PULMONX CORPORATION You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Overview
We are a commercial-stage medical technology company that provides a minimally
invasive treatment for patients with severe emphysema, a form of chronic
obstructive pulmonary disease ("COPD"). Our 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 severe emphysema patients who, despite medical
management, are still profoundly symptomatic and either do not want or are
ineligible for surgical approaches.
In June 2018 , we received pre-market approval ("PMA") by the U.S. Food and Drug
Administration ("FDA") as a result of our breakthrough technology designation.
The Zephyr Valve is now commercially available in more than 25 countries, with
over 100,000 valves used to treat more than 25,000 patients. We have established
reimbursement in major markets in North America , Europe and Asia Pacific and the
Zephyr Valve has been included in treatment guidelines for COPD worldwide.
We market and sell our products in the United States through a direct sales
organization. Our sales territory managers are focused on promoting awareness
and increasing adoption of our solution primarily among the pulmonologists
performing interventional pulmonary procedures across approximately 500 high
volume hospitals in the United States . We are expanding our commercial
operations in the United States while continuing to foster our international
growth. We employ both direct and distributor-based sales models, with over 90%
of our revenue generated in markets where we sell directly.
In the United States , our solution is reimbursed based on established Category I
Current Procedural Terminology ("CPT") and ICD-10 Procedure Coding System
("PCS") codes and associated APC and MS-DRG payment groupings. Current
reimbursement in the United States is believed to cover the hospital costs of
the procedure and related inpatient care. Commercial payors such as Aetna,
Humana, and many of the largest Blue Cross Blue Shield plans including Anthem,
Health Care Service Corporation , and BCBS Michigan have issued positive coverage
policies for the Zephyr Valve, and United Healthcare no longer considers the
procedure unproven or experimental. Medicare covers our solution for patients
when medically necessary, and other commercial insurers are approving
pre-authorization requests on a case-by-case basis. Outside the United States ,
our solution is covered by major health systems across much of Europe , Australia
and South Korea .
We manufacture all our products at our headquarters located in Redwood City,
California . This facility supports production and distribution operations,
including manufacturing, quality control, raw material and finished goods
storage. We have manufactured all our products at this facility for over ten
years. We also store finished goods at secondary facilities. We seek to maintain
higher levels of inventory to protect ourselves from supply interruptions and
have an established distribution system for both U.S. and international
customers.
To date, we have financed our operations primarily through the sale of equity
securities, debt financing arrangements and sales of our products. We have
devoted substantially all of our resources to research and development
activities related to our solution, including clinical and regulatory
initiatives to obtain marketing approval, sales and marketing activities, and
investing in general and administrative infrastructure. We generated
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revenue of$53.7 million , with a gross margin of 74.3% and a net loss of$58.9 million , for the year endedDecember 31, 2022 compared to revenue of$48.4 million , with a gross margin of 73.6% and a net loss of$48.7 million , for the year endedDecember 31, 2021 . As ofDecember 31, 2022 , we had an accumulated deficit of$350.3 million , cash, cash equivalents and marketable securities of$147.1 million , and$17.3 million of outstanding term loans and credit agreements, net of debt discount and debt issuance costs. We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our solution. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of the Zephyr Valve and to support regulatory submissions. We intend to make significant investments building our sales and marketing organization by increasing the number of sales territory managers and continuing our marketing efforts in existing and new markets throughoutthe United States ,Europe andAsia Pacific . We also intend to continue to make investments in research and development efforts to develop our next generation products and support our future regulatory submissions to increase our addressable market and to expand indications and new markets. Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require substantial additional funding, which may include future equity and debt financings.
Management believes that the Company's existing cash, cash equivalents and marketable securities will allow the Company to continue its operations for at least the next 12 months from the date of the issuance of our consolidated financial statements.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has delayed clinical trials and FDA operations and adversely impacted the number of procedures performed using our products. As a result, the COVID-19 pandemic and the measures taken by many countries in response have materially adversely affected, and could in the future materially adversely affect, our business, financial condition and results of operations, as well as the price of our common stock, from a decrease and delay of procedures involving our products. While the Company has seen a recovery in procedure volumes in theU.S. and some international markets, other international markets continue to be hampered by a slower recovery. We are encouraged for the longer term, and we believe the following key indicators are contributing to the stabilization of our business:
•continued opening of new accounts;
•strong physician participation in trainings;
•a strong patient pipeline evidenced by StratX report activity, patient calls into hospitals inquiring about our procedure, and patient calls to our reimbursement support service; and
•a resumption of elective procedures at hospitals and centers.
