Pulmonx Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 8, 2022. Unaudited results. Pulmonx is a commercial-stage medical technology company focused on severe emphysema, primarily selling its Zephyr Endobronchial Valve and related products, with the Chartis assessment system and StratX platform supporting patient selection.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $13.5 million | $13.3 million | $38.2 million | $34.7 million |
| Gross margin | 75.2% | 73.4% | 75.0% | 73.1% |
| Operating loss | $13.9 million | $9.8 million | $44.0 million | $34.9 million |
| Net loss | $14.2 million | $10.2 million | $44.6 million | $35.7 million |
| Basic and diluted loss per share | $0.38 | $0.28 | $1.21 | $0.99 |
- Q3 revenue grew 1.8%; nine-month revenue grew 10.2%. U.S. revenue was $8.4 million in Q3 and $23.0 million for nine months. International revenue declined year over year in both periods.
- Gross margin improved, which management attributed mainly to improved production efficiencies; for the nine-month period, lower scrap and inventory reserve expense also contributed.
- Operating expenses rose 23.5% in Q3 and 20.5% for nine months. Higher personnel and stock-based compensation, sales and marketing, testing, travel, and facility-related costs were among the drivers.
- Cash used in operating activities was $35.3 million for nine months, versus $30.7 million a year earlier. Cash, cash equivalents, and marketable securities totaled $156.9 million at September 30, down from approximately $191.0 million at December 31, 2021. Accumulated deficit was $336.0 million.
- Debt and credit agreements, net of discounts and issuance costs, totaled approximately $17.4 million. The CIBC term loan had a 7.89% effective annual interest rate at September 30; the company reported covenant compliance.
- Inventory was $20.1 million, including $4.6 million classified as long-term inventory. Stock-based compensation expense was $12.2 million for the first nine months.
Material changes and management commentary
- U.S. nine-month revenue increased $5.3 million year over year, while international revenue decreased $1.8 million. Management attributed international weakness to lower procedure volumes and foreign exchange effects; COVID-related recovery remained uneven across markets.
- For Q3, U.S. revenue increased $1.5 million while international revenue fell $1.3 million. The resulting total revenue growth was modest despite U.S. procedure-volume growth.
- Management cited continued new-account openings, physician training participation, patient interest indicators, and resumed elective procedures as signs of stabilization, but cautioned that recovery may not be sustained.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects continued net losses and negative operating cash flows for the foreseeable future, with significant investment in commercialization, research and development, and clinical work. It expects available cash and marketable securities to fund planned operations for at least 12 months from issuance of the financial statements, while noting assumptions could prove inaccurate and additional financing may be needed.
- Subsequent event: On October 31, 2022, CIBC amended the loan agreement, extending maturity to October 31, 2027 and providing an optional $20.0 million term-loan tranche, drawable through October 31, 2023 subject to conditions. The amendment also established a new 24-month interest-only period, potentially extendable by up to 12 months subject to conditions.
- Key risks include reliance on the Zephyr Valve and a limited treatment indication; procedure volumes, hospital capacity, and COVID-19 uncertainty; reimbursement and market adoption; competition; single-source suppliers and manufacturing concentration; foreign exchange and inflation; and the possibility of further funding needs.
- The filing describes serious potential Zephyr Valve complications, including pneumothorax and, rarely, death. It also notes limited long-term safety and effectiveness data beyond one year, with a five-year follow-up study expected to report in February 2023.
- Disclosure controls were deemed ineffective at September 30 because a previously identified material weakness remained unremediated. It concerned IT general controls over user access and segregation of duties for systems supporting expenditure reporting. Management said remediation was ongoing and reported no material misstatement in the periods presented.
- The company disclosed ordinary-course litigation risks, including two Swiss subsidiary disputes with former distributors; management believed the claims were meritless and their impact, if successful, would not be material. Separately, the legal proceedings section said management knew of no pending claims expected to have a material adverse effect.
Important facts for investors to verify
- Whether U.S. growth can offset continued weakness in international procedures and foreign exchange effects.
- Whether spending growth and operating cash burn can be contained while commercializing the product and funding development.
- The conditions, availability, pricing, and covenant implications of the optional $20.0 million CIBC tranche, and the effect of the amended loan terms.
- Progress in remediating the material weakness and whether controls are subsequently tested and found effective.
- Updates on the five-year clinical follow-up, product safety, reimbursement coverage, and the former-distributor litigation.