PULMONX CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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, 2021 filed with the Securities and Exchange
Commission ("SEC") on March 1, 2022.

Insight

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 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.

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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
$13.5 million, with a gross margin of 75.2% and a net loss of $14.2 million, for
the three months ended September 30, 2022 compared to 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. For the nine months ended September 30, 2022,
we generated revenue of $38.2 million, with a gross margin of 75.0% and a net
loss of $44.6 million, compared to revenue of $34.7 million, with a gross margin
of 73.1% and a net loss of $35.7 million, for the nine months ended
September 30, 2021. As of September 30, 2022, we had an accumulated deficit of
$336.0 million, cash, cash equivalents and marketable securities of $156.9
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 enable the Company to continue its operations for at least the next 12 months from the date of publication of our condensed consolidated financial statements.

Impact of the COVID-19 pandemic

The COVID-19 pandemic has delayed clinical trials and FDA operations and
adversely impacted the number of procedures performed using our products. As a
result, the COVID-19 pandemic and the measures taken by many countries in
response have materially adversely affected, and could in the future materially
adversely affect, our business, financial condition and results of operations,
as well as the price of our common stock, from a decrease and delay of
procedures involving our products.

While the Company has seen a recovery in procedure volumes in the U.S. and some
international markets, other international markets continue to be hampered by a
slower recovery. We are encouraged for the longer term, and we believe the
following key indicators are contributing to the stabilization of our business:

•continued to open new accounts;

•strong participation of doctors in training;

•a strong patient pipeline evidenced by StratX reporting activity, patient calls to hospitals to inquire about our procedure, and patient calls to our reimbursement helpdesk; and

•a resumption of elective procedures in hospitals and centres.

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Despite signs of our business resuming, we cannot be certain that a recovery will be sustainable, or that a further resurgence of COVID-19 or virus variants will not occur.

Further, we cannot assure you that our recent volume of Zephyr Valves sold are
indicative of future results. The number of Zephyr Valves sold in the future may
decrease due to a resurgence of the COVID-19 pandemic. In addition, there may be
limited provider capacity due to labor shortages, or for other reasons, which
could limit the ability of patients to receive treatment with Zephyr Valves.
Limited provider and hospital capacity has had a material adverse effect on our
business, financial condition and results of operations and may continue to
materially adversely affect us even as the pandemic subsides.

The extent of the impact of COVID-19, including the macroeconomic conditions, on
our future operational and financial performance will depend on certain
developments, which are highly uncertain and cannot be predicted, including
impact on employees, clinical trials and procedure volumes, new information
which may emerge concerning the severity and spread of COVID-19 and variant
strains, governmental and societal response to contain and treat COVID-19 and
variant strains, and the availability and distribution of vaccines and public
acceptance of vaccines, among others.

For more information on the risks, uncertainties and potential impacts related to the COVID-19 pandemic that could affect our business, financial condition and results of operations, please refer to Part II, item 1A, “Risk Factors” of this Quarterly Report on Form 10. -Q.

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.

Awareness and acceptance of our solution by doctors, patients and hospitals

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

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educate hospitals, doctors and patients on the benefits of our solution for the treatment of severe emphysema.

Reimbursement by a third party

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 key 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.

Invest in research and development to drive 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.

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Additionally, we continue to invest in the accuracy and functionality of our patient assessment tools. Additionally, we are conducting clinical research on AeriSeal, a potential product in development for the treatment of patients with severe emphysema who do not qualify for Zephyr valve therapy 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.

Components of our operating results

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, 2022 and
September 30, 2021.

Revenue from sales of our products fluctuates based on volume of cases
(procedures performed), the average number of Zephyr Valves used for a patient,
pricing, discounts, incentives and mix 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 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.

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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.

Functionnary costs

Our operating expenses consist solely of research and development expenses and selling, general and administrative expenses.

Research and development costs

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, for employees engaged in
research and development, consulting services, clinical trial 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, 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, 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 2020 Equity Incentive 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.

