Good afternoon, and welcome to Pulmonx Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Brian Johnston from the Gilmartin Group for a few introductory comments. Go ahead.

Thanks, Operator. Good afternoon and thank you all for participating in today's call. Joining me from Pulmonx are Glenn French, President and Chief Executive Officer; and Derrick Sung, Chief Financial Officer. Earlier today, Pulmonx released financial results for the quarter and year ended December 31, 2020. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward looking statements, including without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and the product pipeline development are based on our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of our public filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q filed with the SEC on November 13 2020. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 2, 2021. Pulmonx Corporation disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. With that, I'll turn the call over to Glenn.

Thanks, Brian. Good afternoon, everybody. Welcome to our Fourth Quarter and Full Year 2020 Earnings Call. Here with me today is Derrick Sung, our Chief Financial Officer. Today, I would like to share a few highlights and contextualize our fourth quarter results before turning to our outlook and strategic priorities for 2021. 2020 was a major milestone year for Pulmonx and I'm very proud of the progress that our entire team has made in building commercial momentum and beginning our journey as a public company. Despite the turmoil caused by the COVID pandemic, we were able to scale our organization, grow our commercial footprint and execute on a public financing that has put us in a strong position to drive our growth initiatives forward once the pandemic subsides. We achieved full-year worldwide revenue of $32.7 million and grew our business in the U.S. by over 50% despite ongoing pressures from the pandemic. The fourth quarter demonstrated that while COVID continues to be a constantly evolving challenge, our business remains resilient. In Q4, we recorded worldwide sales of $9.8 million. The quarter started strong as we recorded our highest month of sales in the company's history in October, but the global resurgence of COVID in the back half of the quarter reversed our momentum, has locked down measures and increased hospitalizations, inhibited our ability to schedule procedures. Despite the transient pressure of COVID, all signals continue to indicate that the underlying clinical need and demand for our Zephyr Valve solution remains strong. And we believe that the COVID-related slowdown in our business will reverse once the pandemic subsides. We are seeing hospitals work with patients who have had their procedures delayed due to COVID by either rescheduling them to a later date or placing them on a wait list to be…

Thank you, Glen, and good afternoon, everyone. Total worldwide revenue for the three months ended December 31, 2020 was $9.8 million, a 5% decrease from $10.3 million in the same period of the prior year and a decrease of 8% on a constant currency basis. U.S. revenue in the fourth quarter was $4.9 million, a 4% increase from $4.7 million during the prior year period. The year-over-year increase in U.S. revenue reflects increased sales of Zephyr Valve as we expanded our commercial footprint and drove adaption into new accounts offset by the impact of the COVID pandemic. International revenue was $5 million, a 12% decrease from $5.6 million during the same period last year. On a constant currency basis, international sales decreased by 17% as COVID impacted the ability of hospitals to schedule procedures. Gross margin for the fourth quarter of 2020 was 72% compared to 71% in the prior year period. With the timing of manufacturing related investments to support our growth and the impact of stock based compensation on labor costs, we expect 2021 gross margins to start out around 70% and to increase modestly throughout the year as we absorb fixed cost overhead across increasing production volumes. Total operating expenses for the fourth quarter of 2020 were $16.4 million, a 41% increase from $11.6 million in the fourth quarter of 2019. Stock based compensation expense was $2.3 million in the fourth quarter of 2020 and accounted for 45% of the increase in operating expenses from the prior-year period. R&D expenses for the fourth quarter of 2020 were $2.5 million, compared to $1.6 million in the same period of the prior year. Aside from stock based compensation, the increase was primarily due to an increase in personnel and clinical study related expenses needed to support our product development…

[Operator Instructions] Your first question comes from the line of David Lewis from Morgan Stanley. Your line is now open.

Hi, Glen and Derrick. This is actually Cecilia [ph] on for David. I wanted to start off just asking about guidance. What you're contemplating in terms of recovery in the US versus ex-US, as well as the trends you've seen play out in those two regions to the first part of this year?

