Good afternoon and welcome to Pulmonx Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode at this time. We will have a question-and-answer session towards the end of today’s call. I would now like to turn the call over to Laine Morgan from Gilmartin Group for the introductory comments.

Good afternoon and thank you all for participating in today’s call. Joining me from Pulmonx are Glen French, President and Chief Executive Officer; and Derrick Sung, Chief Financial Officer. Earlier today, Pulmonx released financial results for the quarter ended September 30, 2022. A copy of the press release is available on the company’s website. Before I 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 product pipeline development are based upon 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 of 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 August 8, 2022. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 3, 2022. 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. And with that, I will turn the call over to Glen.

Thank you, Laine. Good afternoon everyone and welcome to our third quarter 2022 earnings call. Here with me is Derrick Sung, our Chief Financial Officer. We remain excited about the $12 billion opportunity to establish our clinically proven Zephyr valve therapy as standard of care for the over 1 million patients around the world who suffer from severe emphysema and are profoundly short of breath, despite high-dose medications. Over the past 2.5 years, our business has been severely impacted by COVID surges, filling ICU beds and negatively impacting our procedure volumes. Thus, we are pleased to see that looking forward, despite the continued prevalence of COVID, healthcare systems in most places are adapting to the new normal, and we are moving into a more predictable macro environment for our business. Reflecting on the third quarter, we generated worldwide sales of $13.5 million, representing growth of 2% year-over-year and 7% on a constant currency basis, with $8.4 million coming from the United States, representing growth of 22% compared to the same period last year. While we feel we are moving into a more favorable steady state, our business in the third quarter was negatively impacted by continued foreign exchange headwinds, in addition to two key dynamics, which we’ve mentioned on our last call: hospital staffing constraints and seasonality. Hospital labor constraints, while not getting any worse, continue to limit procedure capacity and reduce patient screening across the geographies we work in, and we expect this dynamic to persist into next year. Meanwhile, summer seasonality was more pronounced than we have seen in the past, particularly in Europe. Looking ahead, we remain focused on creating the market for our Zephyr valve therapy, which addresses an unmet need for over 1 million severe emphysema patients globally, who have very few alternatives available to them and is backed by unparalleled clinical evidence. Specifically, we will focus on the 3-pronged commercial approach, which we have previously discussed to drive growth and penetration of our solution. First, training and launching new accounts that we believe have the potential to be strong Zephyr Valve centers; second, increasing the efficiency and scalability of our base, particularly among our newest accounts, by working hand in hand with our physician and administrative champions, to expand procedural capacity; and finally, increasing center utilization by building local awareness of the benefits of Zephyr Valves with patients and physicians, thereby developing a strong referral network. In terms of account openings, we added 13 new accounts in the U.S. in Q3, bringing the total number of U.S. treatment centers that are performing Zephyr valve procedures to 261. Even with the seasonal impact from the third quarter, we anticipate ending the year with about 275 total U.S. treatment centers. Meanwhile, we gained greater visibility into the state of our treating centers, as pandemic-related pressure has subsided and staffing-related constraints have become clearer. It has become evident that we need to continue to focus on driving efficiency and scalability across our account base, and that it will take longer to bring accounts up to maturity. Over the past two quarters, we have seen a strong recovery in procedure volumes at our well-established sites, but utilization across our less developed accounts was more intermittent than we had expected. With many respiratory care programs thinly staffed and overstretched, we see an opportunity to improve program efficiency and scalability by taking all of our accounts through a series of training and site readiness processes that we have found to be effective at our more developed accounts. In support of these efforts, we have allocated additional field marketing, sales, and patient access resources to support account development and have adopted a new tracking system to measure our success in implementing best practices with our customers. We expect the impact of these programs to be increasingly evident over the next