SEC Filing | Pulmonx Corporation

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lung-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39562

PULMONX CORPORATION

(Exact name of registrant as specified in its charter)



Delaware						77-0424412
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

700 Chesapeake Drive

Redwood City, California 94063

1-650-364-0400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	LUNG	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of July 31, 2023 there were 38,027,722 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

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		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION	41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Securities and Use of Proceeds	98
Item 3.	Defaults Upon Senior Securities	98
Item 4.	Mine Safety Disclosures	98
Item 5.	Other Information	98
Item 6.	Exhibits	99
	Signatures	101

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial condition, business strategy, plans, and objectives of management for future operations and statements that are necessarily dependent upon future events are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties, and assumptions, including risks described in the section entitled “Risk Factors.” These risks are not exhaustive. Other sections of this Quarterly Report on Form 10-Q include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely on these forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or to changes in our expectations, whether as a result of any new information, future events, changed circumstances or otherwise. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•our ability to design, develop, manufacture and market innovative products to treat patients with challenging medical conditions, particularly those with severe chronic obstructive pulmonary disease (“COPD”) and emphysema;

•our expected future growth, including growth in international sales;

•our expected future growth of our sales and marketing organization;

•the size and growth potential of the markets for our products, and our ability to serve those markets;

•the rate and degree of market acceptance of our products;

•coverage and reimbursement for procedures performed using our products;

•the performance of third parties in connection with the development of our products, including third-party suppliers;

•regulatory developments in the United States and foreign countries;

•our ability to obtain and maintain regulatory approval or clearance of our products on expected timelines;

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•our plans to research, develop and commercialize our products and any other approved or cleared product;

•our ability to retain and hire our senior management and other highly qualified personnel;

•the development, regulatory approval, efficacy and commercialization of competing products and technologies in our industry;

•our ability to develop and maintain our corporate infrastructure, including an effective system of internal controls;

•our financial performance and capital requirements;

•our expectations regarding our ability to obtain and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others; and

•our expectations regarding the impact of any public health crises, including a resurgence of COVID-19 infections, on our business, financial condition and results of operations.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

All brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Pulmonx” the “Company,” “we,” “us,” and “our” refer to Pulmonx Corporation.

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Part I. Financial Information

Item 1. Financial Statements

Pulmonx Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)


	June 30, 2023		December 31, 2022

Assets
Current assets
Cash and cash equivalents	$	101,581	$	101,736
Restricted cash	466		231
Short-term marketable securities	33,571		39,402
Accounts receivable, net	8,941		8,677
Inventory	15,636		14,564
Prepaid expenses and other current assets	4,233		4,343
Total current assets	164,428		168,953
Long-term marketable securities	12,454		5,924
Long-term inventory	4,434		5,283
Property and equipment, net	4,218		4,694
Goodwill	2,333		2,333
Intangible assets, net	92		154
Right of use assets	4,706		5,806
Other long-term assets	448		529
Total assets	$	193,113	$	193,676

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,377	$	1,758
Accrued liabilities	13,562		13,276
Income taxes payable	41		19
Deferred revenue	95		120
Short-term debt	93		90
Current lease liabilities	3,353		3,229
Total current liabilities	19,521		18,492
Deferred tax liability	94		94
Long-term lease liabilities	2,399		3,849
Long-term debt	37,147		17,234
Total liabilities	59,161		39,669
Commitments and contingencies (Note 8)
Stockholders’ equity

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Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of June 30, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value, 200,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 38,016,671 shares issued and outstanding as of June 30, 2023 and 37,555,565 shares issued and outstanding as of December 31, 2022	38		38
Additional paid-in capital	514,331		502,712
Accumulated other comprehensive income	1,956		1,575
Accumulated deficit	(382,373)		(350,318)
Total stockholders’ equity	133,952		154,007
Total liabilities and stockholders’ equity	$	193,113	$	193,676