Despite signs of recovery of our business, we cannot be certain that any recovery will be sustained, or that a further resurgence of COVID-19 or variants of the virus will not occur.
Further, we cannot assure you that our recent volume of Zephyr Valves sold are indicative of future results. The number of Zephyr Valves sold in the future may decrease due to a resurgence of the COVID-19 pandemic. In addition, there may be limited provider capacity due to labor shortages, or for other reasons, which could limit the ability of patients to receive treatment with Zephyr Valves. Limited provider and hospital capacity has had a material adverse effect on our business, financial condition and results of operations and may continue to materially adversely affect us even as the pandemic subsides.
The extent of the impact of COVID-19, including the macroeconomic conditions, on our future operational and financial performance will depend on certain developments, which are highly uncertain and cannot be predicted,
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including impact on employees, clinical trials and procedure volumes, new information which may emerge concerning the severity and spread of COVID-19 and variant strains, governmental and societal response to contain and treat COVID-19 and variant strains, and the availability and distribution of vaccines and public acceptance of vaccines, among others.
For additional information about risks, uncertainties and potential impacts related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, please refer to Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.
Factors Affecting our Business and Results of Operations
We believe there are several important factors that have impacted and that we expect will continue to impact our business and results of operations. These factors include:
Our Ability to Recruit, Train and Retain Our Sales Force and its Productivity
We have made, and intend to continue to make, significant investments in recruiting, training and retaining our direct sales force. This process requires significant education and training for our sales personnel to achieve the level of technical competency with our products that is expected by physicians and to gain experience building demand for our products. Upon completion of the training, our sales personnel typically require time in the field to grow their network of accounts and increase their productivity to the levels we expect. Successfully recruiting, training and retaining additional sales personnel will be required to achieve growth. In addition, inability to attract qualified sales personnel or the loss of any productive sales personnel would have a negative impact on our ability to grow our business. We have in the past and expect in the future to enter into different compensation arrangements with our sales professionals, which include minimum guaranteed commissions. This has impacted our compensation expenses in the past and we expect it will do so in the future.
Physician, Patient and Hospital Awareness and Acceptance of Our Solution
Our goal is to establish our solution as a standard of care for severe emphysema. We intend to continue to promote awareness of our solution through training and educating physicians, pulmonary rehabilitation centers, key opinion leaders and various medical societies on the proven clinical benefits of Zephyr Valves. In addition, we intend to continue to publish additional clinical data in various industry and scientific journals and online and to present at various industry conferences. We plan to continue building patient awareness through our direct-to-patient marketing initiatives, which include advertising, social media and online education. We also intend to continue helping physicians in their outreach to patients and other healthcare providers. These efforts require significant investment by our marketing and sales organization, and vary depending upon the physician's practice specialization, and personal preferences and geographic location of physicians, pulmonary rehabilitation centers and patients. In order to grow our business, we will need to continue to make significant investments in training and educating hospitals, physicians and patients on the advantages of our solution for the treatment of severe emphysema.