Expenses and interest 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.

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Other income (expenses), net

Other income (expenses), net, consists mainly of exchange gains and losses.

Results of operations:

Comparison of the three months ended September 30, 2022 and 2021

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

                                         Three Months Ended September 30,
                                             2022                2021              $ Change               % Change
                                                  (in thousands)
Revenue                                 $    13,502          $   13,261          $      241                       1.8  %
Costs of goods sold                           3,350               3,522                (172)                     (4.9) %
Gross profit                                 10,152               9,739                 413                       4.2  %
Operating expenses:
Research and development                      4,366               2,815               1,551                      55.1  %
Selling, general and administrative          19,717              16,686               3,031                      18.2  %
Total operating expenses                     24,083              19,501               4,582                      23.5  %
Loss from operations                        (13,931)             (9,762)             (4,169)                     42.7  %
Interest income                                 477                  99                 378                     381.8  %
Interest expense                               (286)               (207)                (79)                     38.2  %
Other income (expense), net                    (432)               (267)               (165)                     61.8  %
Net loss before tax                         (14,172)            (10,137)             (4,035)                     39.8  %
Income tax expense                                -                  44                 (44)                   (100.0) %
Net loss                                $   (14,172)         $  (10,181)         $   (3,991)                     39.2  %


Revenue

Revenue increased by $0.2 million, or 1.8%, to $13.5 million during the three
months ended September 30, 2022, compared to $13.3 million during the three
months ended September 30, 2021. The sale of products in the United States
increased by $1.5 million to $8.4 million during the three months ended
September 30, 2022, compared to $6.9 million for the three months ended
September 30, 2021. The sale of products in international markets decreased by
$1.3 million to $5.1 million during the three months ended September 30, 2022,
compared to $6.4 million for the three months ended September 30, 2021. The
increase in U.S. revenue reflects continued growth of Zephyr Valve procedure
volumes in the United States, while the decrease in international revenue
reflects lower international procedure volumes and the impact of foreign
currency exchange rates.

Cost of Goods Sold and Gross Margin

Cost of goods sold decreased by $0.2 million, or 4.9%, to $3.3 million during
the three months ended September 30, 2022, compared to $3.5 million during the
three months ended September 30, 2021. Gross margin was 75.2% during the three
months ended September 30, 2022 and 73.4% during the three months ended
September 30, 2021. The increase was primarily due to improved production
efficiencies in the three months ended September 30, 2022.

Research and development costs

Research and development costs increased by $1.6 millioni.e. 55.1%, at $4.4 million in the three months ended September 30, 2022compared to $2.8 million in the three months ended September 30, 2021. The

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increase in research and development expense was primarily due to increases of
$0.7 million in personnel related expenses including stock-based compensation as
we invested in research and development activities, $0.6 million in testing
expenses, and $0.3 million in regulatory and other expenses.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $3.0 million, or
18.2%, to $19.7 million during the three months ended September 30, 2022,
compared to $16.7 million during the three months ended September 30, 2021. The
increase in selling, general and administrative expenses was primarily due to
$1.6 million of payroll and personnel-related expenses including stock-based
compensation for our sales, marketing and administrative personnel, an increase
of $0.9 million in marketing expenses, an increase of $0.4 million in global
travel and conference related expenses, and an increase of $0.3 million in
software and facility related expenses. These increases were offset by a
decrease of $0.2 million in consulting and other expenses.

Expenses and interest income

Interest expense increased by $0.1 million to $0.3 million during the three
months ended September 30, 2022 compared to $0.2 million for the three months
ended September 30, 2021 due to constant outstanding debt principal and higher
interest rates. Interest income increased by $0.4 million to $0.5 million for
the three months ended September 30, 2022 compared to $0.1 million for the three
months ended September 30, 2021, primarily due to an increase in interest income
as a result of higher returns on cash, cash equivalents and marketable
securities balances.