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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Pulmonx Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue	$	17,194	$	13,950	$	31,729	$	24,735
Cost of goods sold	4,460		3,532		8,406		6,206
Gross profit	12,734		10,418		23,323		18,529
Operating expenses
Research and development	5,710		3,594		9,963		7,128
Selling, general and administrative	23,463		21,235		46,199		41,480
Total operating expenses	29,173		24,829		56,162		48,608
Loss from operations	(16,439)		(14,411)		(32,839)		(30,079)
Interest income	1,410		199		2,537		304
Interest expense	(864)		(223)		(1,435)		(421)
Other income (expense), net	(162)		(165)		(54)		(165)
Net loss before tax	(16,055)		(14,600)		(31,791)		(30,361)
Income tax expense	140		40		264		107
Net loss	(16,195)		(14,640)		(32,055)		(30,468)
Other comprehensive income
Currency translation adjustment	170		6		242		(18)
Change in unrealized gain (loss) on marketable securities	(34)		(92)		139		(337)
Total other comprehensive income (loss)	136		(86)		381		(355)
Comprehensive loss	$	(16,059)	$	(14,726)	$	(31,674)	$	(30,823)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.43)	$	(0.40)	$	(0.85)	$	(0.83)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	37,818,256		37,003,443		37,696,001		36,904,952

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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Pulmonx Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances at January 1, 2023	37,555,565	$	38	$	502,712	$	1,575	$	(350,318)	$	154,007
Issuance of common stock upon vesting of restricted stock units	66,895	—		—		—		—		—
Issuance of common stock upon exercise of stock options	23,006	—		46		—		—		46
Issuance of shares pursuant to Employee Stock Purchase Plan	85,210	—		676		—		—		676
Change in shares subject to repurchase	—	—		56		—		—		56
Stock-based compensation expense	—	—		4,764		—		—		4,764
Currency translation adjustment	—	—		—		72		—		72
Change in unrealized gains on marketable securities	—	—		—		173		—		173
Net loss	—	—		—		—		(15,860)		(15,860)
Balances at March 31, 2023	37,730,676	38		508,254		1,820		(366,178)		143,934
Issuance of common stock upon vesting of restricted stock units	222,598	—		—		—		—		—
Issuance of common stock upon exercise of stock options	63,503	—		139		—		—		139
Change in shares subject to repurchase	—	—		47		—		—		47
Repurchase of early exercised common stock options	(106)	—		—		—		—		—
Stock-based compensation expense	—	—		5,891		—		—		5,891
Currency translation adjustment	—	—		—		170		—		170
Change in unrealized losses on marketable securities	—	—		—		(34)		—		(34)
Net loss	—	—		—		—		(16,195)		(16,195)
Balances at June 30, 2023	38,016,671	$	38	$	514,331	$	1,956	$	(382,373)	$	133,952

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	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances at January 1, 2022	36,931,762	$	37	$	482,885	$	1,712	$	(291,395)	$	193,239
Issuance of common stock upon vesting of restricted stock units	21,392	—		—		—		—		—
Issuance of common stock upon exercise of stock options	99,265	—		221		—		—		221
Issuance of shares pursuant to Employee Stock Purchase Plan	46,002	—		1,108		—		—		1,108
Change in shares subject to repurchase	—	—		59		—		—		59
Stock-based compensation expense	—	—		3,615		—		—		3,615
Currency translation adjustment	—	—		—		(24)		—		(24)
Change in unrealized losses on marketable securities	—	—		—		(245)		—		(245)
Net loss	—	—		—		—		(15,828)		(15,828)
Balances at March 31, 2022	37,098,421	37		487,888		1,443		(307,223)		182,145
Issuance of common stock upon vesting of restricted stock units	93,988	—		—		—		—		—
Issuance of common stock upon exercise of stock options	73,621	—		151		—		—		151
Change in shares subject to repurchase	—	—		58		—		—		58
Stock-based compensation expense	—	—		4,554		—		—		4,554
Currency translation adjustment	—	—		—		6		—		6
Change in unrealized losses on marketable securities	—	—		—		(92)		—		(92)
Net loss	—	—		—		—		(14,640)		(14,640)
Balances at June 30, 2022	37,266,030	$	37	$	492,651	$	1,357	$	(321,863)	$	172,182