Third-Party Reimbursement
Since achieving regulatory approval inthe United States inJune 2018 , we have launched the Zephyr Valve treatment and have made progress securing third-party payor reimbursement. The majority of our patients are Medicare beneficiaries. We estimate that roughly 75% of the potential Zephyr Valve patient population are Medicare/Medicaid beneficiaries, of which approximately 30% have managed Medicare/Medicaid and the remaining 45% have traditional Medicare/Medicaid. Approximately 25% of the potential Zephyr Valve patient population is under third-party commercial payor policies. A key element of our strategy remains to broaden our coverage by private third-party payor policies. Commercial payors such as Aetna, Humana, and many of the largestBlue Cross Blue Shield plans including Anthem,Health Care Service Corporation , and BCBS Michigan have issued 93
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positive coverage policies for the Zephyr Valve, andUnited Healthcare no longer considers the procedure unproven or experimental. Some commercial payors do not yet consider our solution medically necessary, but these same plans are approving pre-authorization requests on a case-by-case basis. Medicare, currently without a public coverage policy, covers our solution for patients when medically necessary on a case-by-case basis and other commercial insurers not described above are approving pre-authorization requests on a case-by-case basis. We have a dedicated patient reimbursement support team inthe United States that works collaboratively with patients and providers to help secure the appropriate prior authorization approvals in advance of treatment. We continue to educate private insurers inthe United States on our clinical data and patient selection tools in an effort to continue to expand the number of positive coverage policies, in order to increase our revenue. Outsidethe United States , our solution is covered by major health systems across much ofEurope ,Australia andSouth Korea . Competition Our industry is highly competitive and subject to rapid change from the introduction of new products and technologies and other activities of industry participants. Our goal is to establish our solution as a standard of care for severe emphysema. Existing treatments include medical management, lung volume reduction surgery ("LVRS"), lung transplantation as well as other minimally invasive treatments. Some of our competitors have several competitive advantages, including established relationships with pulmonologists who commonly treat patients with emphysema, significantly greater name recognition and significantly greater sales and marketing resources. In addition to competing for market share, we also compete against these companies for personnel, including qualified sales and other personnel that are necessary to grow our business. Certain of our competitors may challenge our intellectual property, may develop additional competing or superior technologies and processes and compete more aggressively and sustain that competition over a longer period of time than we could. In addition to existing competitors, other companies may acquire or in-license competitive products and could directly compete with us. We must continue to successfully compete in light of our competitors' existing and future products and related pricing and their resources to successfully market to the physicians who use our products.
Leveraging Our Manufacturing Capacity is Critical to Improving Our Gross Margin
With our current operating model and infrastructure, we have the capacity to significantly increase our manufacturing production. If we grow our revenue and sell more units, our fixed manufacturing costs will be spread over more units, which we believe will reduce our manufacturing costs on a per-unit basis and in turn improve our gross margin. In addition, we intend to continue investing in manufacturing efficiencies in order to reduce our overall manufacturing costs. However, other factors will continue to impact our gross margins such as geographic mix, pricing and customer discounts, incentives, support services and potential seasonality.
Investing in Research and Development to Foster Innovation to Expand Our Addressable Market
We intend to continue investing in existing and next generation technologies to
further improve our products and clinical outcomes, enhance patient selection
and broaden the patient population that can be treated with our products. In
addition, we are continuing to invest in the accuracy and features of our
patient assessment tools. Moreover, we are conducting clinical research of
AeriSeal, a potential product in development for the treatment of severe
emphysema patients who are not qualified for Zephyr Valve treatment due to
excessive collateral ventilation.
While research and development and clinical testing are time consuming and
costly, we believe that a pipeline of new products and product enhancements that
improve efficacy, safety and cost effectiveness is critical to increasing the
adoption of our solution.
Seasonality
Historically, we have experienced seasonality, primarily in the first and third
quarters and anticipate this trend to continue. In addition, as our sales grow,
we may experience further seasonality based on holidays, vacations and other
factors because this is an elective procedure.
