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 report 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 section of
this report entitled "Risk Factors," under Part II, Item 1A and those discussed
in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("SEC") on March 15, 2021. Please also see the section of this
Quarterly Report on Form 10-Q titled "Forward-Looking Statements."
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. We estimate our solution currently addresses
approximately 500,000 patients in the United States and 700,000 patients in
select international markets, which represents a global market opportunity of
approximately $12 billion.
We have a compelling body of clinical evidence with over 100 scientific articles
published regarding the clinical benefits of Zephyr Valves, including in The New
England Journal of Medicine, The Lancet and the American Journal of Respiratory
and Critical Care Medicine. Multiple randomized controlled clinical trials have
demonstrated that patients selected with the Chartis System and successfully
treated with Zephyr Valves have shown statistically and clinically significant
improvements in lung function, exercise capacity and quality of life compared to
medical management alone.
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 approximately 800
pulmonologists performing interventional pulmonary procedures and 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,
Anthem Blue Cross Blue Shield, Blue Cross Blue Shield of Michigan, Humana,
Health Care Service Corporation, and Highmark 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.
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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
$13.3 million, with a gross margin of 73.4% and a net loss of $10.2 million, for
the three months ended September 30, 2021 compared to revenue of $10.6 million,
with a gross margin of 70.3% and a net loss of $3.9 million, for the three
months ended September 30, 2020. For the nine months ended September 30, 2021,
we generated revenue of $34.7 million, with a gross margin of 73.1% and a net
loss of $35.7 million, compared to revenue of $22.9 million, with a gross margin
of 61.7% and a net loss of $22.9 million, for the nine months ended
September 30, 2020. As of September 30, 2021, we had an accumulated deficit of
$278.4 million, cash, cash equivalents and marketable securities of $202.6
million, and $17.4 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.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has resulted in public health responses including travel
bans, social distancing requirements, quarantines, stay-at-home orders and other
significant measures, which have delayed clinical trials and FDA operations and
adversely impacted the number of procedures performed using our products. In the
markets in which we operate, elective, specialty and other procedures and
appointments have been suspended or canceled to avoid non-essential patient
exposure to medical environments and potential infection with COVID-19 and to
focus limited resources and personnel capacity toward the treatment of COVID-19
patients. As a result, we have experienced a material adverse impact on our
business, financial condition and results of operations from a decrease and
delay of procedures involving our products.
Beginning in May 2020, we began to see signs of a recovery in our business, and
by September 30, 2020 the total number of Zephyr Valves sold in the third
quarter exceeded the total number of Zephyr Valves sold during the first quarter
of 2020. In November and December 2020, a resurgence of COVID-19 led to a
decrease in procedure volumes, and our revenues in the fourth quarter of 2020
declined compared to revenues in the third quarter of 2020. The COVID-19-driven
impact on procedure volumes extended into the first quarter of 2021. Beginning
in March 2021, we observed indicators of recovery in our US markets which
continued through the second quarter. During the third quarter of 2021,
procedure volumes were again adversely impacted in the U.S. in certain regions
that were affected by the Delta variant of COVID-19. In international markets,
our business recovered during the third quarter of 2021, due to procedure
volumes increasing as COVID-19 cases gradually declined through the quarter. We
may
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continue to see regional variations in procedure volumes in our US markets from
the COVID-19 pandemic and its variants. We are encouraged for the longer term,
and we believe the following key indicators are contributing to the
stabilization of our business:
•continued opening of new accounts;
•strong physician participation in virtual trainings;
•a strong patient pipeline evidenced by an increase in StratX report activity, a
rebound in patient calls into hospitals inquiring about our procedure, and a
resumption of patient calls to our reimbursement support service; and
•hospitals and centers accepting patients for elective procedures.