few quarters, and we have confidence that these efforts, combined with a more normalized operating environment for our customers, will allow us to further enhance procedure rates across all our accounts. Meanwhile, within our more developed accounts, we are also seeing early returns from our efforts to educate referring physicians who manage large populations of COPD patients. We know who these individuals are, and we are working to both provide information on our treatment and introduce them to the treating physicians in area hospitals. Remarkably, when we meet with a referring physician and educate them on our therapy, more than half the time, that physician refers a patient to a treating physician within 6 months. We believe we have a strong playbook that will drive penetration across accounts while expanding our base of more developed accounts. However, given the increased time needed to fully develop our accounts, coupled with the ongoing hospital staffing dynamics and foreign exchange pressure, we are moderating our full year 2022 revenue expectations to now be in the range of $51.5 million to $52.5 million, and we expect global revenue to grow approximately 20% in 2023. In the third quarter, we continued to make significant progress on expanding our addressable market as we grow our commercial footprint and introduce our treatment to new patient populations around the world. We are celebrating a major milestone in our strategic initiative to expand our global footprint. The Japanese Ministry of Health, Labor and Welfare, MHLW agreed to approve Zephyr valves to treat severe COPD emphysema patients in Japan, following a special panel meeting on October 3, 2022. We look forward to bringing our treatment to patients in Japan following the establishment of reimbursement, which we expect in late 2023. As a reminder, we estimate Japan to be a $1 billion market opportunity with approximately 100,000 patients who stand to potentially benefit from our treatment. Also in the third quarter, we saw two very encouraging data readouts associated with our AeriSeal clinical development program. As a reminder, we are developing AeriSeal to expand the addressable market of our Zephyr valve solution to severe emphysema patients not currently eligible due to the presence of a gap in the fissure, separating lobes of the lungs, which results in collateral ventilation or air flow between these lobes. This collateral ventilation prevents the target lobe from deflating when Zephyr valves are inserted. Approximately 1 out of every 5 patients who undergo our Chartis assessment is deemed ineligible to receive Zephyr valves due to the presence of collateral ventilation. AeriSeal is a polymeric foam that is delivered via a bronchoscope to seal the airways leading to the fissure gaps between lobes of the lung, potentially enabling treatment of patients who were previously ineligible for valves due to collateral ventilation. At the European Respiratory Society International Congress in Barcelona, Spain, interim findings from our CONVERT multi-center trial showed that treatment with AeriSeal in the first 40 patients of the study successfully converted 78% of patients to having little to no collateral ventilation, and these patients were subsequently treated with Zephyr valves with successful volume reduction in the target lobe of the lung. The CONVERT trial is ongoing, and we expect it to complete enrollment next year with final data presented in 2024. Learnings from the CONVERT trial continue to inform the design of our U.S. IDE protocol, which we are discussing with the FDA and expect to initiate sometime next year. Also in the third quarter, the full data set from a single-center feasibility study in Australia was published in the Journal of Respirology. Results demonstrated that AeriSeal not only successfully closed collateral air channels to allow patients with collateral ventilation to be treated with Zephyr valves, but that these treated patients showed clinical outcomes comparable to patients without collateral ventilation who are treated with Zephyr valves. Both the preliminary CONVERT trial data presented at ERS and the published Australian study data bolster our belief that AeriSeal could offer a compelling solution to expand our Zephyr valve therapy to patients who are currently not candidates. In summary, we have taken steps forward on multiple market development initiatives, expansion of our global footprint, and our clinical development pipeline. We anticipate growing our market presence by driving site efficiencies across our account base, and increasing utilization in our more developed accounts through geographic expansion, and by broadening the array of patients who we are able to treat with our technologies. Our progress across these initiatives, along with substantial increasing patient interest in Zephyr valves, limited competition in the field, and our financial strength provides us with continued optimism for our long-term growth potential. With that, I will now turn the call over to Derrick to provide a more detailed review of our third-quarter results.