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Components of Our Results of Operations
Revenue
We currently derive substantially all our revenue from the sale of our products to hospitals and distributors. We market and sell our products through a direct sales organization inthe United States and through direct sales and several third-party distributors in select markets outsidethe United States . We currently generate most of our revenue from the sales of Zephyr Valves and delivery catheters. We also generate a smaller amount of our revenue from our Chartis System, which is comprised of sales of the balloon catheters, usage fees and sales of the Chartis console. The StratX Platform, while used to identify patients eligible for treatment with Zephyr Valves, does not independently generate any revenue for us. No single customer accounted for more than 10% of our revenue during the years endedDecember 31, 2022 and 2021. Revenue from sales of our products fluctuates based on volume of cases (procedures performed), the average number of Zephyr Valves used for a patient, pricing, discounts, incentives and mix ofU.S. and international sales. Our revenue also fluctuates and in the future will continue to fluctuate from quarter-to-quarter due to a variety of factors, including the availability of reimbursement, the size and success of our sales force, the number of hospitals and physicians who are aware of and perform the procedures using our solution and seasonality. Our revenue from international sales may also be impacted by fluctuations in foreign currency exchange rates between theU.S. dollar (our reporting currency) and the local currency.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of payroll and personnel-related expenses for our manufacturing and quality assurance employees, costs related to materials, components and subassemblies, third-party costs, manufacturing overhead, equipment depreciation, and charges for excess, obsolete and non-sellable inventories. Overhead costs include the cost of quality assurance, testing, material procurement, inventory control, operations supervision and management and an allocation facilities overhead cost, including rent and utilities. Cost of goods sold also includes certain direct costs such as those incurred for shipping our products and costs related to providing analysis services for patient scans. We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. We expect cost of goods sold to increase in absolute dollars to the extent more of our products are sold. We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily by our manufacturing costs, pricing pressures and, to a lesser extent, the percentage of products we sell inthe United States versus internationally and the percentage of products we sell to distributors versus directly to hospitals. Our gross margin is typically higher on products we sell directly to hospitals as compared to products we sell through distributors. Our gross margin may increase over the long term to the extent our production volume increases as our fixed manufacturing costs would be spread over a larger number of units, thereby reducing our per-unit manufacturing costs. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality.
Operating Expenses
Our operating expenses have consisted solely of research and development costs and selling, general and administrative costs.
Research and Development Expenses
Our research and development activities primarily consist of engineering and research programs associated with our products under development and improvements to our existing products. Research and development expenses
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include payroll and personnel-related costs for our research and development employees, including expenses related to stock-based compensation, consulting services, clinical trial expenses, prototyping, testing, laboratory supplies, and an allocation of facility overhead costs. Our clinical trial expenses, such as those related to our AeriSeal clinical development program, include costs associated with clinical trial design, clinical trial site development and study costs, data management costs, related travel expenses and the cost of products used for clinical activities. We expense research and development costs as they are incurred. We expect our research and development expenses, including related stock-based compensation expense, to increase in absolute dollars as we hire additional personnel to develop new product offerings and product enhancements.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of payroll and personnel-related costs for our sales and marketing personnel, including variable sales compensation, travel expenses, consulting, public relations costs, direct marketing, customer training, trade show and promotional expenses, stock-based compensation and allocated facility overhead costs, and for administrative personnel that support our general operations such as information technology, executive management, finance and accounting, customer services and human resources personnel. We expense sales variable compensation at the time of the sale. Selling, general and administrative expenses also include costs attributable to professional fees for legal and accounting services, insurance, consulting fees, recruiting fees, travel expense, bad debt expense and depreciation. We intend to continue to increase our sales and marketing spending to generate sales opportunities. We expect expenses to increase in absolute dollars as we increase our sales support infrastructure and add additional marketing programs in order to more fully penetrate the global opportunity. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and information technology to support our operations. Additionally, we incur expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing andSEC requirements, director and officer insurance premiums and investor relations costs. We also saw an increase in our stock-based compensation expense with the establishment of our 2020 Equity Incentive Plan and related grants either in the form of restricted stock units or stock options. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories.
Interest Expense and Income
Interest expense consists primarily of interest expense related to our term loan facilities, including amortization of debt discount and issuance costs. Interest income is predominantly derived from investing surplus cash in money market funds and marketable securities.
Other Income (Expense), Net
Other income (expense), net primarily consists of foreign currency exchange gains and losses.