In response to the COVID-19 pandemic, we implemented a variety of measures
intended to help us manage through its impact and position us to resume
operations quickly and efficiently as restrictions, recommendations, and best
practices evolve. These measures include:
•establishing safety protocols, facility enhancements, and work-from-home
strategies to protect our employees;
•ensuring that our manufacturing and supply chain operations remain intact and
operational, and building over four months of inventory;
•keeping our workforce intact and continuing to build our team, including
expansion of our U.S. sales force;
•continuing to focus on new account openings and implementing virtual physician
and sales force training programs;
•accelerating our physician education programs and direct-to-patient marketing
efforts through social media or other virtual forums;
•increasing our capital base by $201.4 million through our IPO in October 2020;
and
•continuing to invest in research and development activities in order to advance
our AeriSeal clinical programs.
Despite signs of recovery of our business, we cannot be certain that any
recovery will be sustained, or that a further resurgence of COVID-19 or variants
of the virus will not occur. We believe many of the measures adopted in response
to, and challenges resulting, from COVID-19 will likely continue for the
duration of the pandemic, which is uncertain, and continues to present a
substantial public health and economic challenge around the world and is
adversely affecting our employees, including our sales force, hospitals,
physicians, patients, communities and business operations, as well as
contributing to significant volatility and negative pressure on the U.S. and
world economy and in financial markets.
We cannot assure you that our recent volume of Zephyr Valves sold are indicative
of future results. The number of Zephyr Valves sold in the future may decrease
due to a resurgence of the COVID-19 pandemic. Further, there may be limited
provider capacity due to labor shortages, or for other reasons, which could
limit the ability of patients to receive treatment with Zephyr Valves. We
believe limited provider and hospital capacity could continue to have a material
adverse effect on our business, financial condition and results of operations as
the pandemic subsides and following the end of the pandemic. Our business,
financial condition and results of operations have been, and may in the future
be, materially and adversely affected by the COVID-19 pandemic. The extent to
which the COVID-19 pandemic impacts our business, financial condition and
results of operations will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge
concerning the
                                       33
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severity and spread of COVID-19 and variant strains, governmental and societal
response to contain and treat COVID-19 and variant strains, and vaccination
efforts, among others.
Our condensed consolidated financial statements reflect judgments and estimates
that could change in the future as a result of the COVID-19 pandemic. For more
information regarding these risks and potential impacts, please refer to Part
II, Item 1A, "Risk Factors."
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 25% have managed
Medicare/Medicaid and the remaining 50% 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, Anthem Blue Cross Blue Shield (BCBS), Blue Cross Blue Shield of
Michigan, Humana, Health Care Service Corporation, and Highmark have issued
positive coverage policies for the Zephyr Valve, and United Healthcare no longer
considers the procedure unproven or experimental. Some commercial payors do not
yet consider our solution medically necessary, but these
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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 outside of the United States,
primarily in the first and third quarters and anticipate this trend to continue.
In addition, as our sales grow in the United States, we may experience
seasonality based on holidays, vacations and other factors because this is an
elective procedure.
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Components of Our Results of Operations
Revenue
We currently derive substantially all our revenue from the sale of our products
to hospitals and distributors. We market and sell our products through a direct
sales organization 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 nine months ended September 30, 2021 and
September 30, 2020.
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, 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 of 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
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include payroll and personnel-related costs for our research and development
employees, including expenses related to stock-based compensation for employees
engaged in research and development, consulting services, clinical trial
expenses, regulatory expenses, prototyping, testing, laboratory supplies, and an
allocation of facility overhead costs. Our clinical trial expenses include costs
associated with clinical trial design, clinical trial site development and study
costs, data management costs, related travel expenses, the cost of products used
for clinical activities, and internal and external costs associated with our
regulatory compliance. 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, financial 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 as a public company. Additionally, we
anticipate increased 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 new equity plan and related
grants either in the form of restricted stock units or 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 changes in the fair value of
our derivative liabilities, changes in the fair value of preferred stock
warrants and foreign currency exchange gains and losses. In February 2020, the
warrants were partly exercised and partly expired. The final fair value of the
warrant liability was reclassified to stockholders' (equity)/deficit. All of our
derivative liabilities were settled during 2020. Upon the closing of our IPO on
October 5, 2020, we paid $1.9 million pursuant to the Success Fee Agreement to
Oxford Finance LLC. In connection with the closing of our IPO, the 2020 Notes
were converted into 2,561,484 shares of common stock.