Thank you, Glen, and good afternoon everyone. Total worldwide revenue for the 3 months ended September 30, 2022, was $13.5 million, a 2% increase from $13.3 million in the same period of the prior year, and an increase of 7% on a constant currency basis. U.S. revenue in the third quarter was $8.4 million, a 22% increase from $6.9 million during the prior year period. The growth in U.S. sales reflected continued commercial momentum and adoption of our Zephyr valve therapy, which was slowed somewhat by ongoing hospital staffing constraints. International revenue in the third quarter of 2022 was $5.1 million, a 20% decrease from $6.4 million during the same period last year and a decrease of 10% on a constant currency basis. Our international markets experienced a more pronounced summer slowdown that materialized earlier in July and lasted longer through September than we have previously seen. We attribute this unusual impact to already thinly staffed teams that saw this summer as the first opportunity for an extended holiday since being on the front lines of the pandemic for the past 2.5 years. Gross margin for the third quarter of 2022 was 75% compared to 73% in the prior year period. The year-over-year expansion in gross margin was primarily driven by production efficiencies. We expect gross margin to remain between 74% and 75% next quarter, as foreign exchange impact continues to offset gains in production efficiencies. Total operating expenses for the third quarter of 2022 were $24.1 million, a 23% increase from $19.5 million in the third quarter of 2021. Non-cash stock-based compensation expense was $4.1 million in the third quarter of 2022 and accounted for 30% of the increase in operating expense from the prior year. As a result of our efforts to prudently manage expenses while continuing to invest to drive growth, we are reducing our operating expense guidance for the full year 2022 to $98 million to $100 million, inclusive of approximately $60 million of stock-based compensation expense compared to our prior operating expense guidance of $100 million to $105 million. R&D expenses for the third quarter of 2022 were $4.4 million compared to $2.8 million in the same period of the prior year. The increase was primarily due to clinical and development costs related to our AeriSeal program, as well as an increase in stock-based compensation expense. Sales, general, and administrative expenses for the third quarter of 2022 were $19.7 million compared to $16.7 million in the third quarter of 2021. The increase was primarily attributable to an increase in sales and marketing expenses, as we expanded our commercial team and increased commercial activities as well as an increase in stock-based compensation expense. Net loss for the third quarter of 2022 was $14.2 million or a loss of $0.38 per share, as compared to a net loss of $10.2 million or a loss of $0.28 per share for the same period of the prior year. An average weighted share count of 37.2 million shares was used to determine loss per share for the third quarter of 2022. Turning to our balance sheet; we ended September 30, 2022, with $157 million in cash, cash equivalents, and marketable securities, a decrease of $10 million from June 30, 2022. We remain on track to reach cash flow breakeven in our current operations with the capital that we have on hand and continue to manage our business to maintain a cash runway of at least 3 years of forward cash burn until we turn cash flow positive. We have also taken a couple of additional measures to provide us with balance sheet flexibility. We recently refinanced our existing $70 million term loan to extend the maturity date out by another 5 years with at least 2 additional years of interest-only payments, and have secured optional access to an additional $20 million in debt financing, of which we have no immediate plan to draw down. We also just filed a shelf registration statement on Form S-3 with the SEC, which we view strictly as a matter of good corporate housekeeping. Finally, turning to our outlook for 2022 and beyond, as Glen mentioned, we are lowering our full year 2022 revenue guidance to be in the range of $51.5 million to $52.5 million compared to our prior guidance of $55 million to $60 million that we communicated at the start of the year. Our updated guidance reflects a foreign exchange headwind to global sales growth of approximately 5% for the full year, which is significantly greater than what we anticipated when we set our initial guidance, and now also reflects our understanding of the ongoing hospital staffing constraints and the additional time required to scale our accounts in this new environment. As Glen discussed, we believe that we have the programs in place to drive the required scale, efficiency, and procedure volumes in our new and existing treatment centers, but the time required to do so is slightly longer than we previously anticipated. Accordingly, we expect to grow 2023 revenue around 20%. As usual, we will be providing full details of our 2023 outlook when we report our Q4 earnings next year. And with that, I would like to thank you for your attention. And we will now open up the call for questions.

