respectively. The aggregate intrinsic F-31 Pulmonx Corporation Notes to Consolidated Financial Statements value of restricted stock units outstanding as of December 31, 2023 and December 31, 2022 was $ 28.6 million and $ 8.4 million, respectively. 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, 2023 and December 31, 2022 was $ 7.77 and $ 10.74 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, 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, 2023 2022 Weighted average expected term (in years) 6.0 6.0 - 6.1 Volatility 73.4 % 44.5 % - 44.8 % Risk-free interest rate 4.2 % 1.6 % - 3.6 % 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 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, 2023 and December 31, 2022 were determined using the Company’s historical volatility and the historical volatilities of industry peers, referred to as “guideline” companies, as the Company had limited trading history for the Company’s common stock. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size. The expected stock price volatility assumptions for the purchase rights under the employee share purchase plan for the years ended December 31, 2023 and December 31, 2022 were determined using the historical volatility of the Company’s common stock. 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 F-32 Pulmonx Corporation Notes to Consolidated Financial Statements The fair value of the Company’s common stock is determined based on its closing market price on the date of grant. 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 Company entered into a new offering period beginning August 16, 2023 and ending February 15, 2024. The Company issued 150,842 and 89,666 shares under the ESPP for the years ended December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023, there were 1,436,823 shares authorized for future purchase under the ESPP. In January 2024, the number of shares of common stock available for issuance under the ESPP was increased by 385,164 shares as a result of the automatic increase provision in the ESPP. Compensation expense is calculated using the fair value of the employees' purchase rights under the Black-Scholes model. Years Ended December 31, 2023 2022 Weighted average expected term (in years) 0.5 0.5 Volatility 43.4 % - 55.6 % 37.8 % - 42.8 % Risk-free interest rate 5.0 % - 5.5 % 0.7 % - 3.1 % 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, 2023 2022 Cost of goods sold $ 1,320 $ 686 Research and development 2,821 2,190 Selling, general and administrative 17,960 13,569 Total $ 22,101 $ 16,445 The above stock-based compensation expense related to the following equity-based awards (in thousands): Years Ended December 31, 2023 2022 Stock options and restricted stock units $ 21,675 $ 15,807 ESPP 426 638 Total $ 22,101 $ 16,445 F-33 Pulmonx Corporation Notes to Consolidated Financial Statements Stock-based compensation of $ 1.6 million and $ 1.2 million was capitalized into inventory for the years ended December 31, 2023 and 2022, respectively. Stock-based compensation capitalized in prior periods of $ 1.3 million and $ 0.7 million was recognized as cost of sales in the years ended December 31, 2023 and 2022, respectively. 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. The total grant date fair value of shares vested during the years ended December 31, 2023 and December 31, 2022 was $ 21.7 million and $ 15.5 million, respectively. As of December 31, 2023, 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. 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, 2023 2022 Numerator Net loss attributable to common stockholders $ ( 60,843 ) $ ( 58,923 ) Denominator Weighted-average common stock outstanding 37,998,509 37,248,292 Less: weighted-average common shares subject to repurchase ( 23,942 ) ( 151,751 ) Weighted-average common shares used to compute basic and diluted net loss per share 37,974,567 37,096,541 Net loss per share attributable to common stockholders, basic and diluted $ ( 1.60 ) $ ( 1.59 ) 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, 2023 2022 Options to purchase common stock 3,142,981 2,495,528 Unvested restricted stock units 2,244,903 998,473 Unvested early exercised common stock options 109 77,782 Shares committed under ESPP 55,714 28,141 Total Shares 5,443,707 3,599,924 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 F-34 Pulmonx Corporation Notes to Consolidated Financial Statements 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): Years Ended December 31, 2023 2022 United States $ 45,917 $ 32,487 Europe, Middle-East and Africa (“EMEA”) 19,336 18,154 Asia Pacific 3,023 2,866 Other International 399 155 Total $ 68,675 $ 53,662 Revenue from Germany represented 8 % and 11 % of total revenue for the years ended December 31, 2023 and 2022, 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, 2023 2022 United States $ 3,962 $ 4,634 Europe, Middle-East and Africa 54 58 Asia Pacific 12 2 Total $ 4,028 $ 4,694 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. F-35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.