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Results of Operations:
Comparison of the Years Ended
The following table summarizes our results of operations for the period
indicated:
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands)
Revenue $ 53,662 $ 48,416 $ 5,246 10.8 %
Costs of goods sold 13,797 12,786 1,011 7.9 %
Gross profit 39,865 35,630 4,235 11.9 %
Operating expenses:
Research and development 15,397 13,063 2,334 17.9 %
Selling, general and administrative 83,105 69,871 13,234 18.9 %
Total operating expenses 98,502 82,934 15,568 18.8 %
Loss from operations (58,637) (47,304) (11,333) 24.0 %
Interest income 1,529 400 1,129 282.3 %
Interest expense (1,066) (829) (237) 28.6 %
Other income (expense), net (396) (585) 189 (32.3) %
Net loss before tax (58,570) (48,318) (10,252) 21.2 %
Income tax expense 353 343 10 2.9 %
Net loss $ (58,923) $ (48,661) $ (10,262) 21.1 %
Revenue
Revenue increased by $5.2 million , or 10.8%, to $53.7 million during the year
ended December 31, 2022 , compared to $48.4 million during the year ended
December 31, 2021 . The sale of products in the United States increased by $7.5
million to $32.5 million during the year ended December 31, 2022 , compared to
$25.0 million for the year ended December 31, 2021 . The sale of products in
international markets decreased by $2.2 million to $21.2 million during the year
ended December 31, 2022 , compared to $23.4 million for the year ended
December 31, 2021 . The increase in U.S. revenue reflects continued growth of
Zephyr Valve procedure volumes in the United States , while the decrease in
international revenue reflects the impact of foreign currency exchange rates.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased by$1.0 million , or 7.9%, to$13.8 million during the year endedDecember 31, 2022 , compared to$12.8 million during the year endedDecember 31, 2021 . The increase was mainly due to an increase in the number of products sold and increased manufacturing costs as we expanded headcount and invested in operational infratstructure to support anticipated growth. Gross margin increased by 0.7% to 74.3% during the year endedDecember 31, 2022 , compared to 73.6% during the year endedDecember 31, 2021 . The increase was primarily due to improved production efficiencies and lower scrap and reserve expense during the year endedDecember 31, 2022 .
Research and Development Expenses
Research and development expenses increased by
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professional services, regulatory, facility and other expenses. These increases were offset by a decrease of$0.5 million in costs associated with our clinical trials, including fees paid to contract research organizations and testing expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by$13.2 million , or 18.9%, to$83.1 million during the year endedDecember 31, 2022 compared to$69.9 million during the year endedDecember 31, 2021 . The increase in selling, general and administrative expenses was primarily due to an increase of$8.6 million of payroll and personnel-related expenses including stock based compensation as we expanded our sales and marketing and administrative function, an increase of$2.1 million in advertising and marketing related expenses, an increase of$1.2 million in travel expenses, and an increase of$1.3 million in facility, consulting, software and other expenses.
Interest Expense and Income
Interest expense increased by$0.2 million , or 28.6%, to$1.1 million during the year endedDecember 31, 2022 , compared to$0.8 million during the year endedDecember 31, 2021 due to higher interest rates on our debt. Interest income increased by$1.1 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , primarily due to higher returns on cash, cash equivalents and marketable securities balances.
Other Income (Expense), Net
Other income (expense), net increased by$0.2 million to($0.4) million during the year endedDecember 31, 2022 , compared to($0.6) million during the year endedDecember 31, 2021 , primarily due to foreign currency exchange losses driven by fluctuations in foreign exchange rates..
Liquidity and Capital Resources; Plan of Operation
To date, we have financed our operations primarily through initial public offering, private placements of equity securities, debt financing arrangements and sales of our products. As ofDecember 31, 2022 , we had cash, cash equivalents and marketable securities of$147.1 million , an accumulated deficit of$350.3 million , and$17.3 million outstanding under the CIBC Loan and Credit Agreement, net of debt discount and debt issuance costs.
CIBC Loan
OnFebruary 20, 2020 , we executed a Loan and Security Agreement with Canadian Imperial Bank of Commerce ("CIBC"), which we subsequently amended onApril 17, 2020 andDecember 28, 2020 (as amended, the "CIBC Agreement"). The CIBC Agreement originally provided us with the ability to borrow up to$32.0 million in debt financing consisting of$17.0 million advanced at the closing of the agreement ("Tranche A"), with the option to draw up to an additional$8.0 million ("Tranche B") on or beforeFebruary 20, 2022 and an additional$7.0 million ("Tranche C") on or beforeFebruary 20, 2022 . Neither Tranche B nor Tranche C was drawn before theFebruary 2022 expiration date.