Our first question comes from Rick Wise from Stifel. Go ahead, Rick.

Thanks a lot. Good afternoon Glen. Hi Derrick. Maybe I am going to start with the 2023 outlook. You are one of the few that’s sort of brave enough to give us a number and a guide. Maybe talk, if you would, a little bit about your thinking there. Just the back-of-the-envelope math, as I look at it, given your ‘22 guidance, it looks like you are talking about a fourth quarter that might be in the $13.5 million, $14 million range. And when I think about the implied number for 2023, in the low $60 million kind of range. That’s sort of – when I think about annualizing the fourth quarter, that really doesn’t show a lot of growth, and help us better understand your caution there? And this is a long – I am going to ask one question, I will just throw a lot into it. But when I see the number of centers you have expanded, your plans to drive efficiency and scalability, it does seem like a cautious initial stab at a ‘23 number. Any thoughts and color there would be very appreciated. Thank you.

Hey Rick. How are you? This is Glen. I think it’s reasonable to characterize it as a cautious number. I think it’s very important to us that we set out things that we don’t like to have calls like this one, where we are reporting on things that we didn’t deliver in the way that we said that we would. We look at next year in a very general sense, as driving about 25% growth in the United States and about 15% growth outside the United States, which blends to just over 20% sort of the back-of-the-envelope number. And we really want to be sure that – I am going to ask Derrick in a moment to add anything he has here. But we want to make sure that we do – we are building something that’s brand new. We are not going in and swapping out somebody else’s treatment. We’ve learned that it takes a little bit longer to establish these fully developed accounts the way that we need to. And we want to be – want to get some performance behind us before we get too aggressive on the growth numbers. One of the things that we are absolutely certain of is that this is a very large opportunity, and we have things lined up, we believe, in a very good way in terms of all of the elements, and we do expect that we are going to tap into this, it’s just taking a little bit longer. Derrick, do you have anything you want to add to that?

Sure, Glen. I will just add that from a macro perspective in terms of the way that we are thinking about this, and I do like the way that you have characterized this, Rick, as an initial stab, because this is an initial stab. We wanted to provide some directional guidance. Clearly, we will be providing a much more refined look, and we will have a much better visibility on our next quarter call. But from where we stand today from a macro perspective, I think the good news is that we are kind of moving out of this pandemic stage of COVID and moving into a more stable environment, where we don’t expect to see kind of the mass shutdowns that we have seen previously as COVID surges come through. And this has given us kind of some visibility and runway to understand what we need to do to more methodically develop this market. From a macro perspective, we do expect that foreign exchange will remain a headwind, at least through the first three quarters of the year if exchange rates stay where they are. So, that’s going to drag down our global growth with 40% of our total sales coming from outside the U.S. And then we do expect that some of these hospital staffing constraints that are continuing to persist through the end of this year will continue to persist into next year, and that’s affecting our outlook as well. So, that’s the additional commentary I would provide.

Thank you. I will stop there. Thanks so much.

Our next question comes from Jason Bednar from Piper Sandler. Go ahead, Jason.

Good afternoon. I wanted to start here on the implied guide for the fourth quarter. I think the revenue here would suggest international business is still going to remain pretty sluggish. But I guess I am trying to reconcile that against the commentary that we are moving into a more unpredictable environment. It seems like something has changed, and it should maybe become a little bit less predictable or it’s simply that we have realized that it takes a little bit longer to get some of these accounts going. Fully appreciate the staffing issue, the seasonality that weighed on the third quarter, but coming back to the fourth quarter, can you help us understand why the business wouldn’t show better constant currency growth than what we are seeing here in the third quarter?

Yes. So, Jason, we are – I think we are moving into the fourth quarter. We are entering the fourth quarter in really good shape. We exited the third quarter in a way that was quite strong, and October was a good month for us. So, we look ahead, and I think one of the things that keeps us on our toes is we do have some history, particularly outside the United States, of things really slowing down around the holidays. In the United States, we give up the better part of three weeks for the holidays. And so I think that’s integrated into our guidance. But having said that, we entered the quarter in a pretty solid place, and I just think we are anticipating that we are going to have some soft weeks, as we get near the end here.

Okay. Alright. And then maybe picking up on Rick’s question as a follow-up, looking to 2023 and thinking about that 20% growth commentary for next year? I agree it is very helpful and commend you for stepping out and giving some kind of guidance when a lot of other companies are waiting here a few more months to do so. But I guess it would seem like the challenges here in the second half, that we are seeing here in the second half of ‘22 from a growth perspective, those might maybe then extend into 2023, maybe the first quarter, the first half. So, really just wondering, as we try to fine-tune things, just see if you would be willing to expand on how you see the growth coming together first half versus the second half of 2023? Thank you.

