What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-28 · 143 added, 171 removed, 106 unchanged (75% of the section changed)

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Forward-looking statements are made as of the date of this report, deal with future events, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in those forward-looking statements.

The risks and uncertainties include, among other things, impacts on our business due to health pandemics or other contagious outbreaks, such as the current COVID-19 pandemic.

The risks and uncertainties include, among other things, impacts on our business due to health pandemics or other contagious outbreaks, such as the ongoing COVID-19 pandemic.

The risks and uncertainties that could cause actual results to differ materially are more fully described under “Risk Factors” in Part II, Item 1A of this Quarterly Report, elsewhere in this Quarterly Report, and in our other reports filed with the SEC.

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Global Presence

We have built a direct sales organization in the United States, Australia, Canada, New Zealand, and certain countries in Europe to call on health care professionals, such as endocrinologists, physicians and diabetes educators, who can educate and influence patient adoption of continuous glucose monitoring.

We have built a direct sales organization in the United States, Australia, