Pulmonx Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; amounts below are U.S. dollars unless stated otherwise. Pulmonx is a commercial-stage medical technology company selling the Zephyr Valve and related emphysema assessment products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $10.6m | $9.1m | $22.9m | $22.2m |
| Gross profit / margin | $7.5m / 70.3% | $6.4m / 70.4% | $14.1m / 61.7% | $15.1m / 67.8% |
| Operating expenses | $12.8m | $10.0m | $37.1m | $28.6m |
| Loss from operations | $(5.3)m | $(3.6)m | $(23.0)m | $(13.5)m |
| Net loss | $(3.9)m | $(4.3)m | $(22.9)m | $(16.0)m |
| Basic and diluted net loss per share | $(1.37) | $(2.41) | $(10.33) | $(9.21) |
Q3 revenue increased 16.6%, led by U.S. sales, up $1.9m to $5.3m; international sales declined $0.4m to $5.3m. For the nine-month period, revenue rose 2.9%: U.S. sales increased $5.3m to $11.3m, while international sales fell $4.7m to $11.6m. EMEA revenue was $9.7m versus $13.4m; Asia Pacific was $1.8m versus $2.6m.
Q3 net loss narrowed 11%, helped by $2.6m of other income, primarily reflecting changes in derivative fair value. Nine-month net loss widened 43%; higher operating expenses and interest costs outweighed modest revenue growth and derivative-related other income. Nine-month SG&A included a $3.0m write-off of deferred IPO costs. Gross margin held roughly flat year over year in Q3 but declined for the nine months, which management attributed principally to lower manufacturing utilization during Q2 and higher overhead investment.
Cash, liquidity and debt
At September 30, cash and cash equivalents were $39.8m, with $0.2m restricted cash; inventory was $9.3m and total current assets were $55.6m. The company reported a $233.4m accumulated deficit. Operating cash use was $23.4m for the first nine months, compared with $17.3m a year earlier. Cash increased by $25.3m, primarily due to financing proceeds and maturities of marketable securities.
Reported debt included $16.8m under the CIBC term loan, $29.8m under convertible notes, and $0.5m under a Swiss COVID-19 credit agreement. The CIBC loan is secured by substantially all company assets and has financial covenants; Pulmonx reported compliance at quarter-end. The convertible notes carried a 12.33% effective annual interest rate. A further $33m could be drawn under the notes subject to conditions. Oxford’s prior term loan was repaid in February 2020.
Subsequent event: On October 5, 2020, Pulmonx completed its IPO, issuing 11.5m shares at $19 per share for approximately $201.4m net proceeds. All preferred shares converted into common stock, and $33.0m principal plus $0.8m accrued interest on the 2020 Notes converted into 2,561,484 common shares. The company also paid Oxford a $1.9m success fee. These transactions are not reflected in the September 30 balance sheet.
Outlook, commentary and risks
Management expects continued net losses for the next several years and plans to invest in sales and marketing, research and development, clinical programs, and public-company infrastructure. Management said quarter-end cash plus IPO proceeds should fund operations for at least 12 months from issuance of the interim financial statements; this depends on estimates and assumptions, and no specific revenue or earnings guidance was provided.
COVID-19 materially reduced and delayed procedures. Zephyr Valve unit volume fell approximately 55% in Q2 versus Q1, reaching a low in April; management reported that Q3 unit sales exceeded Q1 levels by September. It cautioned that the recovery may reflect postponed procedures and may not persist as the backlog clears. Hospital capacity, renewed restrictions, and pandemic uncertainty remain significant risks.
Other notable risks include reliance on the Zephyr Valve and single-source suppliers; adoption and reimbursement uncertainty; competition; manufacturing and inventory risks; and product complications, including pneumothorax and, rarely, death. A former international distributor lawsuit alleges unfair competition and breach of exclusive distribution rights; management stated it did not expect a material impact. The filing also describes a lawsuit involving a former distributor and alleged termination without proper compensation. Management reported disclosure controls were effective at September 30, 2020.
Key facts for investors to verify
- Whether the Q3 procedure and valve-volume recovery continued after the backlog of deferred cases diminished.
- Whether U.S. growth can offset continued weakness in international markets and support improved gross margins.
- Post-IPO cash use, runway, remaining CIBC debt and covenant compliance, including any future borrowing or repayment.
- Progress in reimbursement coverage, hospital adoption, sales-force expansion and clinical programs.
- Developments in the distributor litigation and in product safety, supplier continuity and COVID-19-related operating risks.