In
InJune 2021 , we entered into a First Amendment to the Amended and Restated CIBC Agreement that extended the compliance of certain post-close covenants toMarch 31, 2022 . InOctober 2021 , we 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 would begin inFebruary 2023 . There was no change to the loan interest rate or maturity date. 98
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OnOctober 31, 2022 , we entered into a Third Amendment to the Amended and Restated CIBC Agreement (the "Third Amendment"), which, among other things, extended the maturity date toOctober 31, 2027 ; provided a commitment for a new$20.0 million tranche of term loans that may be drawn at the Company's option throughOctober 31, 2023 , subject to the satisfaction of certain conditions; and provided for a new interest only period of 24 months from the signing date of the Third Amendment, with the possibility of an additional extension of such interest only period of up to 12 months, subject to satisfaction of certain conditions. The loans provided under the Amended and Restated CIBC Agreement bear interest at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate at any time. The loan is collateralized by substantially all of our assets, including cash and cash equivalents, accounts receivable, intellectual property and equipment. We may prepay the loans without penalty. If we borrow any of the$20.0 million tranche made available under the Third Amendment, we may prepay the loans, subject to certain conditions, including a prepayment fee equal to 2.0% of the principal amount repaid during the first year after the effective date of the Third Amendment or 1.0% of the principal amount prepaid during the second year after the effective date of the Third Amendment. The Amended and Restated CIBC Agreement contains financial covenants that require the Company to maintain minimum cash and minimum revenue amounts, and the Amended and Restated CIBC Agreement contains other customary restrictive covenants, representations and warranties, events of default and other customary terms and conditions. We paid$0.4 million fees to the lender and third parties which is reflected as a discount on the loans provided under the Amended and Restated CIBC Agreement and is being accreted over the life of the loan using the effective interest method. During the years endedDecember 31, 2022 andDecember 31, 2021 , we recorded interest expense related to debt discount and debt issuance costs of CIBC Loan of$0.1 million and$0.1 million , respectively.
Interest expense on the CIBC Loan amounted
Credit Agreement
InApril 2020 , Pulmonx International Sàrl, our wholly-owned subsidiary, entered into a COVID-19 Credit Agreement withUBS Switzerland AG to receive up to0.5 million Swiss Francs ($0.5 million U.S. dollar equivalent) under Swiss Federal Government program to mitigate the economic impact of the spread of the coronavirus. InMay 2020 , Pulmonx International Sàrl received0.5 million Swiss Francs ($0.5 million U.S. dollar equivalent) under the COVID-19 Credit Agreement. The COVID-19 Credit Agreement bears no interest and will be repaid within 60 months after receipt of funds, in twelve equal installments, paid semi-annually, beginning in March of 2022. As ofDecember 31, 2022 ,Pulmonx International Sàrl repaid$0.1 million to the lender.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for the period presented below:
Years Ended December 31,
2022 2021
(in thousands)
Net cash (used in) provided by:
Operating activities $ (45,083) $ (41,388)
Investing activities (4,225) (46,255)
Financing activities 2,419 4,456
Effect of exchange rate changes on cash and cash equivalents 145 106
Net decrease in cash, cash equivalents and restricted cash
$ (83,081)
Cash Flows from Operating Activities
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Net cash used in operating activities was$45.1 million for the year endedDecember 31, 2022 . Cash used in operating activities was primarily a result of the net loss of$58.9 million , an increase in inventory of$3.6 million due to continued production to build inventory to meet projected increase in sales and to protect against potential supply interruptions, an increase in accounts receivable of$2.2 million , and a decrease in lease liabilities of$2.2 million due to lease payments, partially offset by an increase in accounts payable of$0.2 million due to timing of payments to our vendors, and a decrease in prepaid expenses and other current assets of$0.8 million , stock-based compensation expense of$16.4 million , non-cash lease expense of$2.5 million , depreciation and amortization expense of$1.5 million and write-down of inventory of$0.5 million . Net cash used in operating activities was$41.4 million for the year endedDecember 31, 2021 . Cash used in operating activities was primarily a result of the net loss of$48.7 million , an increase in accounts receivable of$2.4 million , an increase in inventory of$6.4 million primarily due to higher inventory levels required to support projected increase in sales, an increase in prepaid and other current assets of$1.2 million , an increase in other assets of$0.2 million , a decrease in lease liabilities of$2.5 million , offset by an increase in accrued liabilities of$4.8 million , stock based compensation expense of$7.9 million , employee stock purchase plan expense of$2.6 million , write-down of inventory due to obsolescence of$1.2 million , depreciation and amortization expense of$0.9 million , amortization of debt discount and debt issuance costs of$0.1 million , non-cash lease expense of$2.4 million , and decrease of deferred revenue of$0.1 million . The increase in prepaid expenses, accrued liabilities and accounts payable is primarily due to increases in inventory and expenses related to operating as a public company and timing of payments to our vendors.