Other income (expenses), net

Other income (expense), net decreased by $0.2 million to ($0.4) million during
the three months ended September 30, 2022, compared to $(0.3) million during the
three months ended September 30, 2021, primarily due to foreign currency
exchange losses.

Comparison of the nine months ended September 30, 2022 and 2021

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

                                           Nine months ended
                                          2022           2021         $ Change      % Change
                                             (in thousands)
Revenue                                $  38,237      $  34,708      $  3,529         10.2  %
Costs of goods sold                        9,556          9,329           227          2.4  %
Gross profit                              28,681         25,379         3,302         13.0  %
Operating expenses:
Research and development                  11,494          9,355         2,139         22.9  %
Selling, general and administrative       61,197         50,962        10,235         20.1  %
Total operating expenses                  72,691         60,317        12,374         20.5  %
Loss from operations                     (44,010)       (34,938)       (9,072)        26.0  %
Interest income                              781            306           475        155.2  %
Interest expense                            (707)          (630)          (77)        12.2  %
Other income (expense), net                 (597)          (202)         (395)       195.5  %
Net loss before tax                      (44,533)       (35,464)       (9,069)        25.6  %
Income tax expense                           107            191           (84)       (44.0) %
Net loss                               $ (44,640)     $ (35,655)     $ (8,985)        25.2  %


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Revenue

Revenue increased by $3.5 million, or 10.2%, to $38.2 million during the nine
months ended September 30, 2022, compared to $34.7 million during the nine
months ended September 30, 2021. The sale of products in the United States
increased by $5.3 million to $23.0 million during the nine months ended
September 30, 2022, compared to $17.7 million for the nine months ended
September 30, 2021. The sale of products in international markets decreased by
$1.8 million to $15.2 million during the nine months ended September 30, 2022,
compared to $17.0 million for the nine months ended September 30, 2021. The
increase in U.S. revenue reflects continued growth of Zephyr Valve procedure
volumes in the United States, while the decrease in international revenue
reflects lower international procedure volumes and the impact of foreign
currency exchange rates.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased by $0.2 million, or 2.4%, to $9.6 million during
the nine months ended September 30, 2022, compared to $9.3 million during the
nine months ended September 30, 2021. Gross margin was 75.0% during the nine
months ended September 30, 2022 and 73.1% during the nine months ended
September 30, 2021. The increase was primarily due to improved production
efficiencies and lower scrap and reserve expense during the nine months ended
September 30, 2022.

Research and development costs

Research and development expenses increased by $2.1 million, or 22.9%, to $11.5
million during the nine months ended September 30, 2022, compared to $9.4
million during the nine months ended September 30, 2021. The increase in
research and development expense was primarily due to increases of $1.3 million
in personnel related expenses including stock-based compensation as we invested
in research and development activities, $0.8 million in testing related
expenses, $0.2 million increase in facilities expenses, $0.1 million increase in
regulatory expenses, $0.1 million increase in consulting expenses, $0.1 million
increase in software and other expenses offset by decreases of $0.5 million in
costs associated with our clinical trials, including fees paid to clinical
research organizations.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $10.2 million, or
20.1%, to $61.2 million during the nine months ended September 30, 2022,
compared to $51.0 million during the nine months ended September 30, 2021. The
increase in selling, general and administrative expenses was primarily due to
$6.1 million of payroll and personnel-related expenses including stock-based
compensation for our sales, marketing and administrative personnel, an increase
of $2.2 million in marketing related expenses, an increase of $1.1 million in
global travel and conference related expenses, and $0.9 million in software
implementation and facility related expenses. These increases were offset by a
decrease of $0.1 million in consulting and other expenses.

Expenses and interest income

Interest expense increased by $0.1 million to $0.7 million during the nine
months ended September 30, 2022 compared to $0.6 million during the nine months
ended September 30, 2021 due to constant outstanding debt principal and higher
interest rates. Interest income increased by $0.5 million for the nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021,
primarily due to an increase in interest income as a result of higher returns on
cash, cash equivalents and marketable securities balances.