Actually, the guidance part, I'll ask Derrick to talk about of the trends in the various regions, I'd be happy to talk about after that. So Derrick, the first part of the question was the guidance in US and o-US [ph], how you see that breaking out?

Yes. Hi, Cecilia. So our guidance basically contemplates continued pressure from COVID, but lessening, throughout the first half of this year, and essentially contemplates a recovery in the second half of this year. So with the vaccine coming, and the macro outlook appearing to improve, our assumptions here in our guidance are that we essentially returned to -- begin to return towards normalcy in the second half of this year, both in the United States and outside the US. And that's what's contemplated in our guidance.

So we've got just to talk about the trends that we've seen. Obviously, when we last spoke in early November, we had about a month -- we were about a month deeper into the European uptick of COVID than we were here. It's really quite remarkable when you look at the shape of the curve and where we were on November 10. So we dove into Europe pretty aggressively and some of the markets have started to pull back out. Places like France and Switzerland have come out more strongly, France was hit by the virus at least a month before us here. But each of the countries is pulling out differently. Germany is slow to pull out, they have actually installed a mechanism by which they want to make sure that they have at least 25% of their ICU capacity in reserve in the event there's another wave, which is an unheard of level of capacity, for example, in the United States, where even in the worst case scenario, you're going to have probably two-thirds of your beds full of just standard ICU patients, and a third of them full of COVID patients. And to keep 25%, just open is going to take a little time to get back and going in Germany. In the United States, it was really quite remarkable. We had assumed -- we saw this this wave coming, we saw what was happening in Europe, we knew that it was going to happen here in the US. And so we anticipated the step down October to November to December, and we had assumed that we would see a step up that would look very much like the step down specifically in January, February, and March. And what happened was, we bottomed out and it carried into February, basically the first couple weeks of February. So that's the shape of the curve, it was a little less V-shaped and a little more U-shaped. And we have some very encouraging more recent information as it relates to pulling out of that. And it looks extraordinarily familiar to the last two times we got hit with waves here in the United States.

Okay, thank you. That's helpful. If I could also ask on your backlog, what you've seen in terms of dynamics trends versus late summer in the US, as well as if you could provide some additional color in terms of what you're seeing on StratX trends recently? Thank you.

As far as backlogs and so forth, we had an immediate back, I'll just talk about the United States, it's about 50% of our business, everything else is spread out in a bunch of other countries. And in some ways, all these countries are behaving the same as it relates to COVID. It's just a question of how quickly did they shut down and how quickly do they open back up, but they're all similar, general shapes, if you will. So the backlog is immediate. So if you shut down procedures, and anybody who is scheduled for a procedure either gets pushed out to a new date, or gets put on a waiting list, so that when the hospital opens back up, so that's a natural part of the backlog. And Cecilia, as you had mentioned, we also have StratX scans that have been running through. And so, we've had an accumulating number of what we call StratX Greenlight patients, which is patients -- their CT scan data is run through StratX and they're candidates for then going into a procedure, having Chartis executed at the front end. And then in the great majority of cases, valves thereafter place. So we have accumulated a bit of a backlog and we will be chipping away at that, as some of these accounts open up. And we typically see that among the first patients treated, as you might imagine at these accounts, when they reopen, are those that were rescheduled or postponed.

Your next question comes from the line of Bob Hopkins from Bank of America. Your line is now open.

Thanks and good afternoon. You said you are at 148 centers, I think, right now. Just curious, how many of those are up and running right now and doing procedures?

That's a really good question and I'm going to answer it in just a second. But before I do, I want to clarify one thing that I said in my prepared remarks, where I've got a daughter in North Carolina, and I said North Carolina and I meant North Dakota. So Blue Cross Blue Shield of North Dakota is where we had the success. So Bob, you're wondering about active accounts, it's a really a good and insightful question. And the last time we spoke, we were lumping that together on a quarterly basis. And you may recall that in the pre-COVID phase, our active accounts were those that that had done procedures, bought product in a 90-day period. This COVID situation is so dynamic. And so, on a one-time basis, we'll talk a little bit about what we saw on a monthly basis, and in one case, in a fractional month, just to give you a sense of how things moved across the year. So if you think about the pre-COVID phase at about 70%, in a given month in the pre-COVID phase, about 70% of our accounts would be active, as per the definition that I just threw out. And then, we bottomed out in an incredibly abrupt way in April where we had 4% of our accounts active. So we never again saw that bottom. So we rebounded a little bit across the year, in July we were back up to about 60%. But it was always a bit muted, because of this COVID overhang, if you will. In December, we dipped down to about half of what would be considered normal, the low 30s. And as I mentioned, we had expected that we would see that in January, as well. And we saw it almost exactly,…