Cash Flows from Investing Activities
Net cash used in investing activities in the year endedDecember 31, 2022 was$4.2 million consisting of purchases of marketable securities of$47.2 million and purchases of property and equipment of$1.3 million partially offset by proceeds from maturities of marketable securities of$44.3 million . Net cash used in investing activities in the year endedDecember 31, 2021 was$46.3 million consisting of purchases of marketable securities of$52.6 million and purchases of property and equipment of$3.7 million partially offset by proceeds from maturities of marketable securities of$10.0 million .
Cash Flows from Financing Activities
Net cash provided by financing activities in the year endedDecember 31, 2022 of$2.4 million primarily relates to proceeds from the exercise of stock options of 0.6 million and proceeds from issuance of common stock under the employee stock purchase plan of$1.9 million , offset by repayment of Credit Agreement of$0.1 million .
Net cash provided by financing activities in the year ended
Material Cash Requirements
Our net cash operating expenditures were$45.1 million in 2022 and$41.4 million in 2021, and we intend to continue to make investments in the development of our products, including ongoing research and development programs. Our cash outflows for capital expenditures were$1.3 million in 2022 and$3.7 million in 2021, and we expect to maintain the level of expenditures in the future in support of our commercial infrastructure, sales force and other commercialization efforts. Recent and expected working and other capital requirements include amounts related to future lease payments for operating lease obligations, which totaled$7.5 million atDecember 31, 2022 , with$3.5 million expected to be paid within the next 12 months, and amounts related to future long-term debt which totaled$22.3 million , with$1.5 million expected to be paid within the next 12 months. Lastly, we may undertake additional expenses to further expand our commercial organization and efforts, enhance our research and development efforts and pursue product expansion opportunities. 100
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As ofDecember 31, 2022 , we had cash, cash equivalents and marketable securities of$147.1 million . Based on our current planned operations, we expect that our cash, cash equivalents and marketable securities will enable us to fund our operating expenses for at least 12 months from the issuance of our financial statements as of and for the year endedDecember 31, 2022 . We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and marketable securities, debt financings, and access to other public or private equity offerings. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with research, development and commercialization of medical devices, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:
•the costs of commercialization activities related to commercializing our products inthe United States and elsewhere, including expanding territories, increasing sales and marketing personnel, actual and anticipated product sales, marketing programs, manufacturing and distribution costs;
•the impact of the COVID-19 pandemic on our business;
•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
•the research and development activities we intend to undertake, product enhancements that we intend to pursue;
•whether or not we pursue acquisitions or investments in businesses, products or technologies that are complementary to our current business;
•the degree and rate of market acceptance of our products in
•changes or fluctuations in our inventory supply needs and forecasts of our supply needs;
•our need to implement additional infrastructure and internal systems;
•our ability to hire additional personnel to support our operations as a public company; and
•the emergence of competing technologies or other adverse market developments.
Until such time, if ever, as we can generate product revenue sufficient to
achieve profitability, we expect to finance our cash needs through a combination
of public or private equity offerings, debt financings and collaborations or
licensing arrangements. There can be no assurance that our efforts to procure
additional financing will be successful or that, if they are successful, the
terms and conditions of such financing will be favorable to us or our
stockholders. If we do raise additional capital through public or private equity
or convertible debt offerings, the ownership interest of our existing
stockholders will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect our stockholders' rights.
If we raise additional capital through debt financing, we may be subject to
covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional capital through collaborations agreements, licensing
arrangements or marketing and distribution arrangements, we may have to
relinquish valuable rights to our technologies, future revenue streams, research
programs or product candidates or grant licenses that may not be favorable to
us. If we are unable to raise capital when needed, we will need to delay, limit,
reduce or terminate planned commercialization or product development activities,
or grant rights to develop and commercialize products or product candidates that
we would otherwise prefer to develop and market ourselves in order to reduce
costs.