Other income (expenses), net

Other income (expense), net decreased by $0.4 million to ($0.6) million during
the nine months ended September 30, 2022, compared to ($0.2) million during the
nine months ended September 30, 2021, primarily due to foreign currency exchange
losses.

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liquidity and capital resources; Operation plan

To date, we have financed operations primarily through the sale of equity
securities, debt financing arrangements and sales of our products. As
of September 30, 2022, we had cash, cash equivalents and marketable securities
of $156.9 million, an accumulated deficit of $336.0 million, and $17.4 million
outstanding under the CIBC Loan and Credit Agreement, net of debt discount and
debt issuance costs.

CIBC 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 and December 28, 2020 (as amended, the "CIBC Agreement"). The CIBC
Agreement originally provided us with the ability to borrow up to $32.0 million
in debt financing consisting of $17.0 million advanced at the closing of the
agreement ("Tranche A"), with the option to draw up to an additional $8.0
million ("Tranche B") on or before February 20, 2022 and an additional $7.0
million ("Tranche C") on or before February 20, 2022. Neither Tranche B nor
Tranche C was drawn before the February 2022 expiration date.

In March 2021we 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 maturity date of the Loan to terms of the CIBC agreement of March 15, 2022 at February 20, 2025and amended certain financial covenants.

In June 2021, we 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, we entered into a Second Amendment to the Amended and Restated
CIBC Agreement, which extended the interest only period of the loan from 24
months to 36 months. Under the amended terms, principal repayment would begin in
February 2023. There was no change to the loan interest rate or maturity date.

On October 31, 2022, we entered into a Third Amendment to the Amended and
Restated CIBC Agreement (the "Third Amendment"), which, among other things,
extended the maturity date to October 31, 2027; provided a commitment for a new
$20.0 million tranche of term loans that may be drawn at the Company's option
through October 31, 2023, subject to the satisfaction of certain conditions; and
provided for a new interest only period of 24 months from the signing date of
the Third Amendment, with the possibility of an additional extension of such
interest only period of up to 12 months, subject to satisfaction of certain
conditions.

The loans provided under the Amended and Restated CIBC Agreement bear interest
at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate at any
time. The loan is collateralized by substantially all of our assets, including
cash and cash equivalents, accounts receivable, intellectual property and
equipment. We may prepay the loans without penalty. If we borrow any of the
$20.0 million tranche made available under the Third Amendment, we may prepay
the loans, subject to certain conditions, including a prepayment fee equal to
2.0% of the principal amount repaid during the first year after the effective
date of the Third Amendment or 1.0% of the principal amount prepaid during the
second year after the effective date of the Third Amendment. The Amended and
Restated CIBC Agreement contains financial covenants that require the Company to
maintain minimum cash and minimum revenue amounts, and the Amended and Restated
CIBC Agreement contains other customary restrictive covenants, representations
and warranties, events of default and other customary terms and conditions.

Through September 30, 2022, we paid $0.4 million fees to the lender and third
parties which is reflected as a discount on the loans provided under the Amended
and Restated CIBC Agreement and is being accreted over the life of the loan
using the effective interest method. During the three months ended September 30,
2022 and 2021, we recorded interest expense related to debt discount and debt
issuance costs of CIBC term loan of less than $0.1 million and less than $0.1
million, respectively. During the nine months ended September 30, 2022 and 2021,
we

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Interest expense recorded related to debt discounting and issuance costs of CIBC term loan debt of less than $0.1 million and $0.1 millionrespectively.

Interest expense on the CIBC term loan amounted $0.3 million and $0.2 million
during the three months ended September 30, 2022 and 2021, respectively.
Interest expense on the CIBC term loan amounted $0.7 million and $0.6 million
during the nine months ended September 30, 2022 and 2021, respectively.

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 bears no interest and will be repaid
within 60 months after receipt of funds, in twelve equal installments, paid
semi-annually, beginning in March of 2022. As of September 30, 2022, Pulmonx
International Sàrl paid less than $0.1 million to the lender.

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