Yes. Thanks, Jason. This is Derrick. I think that’s well characterized. When we provide our forward-looking guidance for 2023 and again, it’s our initial stab, I think we are looking at the dynamics that we are seeing in the back half of this year. And again, what we are seeing here in the back half of this year is really the first opportunity we now have kind of two quarters, which isn’t a lot, but we have two quarters of kind of visibility post this pandemic era of COVID to get a better sense for where our accounts are and how they are developing and kind of what the ongoing constraints may be. And we essentially kind of expect to see kind of the same dynamic that we are seeing in the back half of this year extend into at least the first half of 2023. So, that’s kind of where we don’t want to get ahead of our skis. And certainly we are not expecting 2023 – the first half of 2023 to look anything like the first half of 2022, right, where we saw just a mass shutdown of procedure volumes in the first quarter, when that last major surge came through. But I think we are expecting kind of the dynamic that we are seeing currently in the back half, with continued constraints and taking a bit longer to develop our accounts we expect that to extend into the first half of next year, and that’s driving some of the outlook that we are providing in 2023.

Alright. Our next question comes from Bill Plovanic. Go ahead, Bill.

Hi, this is Zachary David on behalf of Bill. Thank you for taking my question. Do you have any insights on the StratX, particularly regarding new patient flow at the top of the funnel? How should we consider this in relation to COVID, if there’s any connection?

Sorry about that. I was on mute. The StratX numbers are looking strong, particularly outside the United States. It’s an interesting – an encouraging sign that our StratX numbers are looking as strong as they are, particularly in markets where the procedures are presently pretty depressed, places like Germany and France relative to prior year. So, I think we are seeing that both in the U.S. and outside the United States, which gives us optimism about what’s ahead. But with regard to COVID, I think the short answer is, as we look ahead, we don’t see a significant reduction in our ability to deliver StratX scans as a result of COVID. It could be that staffing could provide some challenges along the way, but the challenges that we face with staffing aren’t really specific to StratX; it’s much more likely to be impacting the pulmonary function testing that needs to happen before the cardiac testing, that needs to happen before the pulmonary rehabilitation that has to happen before one of our procedures and so forth, as well as the team that executes the procedure. So, there are multiple steps to our process. StratX is pretty straightforward because keep in mind, what feeds into StratX is the CT scan that is standard in terms of the diagnosis of a patient with emphysema. Patient shows up, says I am short of breath. There, the doctor says, are you a current or former smoker, and if the answer is yes, they immediately order a CT scan, look and oversee what the tissue density is, diagnose the emphysema, and if the distribution looks like they might be a good candidate, then that data flows into StratX. So, I don’t think that COVID is a real big impactor on StratX, particularly as we look ahead.

Okay. Got it. That makes sense. Thank you for clarifying that. And if I could follow-up, so you cited, like 5% on the FX headwinds for Q3. It was around the same for Q2 and you said, Q3 was higher than you expected. And do you think that those headwinds are going to be roughly the same moving forward into 2023 for a little bit? So, you think around like 5%, like if we were to have a specific figure? Does that seem fair?

Yes. So, let me just clarify that. Yes. So, FX on a global basis impacted Q3 about 5% that was similar to Q2. My commentary was in relationship to our moderation of our guidance for the full year of 2022. So, when we set our guidance at the beginning of this year, we were not expecting a 5% global headwind to year-over-year growth, by any means. We were looking at something on the order of a couple of percent. So, that is greater than expected that I was referring to. I would expect that in Q4, we will probably see a similar sort of 5% headwind to growth. And through the first three quarters of 2023, if you look at the exchange rates, I mean they are just almost linear downwards through from Q1 to Q3. So, even assuming things stay the same, I would expect next year we will see – if things stay the same we will see something less than 5%, but it’s probably closer to 3%. I think you are going to see a similar sort of drag in the first two quarters. And then again assuming FX stays at current rates, they might level off a little bit more in the back half of 2023. So, right now where we stand, we estimate it will be maybe 3% to global growth.

Our next question comes from Yogesh Pareek.

Hi. I have a question regarding AeriSeal. Is there any way you could give more color on AeriSeal for the U.S. market and FDA timeline?

Yes. We are in discussions with the FDA, very deep in discussions. We have said essentially – we are moving forward on finalizing an IDE trial protocol that we will execute a multinational study. It will be like the CONVERT trial. Very much like the CONVERT trial. And that will be the path to getting U.S. approval. We expect that that study will commence next year. We expect that in 2025, 2026 that product will get to the U.S. market.

Alright, it appears there are no questions at this moment. Thank you for joining today's conference call. This concludes our program, and you may now disconnect.