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Critical Accounting Estimates
Our financial statements have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses incurred during the reporting periods. Our estimates are based on our knowledge of current events and actions we may undertake in the future and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. For more detail on our critical accounting policies, refer to Note 2 to the financial statements appearing elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
Our revenue is generated from the sale of our products to hospitals and distributors in theU.S. and international markets. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products. Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of our products to our customers, either upon shipment of the product or delivery of the product to the customer under the terms and conditions agreed with the customer. We defer revenue relating to any remaining performance obligations by us 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 Zephyr Valves. We identify performance obligations in contracts with customers, which may include our 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. We are entitled to the total consideration for the products ordered by customers, net of early pay discounts, volume-based rebates and other transaction price adjustments. We exclude taxes assessed by governmental authorities on revenue-producing transactions from the measurement of the transaction price. We accept product returns at our discretion or if the product is defective as manufactured. We elected to treat shipping and handling costs as a fulfillment cost and include them in the cost of goods sold as incurred.
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 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. We record 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 are intended to reduce the carrying value of inventory to its net realizable value. We review our 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.
Research and Development
Research and development expenses consist of costs incurred to further our
research and development activities and include 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 our overall research and development programs. All research
and development costs are expensed as incurred.
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Clinical trial costs are a significant component of our research and development expenses. We contract with third parties that perform various clinical trial activities on our behalf in the ongoing development of our 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. We accrue and expense costs of our clinical trial activities performed by third parties, including CROs and other service providers, based upon estimates of the work completed over the life of the individual study in accordance with associated agreements. We determine 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.
Common Stock Valuation and Stock-Based Compensation
We recognize compensation costs related to stock options and awards granted to employees and non-employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value of stock options, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the period during which the optionee is required to provide service in exchange for the award, which is typically the vesting period. We account for forfeitures as they occur. Estimates of the fair value of equity awards as of the grant date using valuation models such as the Black-Scholes option pricing model are affected by assumptions with a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately the amount of stock-based compensation expense recognized. These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the following assumptions can materially affect the estimate of the fair value of stock-based compensation: •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. •Expected Volatility. The expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term for the options. In evaluating similarity, we considered factors such as stage of development, risk profile, enterprise value and position within the life sciences industry. •Risk-free Interest Rate. The risk-free interest rate is based on theU.S. Treasury yield in effect at the time of the grant for zero-couponU.S. Treasury notes with remaining terms similar to the expected term of the options.
•Dividend Rate. We assumed the expected dividend to be zero as we have never paid dividends and have no current plans to do so.
As ofDecember 31, 2022 , there was$41.6 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 2.73 years.
Subsequent to our IPO, the fair value of our common stock is determined based on our closing market price.
Income Taxes
Our major tax jurisdictions are
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Significant judgment is required to determine our provision for income taxes and
income tax assets and liabilities, including evaluating uncertainties in the
application of accounting principles, complex tax laws, or variances between our
actual and anticipated operating results. Therefore, actual income taxes could
materially vary from these estimates.
We provide for income taxes under the asset and liability method. Current income
tax expense or benefit represents the amount of income taxes expected to be
payable or refundable for the current year. Deferred income tax assets and
liabilities arise due to differences between when assets or liabilities are
recognized for tax purposes and when they are recognized for financial reporting
purposes. Net operating losses and credit carryforwards are also deferred tax
assets. Deferred tax assets and liabilities are measured using the enacted tax
rates and laws that will be in effect when such items are expected to reverse.
Deferred income tax assets are reduced, as necessary, by a valuation allowance
when management determines it is more likely than not that some or all of the
tax benefits will not be realized.
We assess all material positions taken in any income tax return, including all
significant uncertain positions, in all tax years that are still subject to
assessment or challenge by relevant taxing authorities. All of our tax years
will remain open for examination by the federal and state tax authorities for
three and four years, respectively, from the date of utilization of the net
operating loss or research and development credits. We do not have any tax
audits or other issues pending.
Utilization of the net operating loss carryforwards and research and development
tax credit carryforwards may be subject to annual limitations due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended ("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.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
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