Interesting, thank you for that, that's super helpful. It feels like you're almost back to levels that would suggest -- as long as you keep on the run rate of late February, early March, that's all you need to do to get to the guidance for this year. I could be off there a little bit because you didn't give us specific revenue numbers for back half and front of half of February. But, it feels like a nice recovery. So one, am I directionally correct there? And two, where are we right now in terms of number of active centers? What is that percentage today? I'm sorry if I missed it in your response.

In February, the number of active centers -- the percentage was 33%. So we’re just reigniting those centers. We still have -- if the norm is 70%, then we would expect roughly a doubling as we go forward here of those centers being active to get up into that range. I think the other thing, I think, we talked about on the last call, there's two elements to this. One is, what proportion of our accounts are active, and I just gave you those data. And I can tell you that in every single case they're down because of COVID. So there's not something else going on here. And then you have this standard overhang. You may remember that our active accounts, established accounts, were running at about seven procedures per quarter once you get them up and running. And that in this phase that we're in, our established accounts are running at about four procedures per quarter. So we're not only looking to open up these accounts, but also to get them back up to pre-COVID procedure levels. And I think that's what we started to see, we saw that acceleration in the existing accounts in the back half of February and I expect -- we had a new account, that big Kaiser account actually, they just did their first case today, and we're going to start to see more and more of our existing accounts come back online and additional new accounts come online.

That's great. Those 33% seems to be using it quite a bit. That's impressive. Anyway, thanks for the detail.

Next question is from Frederick Wise with Stifel. Your line is now open.

Good afternoon, gentlemen. Glen, could you talk to us and give us more color on the 65% to 70% accounts who are not active? And my question really is -- I'm sure you're engaged with them, what are they saying to you, are they giving you an indication of interest, and what it would take to get them back online? And what do you sense is the hold up? Just maybe reflect on the non-active dock and center?

Yes. So one of the things you get -- we're super sensitive to ICU capacity and ICU consumption. And if you think about the shape of the curve -- you're the guy that I spoke with last because you had a little conference that was a few days after the last call. And it was -- we were right on the base of the mountain. And we've gone all the way up that mountain in terms of number of cases. And we've come back down almost to the exact same level when we spoke last. But think about another curve that pushed out. And that's the ICU curve. And so, what happens is those beds tend to fill up and they're not going to empty out for some number of weeks afterwards. So a lot of these hospitals are trying to make sure they clear and have the ICU capacity, and then they just have to restart their engine. So one of the questions might be, what are the indicators? Well, I think the best indicator is revenue, which is what I just -- basically, we've seen -- I talked about cases in the United States, 70% of our businesses case is basically trunk stocks. So our revenues reflect cases. But if you look at revenues, the numbers are even more impressive than the ones that I just shared with you. If you look at the back half of February, revenues were 80% higher than they were in the front half. And that extra revenue was just stocking accounts, putting product on shelf, getting ready for procedures, and so forth. So the other things -- for me, those are really important metrics. But there's a lot of other indicators that point in that direction, if you look at it, you see an upward trend since the beginning of the year in terms of StratX accumulations, you see an upward trend on the number of inbound calls into our treatment centers, we see an increase since the beginning of the year, again, an upward trend in web traffic where people are gathering information on the procedure. As I mentioned, we added some accounts, it's pretty crazy time to be adding new accounts, and we added 13 in the fourth quarter. And then, like I said, just the case volume, which we have visibility to as we look forward.