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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Pulmonx Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(32,055)	$	(30,468)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense	10,500		7,896
Loss on disposal of fixed assets	1		1
Allowance for doubtful accounts	(1)		1
Inventory write-downs	380		111
Depreciation and amortization expense	846		744
Amortization of debt discount and debt issuance costs	22		32
Amortization of premiums and discounts on marketable securities	(437)		19
Non-cash lease expense	1,324		1,226
Net changes in operating assets and liabilities:
Accounts receivable	(184)		(1,073)
Inventory	(267)		(3,030)
Prepaid expenses and other current assets	25		1,065
Other assets	17		6
Accounts payable	350		1,062
Accrued liabilities	501		(1,296)
Income taxes payable	19		(150)
Lease liabilities	(1,550)		(707)
Deferred revenue	(26)		(29)
Net cash used in operating activities	(20,535)		(24,590)
Cash flows from investing activities
Purchases of investments	(25,624)		(21,959)
Maturities of short-term marketable securities	25,500		19,280
Purchases of property and equipment	(115)		(863)
Net cash used in investing activities	(239)		(3,542)
Cash flows from financing activities
Proceeds from borrowing under term loan	20,000		—
Repayment of Credit Agreement	(47)		(44)
Proceeds from exercise of common stock options	183		382
Proceeds from issuance of common stock under the employee stock purchase plan	676		1,108
Net cash provided by financing activities	20,812		1,446
Effect of exchange rate changes on cash and cash equivalents	42		153
Net increase (decrease) in cash and cash equivalents	80		(26,533)
Cash, cash equivalents and restricted cash, at beginning of the period	101,967		148,711
Cash, cash equivalents and restricted cash, at end of the period	$	102,047	$	122,178
Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets:
Cash and cash equivalents	$	101,581	$	121,947
Restricted cash	466		231
Cash, cash equivalents and restricted cash in consolidated balance sheets	$	102,047	$	122,178

Supplemental non-cash items:
Lapse in repurchase rights of common stock	$	103	$	117

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Purchases of property and equipment in accounts payable and accrued liabilities	$	450	$	486
Amount receivable from exercise of common stock options	$	—	$	1
Operating lease right of use assets obtained in exchange for new lease liabilities	$	224	$	138
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	206	$	228
Cash paid for interest	$	1,235	$	375

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

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 $382.4 million as of June 30, 2023. During the six months ended June 30, 2023 and 2022, the Company used $20.5 million and $24.6 million of cash in its operating activities, respectively. As of June 30, 2023, the Company had cash, cash equivalents and marketable securities of $147.6 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 condensed 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 unaudited interim condensed consolidated financial statements.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s unaudited interim condensed 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 condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2022 and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

1, 2023. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position as of June 30, 2023 and condensed consolidated results of operations for the three and six months ended June 30, 2023 and 2022 and condensed consolidated cash flows for the six months ended June 30, 2023 and 2022 have been made. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.

Use of Estimates

The preparation of unaudited interim condensed 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 unaudited interim condensed 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, debt and related features, deferred tax assets and related valuation allowances and impact of contingencies.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. 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).

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 June 30, 2023 and December 31, 2022, the Company also had cash on deposit with foreign banks of approximately $4.1 million and $4.5 million, respectively, that was not federally insured.

The Company earns revenue 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 six months ended June 30, 2023 and 2022. The Company’s accounts receivable are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. As of June 30, 2023 and December 31, 2022, no customer accounted for more than 10% of accounts receivable. For the three and six months ended June 30, 2023 and 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.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

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 condensed consolidated balance sheet. Foreign currency translation adjustments are recorded in other comprehensive income (loss) in the condensed consolidated statements of operations and comprehensive loss and was $0.2 million and less than $0.1 million during the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and less than $(0.1) million during the six months ended June 30, 2023 and 2022, respectively.