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Results of Operations:
Comparison of the Three Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the period
indicated:
                                         Three Months Ended September 30,
                                             2021                2020              $ Change                % Change
                                                  (in thousands)
Revenue                                 $    13,261          $   10,612          $    2,649                       25.0  %
Costs of goods sold                           3,522               3,150                 372                       11.8  %
Gross profit                                  9,739               7,462               2,277                       30.5  %
Operating expenses:
Research and development                      2,815               1,997                 818                       41.0  %
Selling, general and administrative          16,686              10,813               5,873                       54.3  %
Total operating expenses                     19,501              12,810               6,691                       52.2  %
Loss from operations                         (9,762)             (5,348)             (4,414)                      82.5  %
Interest income                                  99                   9                  90                    1,000.0  %
Interest expense                               (207)             (1,103)                896                      (81.2) %
Other income (expense), net                    (267)              2,631              (2,898)                    (110.1) %
Net loss before tax                         (10,137)             (3,811)             (6,326)                     166.0  %
Income tax expense                               44                  49                  (5)                     (10.2) %
Net loss                                $   (10,181)         $   (3,860)         $   (6,321)                     163.8  %


Revenue
Revenue increased by $2.6 million, or 25.0%, to $13.3 million during the three
months ended September 30, 2021, compared to $10.6 million during the three
months ended September 30, 2020. The sale of products in the United States
increased by $1.6 million to $6.9 million during the three months ended
September 30, 2021, compared to $5.3 million for the three months ended
September 30, 2020. The sale of products in international markets increased by
$1.1 million to $6.4 million during the three months ended September 30, 2021,
compared to $5.3 million for the three months ended September 30, 2020. The
increase in revenue across regions was driven by an increase in procedure
volumes from increasing commercial adoption in select markets that were less
affected by COVID-19.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased by $0.4 million, or 11.8%, to $3.5 million during
the three months ended September 30, 2021, compared to $3.2 million during the
three months ended September 30, 2020. The increase was primarily due to growth
in shipments. Gross margin was 73.4% during the three months ended September 30,
2021 and 70.3% during the three months ended September 30, 2020.
Research and Development Expenses
Research and development expenses increased by $0.8 million, or 41.0%, to
$2.8 million during the three months ended September 30, 2021, compared to
$2.0 million during the three months ended September 30, 2020. The increase in
research and development expense was primarily due to increases of $0.4 million
of costs associated with our clinical trials, $0.2 million in research and
development testing and consulting expenses, and $0.2 million in facilities,
personnel related, and other expenses.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.9 million, or
54.3%, to $16.7 million during the three months ended September 30, 2021,
compared to $10.8 million during the three months ended September 30, 2020. The
increase in selling, general and administrative expenses was primarily due to
$3.5 million of payroll and personnel-related expenses including stock based
compensation for our sales, marketing and administrative personnel, an increase
of $1.1 million in advertising expenses, an increase of $0.7 million in
insurance costs associated with being a public company, and an increase of $0.6
million in consulting, recruiting, and facilities expense.
Interest Expense and Income
Interest expense decreased by $0.9 million to $0.2 million during the three
months ended September 30, 2021, compared to $1.1 million during the three
months ended September 30, 2020 primarily due to a lower amount of debt
outstanding during the three months ended September 30, 2021 compared to the
three months ended September 30, 2020. Interest income increased by $0.1 million
for the three months ended September 30, 2021 compared to the three months ended
September 30, 2020, primarily as a result of higher balances of our cash, cash
equivalents and marketable securities balances.