Great. And I'm not sure this is a relevant question given -- or it's an answerable question, given it's still such early days, but just out of curiosity, clearly you're calling out again and again, Glen, that StratX is growing, it's got to be, I assume, growing more than an implant. Is there a ratio of StratX to implants that you'd want to share? And I assume it would typically -- or we expect it to be, more than implant rates. But is it one and a half times normal, is that a way to think about it?

It's just so hard to give those data right now, because of COVID and the faucet being turned on and off with regard to procedures, it's really hard to give you that information. And you got delayed cases, and we are building algorithms that look at the very question that -- we've already built them, but they get blown up by this -- we had three major mountains that hit us of COVID across 2021. So the data that comes out of this, when you start saying, well, wait a minute, we got the StratX scan, and then they get hit by a wave and basically everything froze for three months, and then they had to rewarm them and does that mean that the normal time between the StratX scan and treatment is seven months? No, it doesn't. I should say, we don't know. That's what it was when we had all those big delays in the middle, but what you're asking for, yes, we are definitely digging deep. But I think we're going to have to get some clear runway out in front of us to be able to gather what I would consider to be good data. I can't tell you the trend lines up on all those things. So I feel, when we last spoke, I was really anxious about what was ahead. And I feel infinitely more comfortable knowing that we're on the backside of this thing. And I just saw moments ago, Biden claiming that everyone's going to get vaccinated by the end of May, who knows whether that's going to happen. But the point is that I think we're headed in a positive direction and we've got a lot of indications that our business is lining up in that way.

Great, it's wonderful to hear. Two last quick ones, I'll ask them at the same time, just so Derrick doesn't feel left out. I know you’re anxious to give us gross margin guidance for 2021. I say to myself, okay, fourth quarter was a more pressured quarter than you might have expected, you stole [ph] my gross margin number, why wouldn't 2021 be at that fourth quarter rate, if not better, but why wouldn’t it be better given higher volume. And my last I'm just curious, you didn't talk about weather Glen, to what extent did weather have an impact on your January, February volumes? Maybe not at all; I don't know. But thank you very much.

I'll take the last question first. As staggering as that snow storm was, and I'm sure we lost a few cases as a result, all my salesforce is talking about is COVID restarts and so forth. So I think it got muted a little bit by the impact of COVID restarts. But I'm sure we probably postponed some number of cases and various different locations. Derrick, gross margin?

Yes, that's a great question, Rick. So when we think about gross margins for 2021, there's a couple of important dynamics to consider. So first off, we were very happy to see our gross margin at 72%, which I think is one of the highest levels that we've ever seen in this last fourth quarter of 2020. Moving into 2021, there are two dynamics to factor in. One is that we're seeing a significant increase in stock based compensation expense. So that clearly flows through the OpEx line, as I mentioned, and we're expecting $9 million of the OpEx guidance that I provided to you, to be accounted for by this non-cash charge. Stock based compensation also flows into our cogs through an increase in labor costs. And that gets capitalized into inventory, and then comes through the P&L as we sell our inventory. So stock based compensation, expense related cost to labor, dragged down our gross margins by about 1% next year. And then on top of that, we do have a couple of manufacturing-related initiatives and investments associated with helping to automate our supply chain and helping to mitigate risks through second sourcing, if you will. And some of those expenses also hit our cogs line next year. So that's the reason why we think we'll start out at around 70% versus the 72% that we saw last quarter, but we do then expect them to move up our gross margins steadily by a point or so probably throughout the year, as we continue to drive overhead absorption through our increased production volumes.

Next question is from Lawrence Biegelsen from Wells Fargo. You may ask your question.

Good afternoon. Thanks for taking the question, just a few for me here. Derrick, on OpEx, I think even when you adjust for stock based comp; the guidance was a little bit higher than we were modeling. So could you give us an apples-to-apples number, the $85 million to $94 million for 2021 versus what it was ex-stock based comp adjusting for that compared to 2020? And just a color on where the incremental spending is going? And I had a couple follow ups.