Foreign currency transaction gains and losses are included in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss and was $(0.2) million and $(0.2) million during the three months ended June 30, 2023 and 2022, respectively, and $(0.2) million and $(0.2) million during the six months ended June 30, 2023 and 2022, respectively.

Credit Losses—Marketable Securities

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.

Beginning 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.

Credit Losses—Accounts Receivable

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 June 30, 2023 and December 31, 2022, accounts receivable is presented net of an allowance for credit losses of $0.1 million and $0.1 million, respectively.

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

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

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.

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.

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 ASU 2016-13 as of January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements and related disclosures.

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

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

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 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):


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	24,985	$	—	$	—	$	24,985
Cash equivalents	24,985		—		—		24,985
U.S. Government agency bonds	2,709		29,784		—		32,493
Commercial paper	—		13,532		—		13,532
Marketable securities	2,709		43,316		—		46,025
Total financial assets	$	27,694	$	43,316	$	—	$	71,010

There were no liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2023.


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	4,647	$	—	$	—	$	4,647
Cash equivalents	4,647		—		—		4,647
U.S. Government agency bonds	14,743		15,872		—		30,615
Commercial paper	—		14,711		—		14,711
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, 2022.

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the cost, unrealized gains and losses and fair value of marketable securities (in thousands):


	June 30, 2023
	Amortized Cost		Unrealized Losses		Unrealized Gains		Fair Value
U.S. Government agency bonds	$	32,643	$	(151)	$	1	$	32,493
Commercial paper	13,554		(22)		—		13,532
Marketable securities	$	46,197	$	(173)	$	1	$	46,025
Amounts recognized on the consolidated balance sheet
Short-term marketable securities							33,571
Long-term marketable securities							12,454
Marketable securities							$	46,025


	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		(29)		—		14,711
Marketable securities	$	45,637	$	(311)	$	—	$	45,326
Amounts recognized on the consolidated balance sheet
Short-term marketable securities							39,402
Long-term marketable securities							5,924
Marketable securities							$	45,326

The unrealized losses for marketable securities relate to changes in interest rates. No allowance for credit losses was recorded as of June 30, 2023 and December 31, 2022, and no impairment losses were recognized for the three and six months ended June 30, 2023.

Accrued interest receivable on marketable securities of $0.4 million and $0.1 million as of June 30, 2023 and December 31, 2022, respectively, is included in prepaid expenses and other current assets on the condensed consolidated balance sheet. 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 amounts are determined to be uncollectible. The Company did not write off any accrued interest receivable during the three and six months ended June 30, 2023.

5. Balance Sheet Components

Cash and Cash Equivalents

The Company’s cash and cash equivalents consist of the following (in thousands):


	June 30,		December 31,
	2023		2022
Cash	$	76,596	$	97,089
Cash equivalents:
Money market funds	24,985		4,647
Total cash and cash equivalents	$	101,581	$	101,736

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Inventory

Inventory consists of the following (in thousands):


	June 30,		December 31,
	2023		2022
Raw materials	$	3,343	$	3,820
Work in process	636		386
Finished goods	16,091		15,641
Total inventory	$	20,070	$	19,847
Reported as:
Inventory	$	15,636	$	14,564
Long-term inventory	4,434		5,283
Total inventory	$	20,070	$	19,847

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):


	June 30,		December 31,
	2023		2022
Prepaid expenses	$	2,658	$	2,044
Prepaid insurance	568		1,407
VAT and other receivable	889		602
Other current assets	118		290
Total prepaid expenses and other current assets	$	4,233	$	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 June 30, 2023 and December 31, 2022, the Company has capitalized approximately $0.4 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 June 30, 2023, approximately $0.3 million and less than $0.1 million capitalized costs were included in prepaid expenses and other current assets, and other long-term assets, respectively. Amortization expense, which was included in selling, general and administrative expenses, was $0.1 million and less than $0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $0.1 million for the six months ended June 30, 2023 and 2022, respectively.