Other Income (Expense), Net
Other income (expense), net decreased by $2.9 million to $(0.3) million during
the three months ended September 30, 2021, compared to $2.6 million during the
three months ended September 30, 2020, primarily due to a change in the fair
value of derivative liabilities in 2020.
Comparison of the Nine Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the period
indicated:
                                            Nine Months Ended September 30,
                                               2021                   2020              $ Change               % Change
                                                    (in thousands)
Revenue                                 $         34,708          $   22,903          $   11,805                      51.5  %
Costs of goods sold                                9,329               8,779                 550                       6.3  %
Gross profit                                      25,379              14,124              11,255                      79.7  %
Operating expenses:
Research and development                           9,355               4,988               4,367                      87.6  %
Selling, general and administrative               50,962              32,114              18,848                      58.7  %
Total operating expenses                          60,317              37,102              23,215                      62.6  %
Loss from operations                             (34,938)            (22,978)            (11,960)                     52.0  %
Interest income                                      306                  98                 208                     212.2  %
Interest expense                                    (630)             (2,914)              2,284                     (78.4) %
Other income (expense), net                         (202)              3,052              (3,254)                   (106.6) %
Net loss before tax                              (35,464)            (22,742)            (12,722)                     55.9  %
Income tax expense                                   191                 192                  (1)                     (0.5) %
Net loss                                $        (35,655)         $  (22,934)         $  (12,721)                     55.5  %


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Revenue


Revenue increased by $11.8 million, or 51.5%, to $34.7 million during the nine
months ended September 30, 2021, compared to $22.9 million during the nine
months ended September 30, 2020. The sale of products in the United States
increased by $6.4 million to $17.7 million during the nine months ended
September 30, 2021, compared to $11.3 million for the nine months ended
September 30, 2020. The sale of products in international markets increased by
$5.4 million to $17.0 million during the nine months ended September 30, 2021,
compared to $11.6 million for the nine months ended September 30, 2020. The
increase in revenue across regions was driven by an increase in procedure
volumes due to a relative recovery from the COVID-19 pandemic and increasing
commercial adoption in select markets.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased by $0.6 million, or 6.3%, to $9.3 million during
the nine months ended September 30, 2021, compared to $8.8 million during the
nine months ended September 30, 2020. The increase was primarily due to growth
in shipments. Gross margin was 73.1% during the nine months ended September 30,
2021 and 61.7% during the nine months ended September 30, 2020.
Research and Development Expenses
Research and development expenses increased by $4.4 million, or 87.6%, to
$9.4 million during the nine months ended September 30, 2021, compared to
$5.0 million during the nine months ended September 30, 2020. The increase in
research and development expense was primarily due to increases of $1.9 million
of costs associated with our clinical trials, $1.5 million in personnel related
expenses including stock based compensation as we invested in research and
development activities, $0.6 million of research and development testing and
consulting expenses, and $0.4 million of expenses in facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $18.8 million, or
58.7%, to $51.0 million during the nine months ended September 30, 2021,
compared to $32.1 million during the nine months ended September 30, 2020. The
increase in selling, general and administrative expenses was primarily due to
increase of $13.6 million in payroll and personnel-related expenses including
stock based compensation for our sales, marketing and administrative personnel,
$2.8 million in advertising expenses, $2.1 million in insurance costs associated
with being a public company, $2.1 million in consulting and recruiting expenses,
$0.5 million in facilities expense, and an increase of $0.7 million in other
expenses, offset by a decrease of $3 million in IPO expenses written-off in the
prior year.
Interest Expense and Income
Interest expense decreased by $2.3 million to $0.6 million during the nine
months ended September 30, 2021, compared to $2.9 million during the nine months
ended September 30, 2020 primarily due to the conversion of convertible notes in
2020. Interest income increased by $0.2 million for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020,
primarily as a result of higher balances of our cash, cash equivalents and
marketable securities balances.