Yes, so stock based comp in 2021, again, as I mentioned, I think that's going to be close to $10 million, call at $9 million, or so in contribution. So, absent that stock based comp, you're talking $10 million lower. So $70 million, $75 million or so to $80 million. And in terms of the stock based compensation in 2020, it was relatively low, absent Q4, where we did see a significant contribution primarily from the ESPP program. And, of course, this is all related to the very rapid appreciation of our stock price. So, again, I would take out about $9 million from our 2021 OpEx, and that's what it would have been without this non-cash charge. Now, in terms of where the office spend is going to go, I would think about a few million dollars step up sequentially between the $16.4 million that we did in Q4, and what we think we'll do in Q1, and that initial step up is, again, public company costs and incremental stock based comp charges. And then, I would expect to see a continued slight increase in OpEx through the remaining three quarters of year. And that OpEx is primarily driven by an increase in personnel-related expenses, much of which is related to expansion of our commercial organization or commercial infrastructure, as well as some G&A. And then, on the R&D front, spend in towards our clinical study costs associated with AeriSeal, again, increasing through the back part of the year, is a major driver for that expense.

That's very helpful. And just two last ones for me here. What are the next steps in AeriSeal? Congratulations on the breakthrough status. But what's the path forward here? And just lastly, Glen, any update on Japan? Thanks for taking the questions.

Yes. So with regard to AeriSeal, as we've talked about before, we're executing a study in Europe. When we last spoke, I think we had maybe an ethics approval, we've got a number of them now, we've got three sites that have been activated. We've enrolled a few patients already. So we're often running on that trial. So that's where we are. We're also planning on submitting an IDE in the US later this year, specific to AeriSeal. So we're marching along, that's something that we are very interested and excited about. But it's off on the horizon, app setting [ph] best case US market entry at the end of 2024, almost certainly 2025, certainly expect to o-US [ph] before then, but probably sometime during 2024. So those are things that are out in front of us, and we're working hard on. With regard to Japan, that too is something that we're very focused on. I think we're on schedule, as it relates to what we talked about probably the last time, which is to say that we are planning on submitting our application to PMDA later on this year, and we see ourselves commercial sometime probably later in 2023.

Your last question is from William Plovanic. Your line is now open.

Hi, thanks. Just a question on clarification, Glen, you mentioned that you're seeing high volumes at the centers that are active. And my only question really coming out of this is, are you seeing patients that are transferring from one center to another in order to get a procedure completed? Or are these your existing customers just becoming more active?

It is certainly more the latter than the former. We have seen the movement of patients from one center to another, but often it's a center that's not doing procedures, not a treatment center, going to a treatment center, which was actually what happened today at Kaiser, where they were from one Kaiser location and moved to another to have the procedure. So that happens occasionally. And in military hospitals that often happens, where they'll go to one of the local hospitals that's doing the procedure. But the higher volumes in existing centers, it may not be that -- it's possible that my resolution on number of accounts is not quite where my resolution is on revenues and case volume, the indications that I have suggests that existing accounts are doing more procedures, which makes sense to me. I think they just feel more confident as they move forward, that there's not another wave that's going to hit. And so they're freeing up some patients on their waiting list in, I'm assuming,

Yes. Your commentary that the average four per quarter versus seven, is that for the active centers or all the centers? Because what I'm trying to get at is, are you exceeding that seven if those active centers are doing eight or nine, and so when we do get the opening back up, what can that translate to?

Yes, these numbers are probably relatively steady state numbers. And what happens when you come out of here, as you get these kinds of post-wave, this being the third, I expect that those are going to be lumpy. And we'll have to see that over time, I expect that we will get back up to seven. During this re-emergence, I wouldn't be surprised that that if people pull some number off of a waiting list, that they may go above what they would normally do when they get back to steady state. So I don't think I have a real clean answer to your question.

I'll turn the call back over to Glen, for closing statement.

Great, well, I really have a closing statement, but I really appreciate everybody's interest and ongoing support. And we're very excited about what's out ahead. We've navigated through some pretty challenging situations and are very pleased with the fundamentals that we see aligned as we move forward. So thank you very much.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.