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Property and Equipment, Net

Property and equipment, net consist of the following (in thousands):


	June 30,		December 31,
	2023		2022
Machinery and equipment	$	2,170	$	2,112
Computer equipment and software	1,915		1,773
Furniture and fixtures	263		263
Leasehold improvements	2,277		2,277
Construction in progress	1,877		1,825
Total	8,502		8,250
Less: accumulated depreciation	(4,284)		(3,556)
Property and equipment, net	$	4,218	$	4,694

Depreciation expense for the three months ended June 30, 2023 and 2022 was $0.3 million and $0.3 million, respectively. Depreciation expense for the six months ended June 30, 2023 and 2022 was $0.7 million and $0.7 million, respectively.

Goodwill

Goodwill was $2.3 million as of June 30, 2023 and December 31, 2022 arising from the Company’s acquisition of Emphasys Medical, Inc, in March 2009. No goodwill impairment losses have been recognized since the acquisition. There were no acquisitions or dispositions of goodwill in the six months ended June 30, 2023 and 2022. The Company assesses goodwill for impairment annually, or more frequently, when events or changes in circumstances indicate there may be impairment. Through June 30, 2023, there have been no events or changes in circumstances that indicated that the carrying value of goodwill may not be recoverable. As a result, no impairment charge was recorded during the six months ended June 30, 2023.

Intangible Assets

Intangible assets consist of the following (in thousands):


	June 30, 2023
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Developed technology	$	1,658	$	(1,576)	$	82
Trademarks	191		(181)		10
Total intangible assets	$	1,849	$	(1,757)	$	92


	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

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Amortization expense relating to the intangibles totaled less than $0.1 million during each of the three months ended June 30, 2023 and 2022, respectively. Amortization expense relating to the intangibles totaled $0.1 million during each of the six months ended June 30, 2023 and 2022, respectively.

Future amortization expense is as follows as of June 30, 2023 (in thousands):


2023 (remaining six months)	$	61
2024	31
Total amortization expense	$	92

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	June 30,		December 31,
	2023		2022
Accrued employee bonuses and commissions	$	4,280	$	4,973
Accrued professional fees	3,444		2,366
Accrued vacation	2,364		2,113
Other accrued personnel related expenses	2,318		2,513
Sales taxes, franchise tax and VAT	735		627
Accrued inventory purchases	77		167
Liability for early exercise of stock options	72		145
Other	272		372
Total accrued liabilities	$	13,562	$	13,276

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.

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

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.

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 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 June 30, 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 June 30, 2023, the CIBC Loan had an annual effective interest rate of 9.9% per year.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

The CIBC Loan consists of the following (in thousands):


	June 30,		December 31,
	2023		2022
Term loan	$	37,000	$	17,000
Less: debt issuance costs	(177)		(127)
Term loan	$	36,823	$	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 three months ended June 30, 2023 and 2022, the Company recorded interest expense related to debt discount and debt issuance costs of CIBC Loan of less than $0.1 million and less than $0.1 million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded interest expense related to debt discount and debt issuance costs of CIBC Loan of less than $0.1 million and less than $0.1 million, respectively.

Interest expense on the CIBC Loan amounted $0.9 million and $0.2 million during the three months ended June 30, 2023 and 2022, respectively. Interest expense on the CIBC Loan amounted $1.4 million and $0.4 million during the six months ended June 30, 2023 and 2022, respectively.

Credit Agreement

In April 2020, Pulmonx International Sàrl, a wholly-owned subsidiary of the Company, entered into a COVID-19 Credit Agreement with UBS Switzerland AG to receive up to 0.5 million Swiss Francs ($0.5 million U.S. dollar equivalent) under Swiss Federal Government program to mitigate the economic impact of the spread of the coronavirus. In May 2020, Pulmonx International Sàrl received 0.5 million Swiss Francs ($0.5 million U.S. dollar equivalent) under the COVID-19 Credit Agreement. The COVID-19 Credit Agreement 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. As of June 30, 2023, Pulmonx International Sàrl repaid $0.1 million to the lender.