Other Income (Expense), Net
Other income (expense), net decreased by $3.3 million to $(0.2) million during
the nine months ended September 30, 2021, compared to $3.1 million during the
nine months ended September 30, 2020, primarily due to a change in the fair
value of derivative liabilities in 2020.
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Liquidity and Capital Resources; Plan of Operation
To date, we have financed our operations primarily through the sale of equity
securities, debt financing arrangements and sales of our products. As
of September 30, 2021, we had cash, cash equivalents and marketable securities
of $202.6 million, an accumulated deficit of $278.4 million, and $16.9 million
outstanding under the CIBC Term Loan, net of debt discount.
Oxford Term Loan
From August 2014 until February 2020, we were party to a Loan and Security
Agreement with Oxford (the "Oxford Agreement"), which provided us with the
ability to borrow up to $20.0 million in term loans. The Oxford Agreement
included a floating interest rate tied to LIBOR and included customary
representations and warranties, restrictive covenants, events of default and
other customary terms and conditions.
In connection with the closing of the Oxford Agreement in August 2014, we also
entered into a Success Fee Agreement, which requires us to pay up to $2.5
million (the "Success Fee") in the event of a sale or other disposition by us of
all or substantially all of our assets, a merger or consolidation or an initial
public offering (a Liquidity Event), in each case before August 28, 2021. We
borrowed a total of $15.0 million principal amount of term loans under the
Oxford Agreement, which based on the formula in the Success Fee Agreement,
obligated us to pay a Success Fee of $1.9 million on the closing of our IPO in
October 2020.
In February 2020, we terminated and paid off in full $17.3 million, including
the outstanding loan amount of $15.0 million, final payment of $1.3 million,
amendment fees of $0.9 million and accrued interest of $0.1 million, outstanding
under the Oxford Agreement. The repayment of the loans under the Oxford
Agreement was accounted as extinguishment and the Company recorded a loss on
debt extinguishment of $0.4 million. All of our obligations under the Oxford
Agreement have been terminated except the indemnity obligation thereunder, which
by their terms survive the facility. On October 5, 2020, upon the closing of our
IPO, we paid $1.9 million pursuant to the Success Fee Agreement to Oxford
Finance LLC.
In the three and nine months ended September 30, 2020, we recorded interest
expense on the term loan of $0 million and $0.4 million, respectively.
We incurred fees and legal expenses of $0.1 million in connection with the
Oxford Agreement and related Amendments, which were recorded as deferred
financing costs and amortized to interest expense. We also paid $0.2 million in
fees to Oxford which is reflected as a discount on the debt and was being
accreted over the life of the term loan. In the three and nine months ended
September 30, 2020, we recorded interest expense related to deferred financing
and debt issuance costs of $0 million and less than $0.1 million, respectively.
CIBC Term Loan
On February 20, 2020, we executed a Loan and Security Agreement with Canadian
Imperial Bank of Commerce ("CIBC"), which we subsequently amended on April 17,
2020, December 28, 2020 and March 29, 2021 (as amended, the "CIBC Agreement").
The CIBC Agreement provided us with the ability to borrow up to $32.0 million in
debt financing consisting of $17.0 million advanced at the closing of the
agreement ("Tranche A"), with the option to draw up to an additional $8.0
million ("Tranche B") on or before February 20, 2022 and an additional $7.0
million ("Tranche C") on or before February 20, 2022. Tranche B is conditioned
upon achieving a trailing six-month revenue of at least $15.0 million as of the
date of any Tranche B Borrowing, and Tranche C is conditioned upon achieving a
trailing six-month revenue of at least $20.0 million as of the date of any
Tranche C borrowing. The availability of Tranche B and Tranche C is further
conditioned upon the joining of Pulmonx International Sàrl to the CIBC Agreement
and the execution by Pulmonx International Sàrl of Swiss-law collateral
documentation in favor of CIBC.
The loan bears interest at a floating rate equal to 1.0% above the Wall Street
Journal Prime Rate at any time. The Tranche C loan will bear interest at a
floating rate equal to 1.5% above the Wall Street Journal Prime Rate at any
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time. The loan is collateralized by substantially all of our assets, including
cash and cash equivalents, accounts receivable, intellectual property and
equipment. We may prepay the loan, subject to certain requirements. The CIBC
Agreement includes customary restrictive covenants, financial covenants, events
of default and other customary terms and conditions. In December 2020, to
address certain post-close covenants for which we were not in compliance, we
entered into a Second Amendment to the CIBC Agreement that extended the
compliance date for certain post-close covenants to June 30, 2021. In March
2021, we entered into a Third Amendment to the CIBC Agreement which extended the
loan maturity date from March 15, 2022 to February 20, 2025, and modified
certain financial covenants. Per the amended terms, 36 equal payments of
principal plus accrued interest will be due beginning March 31, 2022. The
beginning of principal repayment can be extended to March 31, 2023 if the
Company achieves three-month trailing revenue of at least $20.0 million as of
February 20, 2022. The amendment was accounted for as a debt modification and no
gain or loss was recognized. In June 2021, the Company entered into an amended
and restated loan and security agreement with CIBC that extended the compliance
date for certain post-close covenants to March 31, 2022.
We paid $0.4 million fees to the lender and third parties which is reflected as
a discount on the CIBC Loan and is being accreted over the life of the term loan
using the effective interest method. During each three months ended
September 30, 2021 and 2020, we recorded interest expense related to debt
discount and debt issuance costs of CIBC Loan of less than $0.1 million. During
the nine months ended September 30, 2021 and 2020, we recorded interest expense
related to debt discount and debt issuance costs of CIBC Loan of $0.1 million
and $0.1 million, respectively.
Interest expense on the CIBC Loan was $0.2 million and $0.2 million during the
three months ended September 30, 2021 and 2020, respectively. Interest expense
on the CIBC Loan was $0.6 million and $0.5 million during the nine months ended
September 30, 2021 and 2020, respectively.
2020 Notes
In April 2020, we issued and sold the 2020 Notes in the aggregate principal
amount of $33.0 million. We have the option to call up to an additional $33.0
million for a maximum aggregate amount of $66.0 million, subject to customary
closing conditions, provided that any such call be for no less than $5.0 million
on or prior to April 17, 2022. The 2020 Notes accrue interest at a rate equal to
2.0% above the Wall Street Journal Prime Rate. All unpaid interest and principal
will be due and payable upon request of the majority of lenders ("Majority
Holders") on or after the earlier of April 17, 2022 or an event of default. The
Company may prepay the 2020 Notes prior to April 17, 2022 only with the consent
of the Majority Holders.
The 2020 Notes included embedded derivatives that were required to be bifurcated
from the 2020 Notes and accounted for separately as a single, compound embedded
derivative instrument under ASC 815, Derivatives (2020 Notes derivative
liability). We determined that the share settled redemption in the case of a
financing or an IPO discussed above represents an embedded derivative that is
not clearly and closely related to the debt host and have accounted for these
settlement alternatives as separate embedded derivative liability. The fair
value of the 2020 derivative liability of $3.9 million was recorded on the
issuance date of the 2020 Notes resulting in a debt discount, which is reported
as a direct deduction from the face amount of the 2020 Notes. The 2020
derivative liability was remeasured to its fair value at the end of each
reporting period and any change in fair value was recognized in other income
(expense), net in the statements of operations and comprehensive loss. The fair
value of the 2020 derivative liability upon the effectiveness of our IPO was
recognized in the consolidated statements of operations and comprehensive loss
and the derivative liability was extinguished.
We incurred debt issuance costs of $0.1 million in connection with the 2020
Notes Agreement, which are reported on the balance sheet as a direct deduction
from the face amount of the 2020 Notes.