Contractual Maturities of Financing Obligations

As of June 30, 2023, the aggregate future payments under the CIBC Loan and Credit Agreement (including interest payments) are as follows (in thousands):


2023 (remaining six months)	$	1,774
2024	5,569
2025	15,136
2026	13,995
2027	10,804
Total	47,278
Less: unamortized debt discount	(177)
Less: interest	(9,861)
Term loan and credit agreement	$	37,240

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

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 and $0.1 million as of June 30, 2023 and December 31, 2022, respectively. The deferred revenue as of December 31, 2022 of $0.1 million was recognized as revenue during the six months ended June 30, 2023.

The Company disaggregates its revenue by major geographic region, which has been disclosed in Note 12, “Segment Information.”

8. Commitments and Contingencies

Leases

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-months’ 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 18th 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 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.

The Company has leases on twelve vehicles with an average lease term of 2.9 years.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Operating lease cost consists of the following (in thousands):


	Six Months Ended June 30,
	2023		2022
Operating lease cost	$	1,442	$	1,446
Short-term lease cost	18		16
Variable lease cost	320		290
Total lease cost	$	1,780	$	1,752

The following table summarizes a maturity analysis of the Company’s lease liabilities showing the aggregate lease payments as of June 30, 2023 (in thousands):


2023 (remaining six months)	$	1,805
2024	3,192
2025	1,073
2026	10
Total minimum lease payments	6,080
Less: Amount of lease payments representing interest	328
Present value of future minimum lease payments	$	5,752
Less: Current lease liabilities	3,353
Long-term lease liabilities	$	2,399

The following table summarizes additional information related to the Company’s operating leases (in thousands, except weighted average data):


	June 30, 2023			December 31, 2022
Right of use asset	$	4,706		$	5,806
Weighted average remaining lease term (years)	1.75			2.08
Weighted average discount rate (percent)	6.6		%	6.0		%

The following table summarizes other supplemental information related to the Company’s operating leases (in thousands):


	Six Months Ended June 30,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities included in cash flows used in operating activities	$	1,748	$	966
Right-of-use assets obtained in exchange for lease liabilities	$	224	$	138

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 the next three years. From inception of the agreement

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Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

through June 30, 2023, the Company recorded $0.7 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.

9. Income Taxes

The income tax expense for the three months ended June 30, 2023 and 2022 was $0.1 million and less than $0.1 million, respectively. The income tax expense for the six months ended June 30, 2023 and 2022 was $0.3 million and $0.1 million, respectively. The income tax expense was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions. The difference between the Company’s effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, foreign income taxes, and non-recognition of US tax benefit because of a full valuation allowance against US deferred tax assets.

The income tax expense for the six months ended June 30, 2023 and 2022 relates primarily to state minimum income tax and income tax on the Company’s earnings in foreign jurisdictions.

10. Stockholders’ Equity

Common Stock

As of June 30, 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.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuances as follows:


	June 30,	December 31,
	2023	2022
Common stock options issued and outstanding	3,201,912	2,495,528
Common stock restricted stock units issued and outstanding	2,556,721	998,473
Common stock available for future grants	2,607,813	3,765,706
Common stock available for ESPP	1,502,455	1,212,109
Total	9,868,901	8,471,816

Stock Option Plan

A summary of stock option activity for the six months ended June 30, 2023 is set forth below:


	Outstanding Options
	Number of Shares	Weighted Average Exercise Price
Balance, January 1, 2023	2,495,528	$	17.35
Options granted	835,400	11.48
Options exercised	(86,509)	2.14
Options canceled	(42,507)	19.60
Balance, June 30, 2023	3,201,912	$	16.20

The aggregate intrinsic value of options outstanding as of June 30, 2023 was $12.3 million.