Debt discount of $4.0 million is being amortized using the effective interest
rate method over the term of the note and recorded as a non-cash interest
expense.
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Obligations with respect to the 2020 Notes are unsecured and subordinated to our
obligations with respect to the CIBC Loan. The 2020 Notes include customary
events of default.
Upon the closing of our IPO in October 2020, the 2020 Notes, including accrued
interest thereon, automatically converted into 2,561,484 shares of our common
stock at a conversion price of $13.20 per share.
Credit Agreement
In April 2020, Pulmonx International Sàrl, our wholly-owned subsidiary, entered
into a COVID-19 Credit Agreement with UBS Switzerland AG to receive up to
0.5 million Swiss Francs ($0.5 million U.S. dollar equivalent) under Swiss
Federal Government program to mitigate the economic impact of the spread of the
coronavirus. In May 2020, Pulmonx International Sàrl received 0.5 million Swiss
Francs ($0.5 million U.S. dollar equivalent) under the COVID-19 Credit
Agreement. The COVID-19 Credit Agreement will bear no interest and is payable
within 60 months after receipt of funds. As of September 30, 2021, Pulmonx
International Sàrl did not make any repayment of the credit agreement.
Funding Requirements
We expect to incur continued expenditures in the future in support of our
commercial infrastructure, sales force and other commercialization efforts. In
addition, we intend to continue to make investments in the development of our
products, including ongoing research and development programs. We also expect to
incur additional costs associated with operating as a public company. Lastly, we
may also undertake additional expenses to further expand our commercial
organization and efforts, enhance our research and development efforts and
pursue product expansion opportunities.
As of September 30, 2021, we had cash, cash equivalents and marketable
securities of $202.6 million. Based on our current planned operations, we expect
that our cash and cash equivalents will enable us to fund our operating expenses
for at least 12 months from the issuance of our condensed consolidated financial
statements as of and for the three months ended September 30, 2021. We have
based these estimates on assumptions that may prove to be wrong, and we could
utilize our available capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with research,
development and commercialization of medical devices, we are unable to estimate
the exact amount of our working capital requirements. Our future funding
requirements will depend on many factors, including:
•the costs of commercialization activities related to commercializing our
products in the United States and elsewhere, including expanding territories,
increasing sales and marketing personnel, actual and anticipated product sales,
marketing programs, manufacturing and distribution costs;
•the impact of the COVID-19 pandemic on our business;
•the cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights;
•the research and development activities we intend to undertake, product
enhancements that we intend to pursue;
•whether or not we pursue acquisitions or investments in businesses, products or
technologies that are complementary to our current business;
•the degree and rate of market acceptance of our products in the United States
and elsewhere;
•changes or fluctuations in our inventory supply needs and forecasts of our
supply needs;
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•our need to implement additional infrastructure and internal systems;
•our ability to hire additional personnel to support our operations as a public
company; and
•the emergence of competing technologies or other adverse market developments.
Until such time, if ever, as we can generate product revenue sufficient to
achieve profitability, we expect to finance our cash needs through a combination
of public or private equity offerings, debt financings and collaborations or
licensing arrangements. There can be no assurance that our efforts to procure
additional financing will be successful or that, if they are successful, the
terms and conditions of such financing will be favorable to us or our
stockholders. If we do raise additional capital through public or private equity
or convertible debt offerings, the ownership interest of our existing
stockholders will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect our stockholders' rights.
If we raise additional capital through debt financing, we may be subject to
covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional capital through collaborations agreements, licensing
arrangements or marketing and distribution arrangements, we may have to
relinquish valuable rights to our technologies, future revenue streams, research
programs or product candidates or grant licenses that may not be favorable to
us. If we are unable to raise capital when needed, we will need to delay, limit,
reduce or terminate planned commercialization or product development activities,
or grant rights to develop and commercialize products or product candidates that
we would otherwise prefer to develop and market ourselves in order to reduce
costs.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash and cash
equivalents for the period presented below:

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