	June 30, 2023
	Number of Shares	Weighted Average Exercise Price		Weighted Average Contractual Life (in Years)
Options vested	1,389,110	$	14.86	6.90
Options vested and expected to vest	3,201,912	$	16.20	7.97

Total intrinsic value of options vested as of June 30, 2023 was $7.8 million.

Early Exercise of Stock Options

Under the terms of the individual option grants, options are fully exercisable on the grant date, subject to the Company’s repurchase right at the original exercise price. Accordingly, options may be exercised prior to vesting. The shares are subject to the Company’s lapsing repurchase right upon termination of employment or over the options’ vesting period of generally four years at the original purchase price. The proceeds initially are recorded in other liabilities from the early exercise of stock options and are reclassified to additional paid-in capital as the Company’s repurchase right lapses. During the six months ended June 30, 2023, the Company repurchased 106 shares of common stock for less than $0.1 million. During the six months ended June 30, 2022, the Company did not repurchase shares of common stock. As of June 30, 2023 and December 31, 2022, 20,055 and 77,782 shares, respectively, were subject to repurchase, with an aggregate exercise price of less than $0.1 million and $0.1 million, respectively, and were recorded in other current liabilities.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Restricted Stock Units

Activity with respect to restricted stock units was as follows:


	Number of Shares Underlying Outstanding Restricted Stock	Weighted Average Grant Date Fair Value
Unvested, January 1, 2023	998,473	$	27.72
Granted	1,931,460	11.52
Vested	(289,493)	21.74
Canceled	(83,719)	20.61
Unvested, June 30, 2023	2,556,721	$	16.40

The aggregate intrinsic value of restricted stock units outstanding as of June 30, 2023 was $33.5 million.

Total Stock-Based Compensation

Stock-based compensation expense is reflected in the statements of operations and comprehensive loss as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Cost of goods sold	$	391	$	189	$	614	$	336
Research and development	760		556		1,326		977
Selling, general and administrative	4,711		3,638		8,560		6,583
Total	$	5,862	$	4,383	$	10,500	$	7,896

The above stock-based compensation expense related to the following equity-based awards (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Stock options and restricted stock units	$	5,799	$	4,209	$	10,339	$	7,521
ESPP	63		174		161		375
Total	$	5,862	$	4,383	$	10,500	$	7,896

Stock-based compensation of $0.4 million and $0.3 million was capitalized into inventory for the three months ended June 30, 2023 and 2022, respectively. Stock-based compensation of $0.8 million and $0.6 million was capitalized into inventory for the six months ended June 30, 2023 and 2022, respectively. Stock-based compensation capitalized in prior periods of $0.4 million and $0.2 million was recognized as cost of sales in the three months ended June 30, 2023 and 2022, respectively. Stock-based compensation capitalized in prior periods of $0.6 million and $0.3 million was recognized as cost of sales in the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, there was $58.2 million of unrecognized compensation costs related to unvested common stock options and restricted stock units, expected to be recognized over a weighted-average period of 2.9 years. The total grant date fair value of shares vested during the three months ended June 30, 2023 and 2022 was $6.4 million and $4.7 million, respectively. The total grant date fair value of shares vested during the six months ended June 30, 2023 and 2022 was $10.3 million and $7.4 million, respectively.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

As of June 30, 2023, the Company had unrecognized employee stock-based compensation relating to ESPP awards of approximately less than $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):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator
Net loss attributable to common stockholders	$	(16,195)	$	(14,640)	$	(32,055)	$	(30,468)
Denominator
Weighted-average common stock outstanding	37,846,019		37,171,893		37,738,775		37,090,164
Less: weighted-average common shares subject to repurchase	(27,763)		(168,450)		(42,774)		(185,212)
Weighted-average common shares used to compute basic and diluted net loss per share	37,818,256		37,003,443		37,696,001		36,904,952
Net loss per share attributable to common stockholders, basic and diluted	$	(0.43)	$	(0.40)	$	(0.85)	$	(0.83)

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:


	As of June 30,
	2023	2022
Options to purchase common stock	3,201,912	2,600,244
Unvested restricted stock units	2,556,721	1,091,957
Unvested early exercised common stock options	20,055	155,969
Shares committed under ESPP	49,220	33,035
Total	5,827,908	3,881,205

12. Segment Information

The chief operating decision maker for the Company is the Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure. The Company’s Chief Executive Officer evaluates performance based primarily on revenue in the geographic locations in which the Company operates.

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Pulmonx Corporation

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

Revenue by geographic area is based on the billing address of the customer. The following table sets forth the Company’s revenue by geographic area (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	11,022	$	8,616	$	20,359	$	14,629
Europe, Middle-East and Africa (“EMEA”)	5,312		4,570		9,843		8,623
Asia Pacific	792		724		1,388		1,443
Other International	68		40		139		40
Total	$	17,194	$	13,950	$	31,729	$	24,735

Revenue from Germany represented 9% and 10% of total revenue for the three months ended June 30, 2023 and 2022, respectively. Revenue from Germany represented 9% and 12% of total revenue for the six months ended June 30, 2023 and 2022, respectively.

Long-lived assets by geographic area are based on physical location of those assets. The following table sets forth the Company’s long-lived assets by geographic area (in thousands):


	June 30,		December 31,
	2023		2022
United States	$	4,148	$	4,634
EMEA	57		58
Asia Pacific	13		2
Total	$	4,218	$	4,694

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections of this Quarterly Report entitled “Forward-Looking Statements” and “Risk Factors,” under Part II, Item 1A and those discussed in our Annual Report on Form 10-K for the year ending December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023.

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 revenue of $17.2 million, with a gross margin of 74.1% and a net loss of $16.2 million, for the three months ended June 30, 2023 compared to revenue of $14.0 million, with a gross margin of 74.7% and a net loss of $14.6 million, for the three months ended June 30, 2022. For the six months ended June 30, 2023, we generated revenue of $31.7 million, with a gross margin of 73.5% and a net loss of $32.1 million, compared to revenue of $24.7 million, with a gross margin of 74.9% and a net loss of $30.5 million, for the six months ended June 30, 2022. As of June 30, 2023, we had an accumulated deficit of $382.4 million, cash, cash equivalents and marketable securities of $147.6 million, and $37.2 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 throughout the United States, Europe and Asia 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 condensed consolidated financial statements.

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 in the United States in June 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 largest Blue Cross Blue Shield plans including Anthem, Health Care Service Corporation, and BCBS Michigan have issued positive coverage policies for the Zephyr Valve, and United Healthcare no longer considers the procedure unproven or experimental. Some commercial payors do not yet consider our solution medically necessary, but these same plans are approving pre-authorization requests on a case-by-case basis. Medicare, currently without a public coverage policy, covers our solution for patients when medically necessary on a case-by-case basis and other commercial insurers not described above are approving pre-authorization requests on a case-by-case basis.

We have a dedicated patient reimbursement support team in the United States that works collaboratively with patients and providers to help secure the appropriate prior authorization approvals in advance of treatment. We continue to educate private insurers in the United States on our clinical data and patient selection tools in an effort to continue to expand the number of positive coverage policies, in order to increase our revenue. Outside the United States, our solution is covered by major health systems across much of Europe, Australia and South Korea.

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.

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 in the United States and through direct sales and several third-party distributors in select markets outside the 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 three and six months ended June 30, 2023 and 2022.

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 of U.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 the U.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 in the 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 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 and SEC requirements, director and officer insurance premiums and investor relations costs. We also saw an increase in our stock-based compensation expense with the establishment of our 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.

Results of Operations:

Comparison of the Three Months Ended June 30, 2023 and 2022

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


	Three Months Ended June 30,
	2023		2022		$ Change		% Change
	(in thousands)
Revenue	$	17,194	$	13,950	$	3,244	23.3	%
Costs of goods sold	4,460		3,532		928		26.3	%
Gross profit	12,734		10,418		2,316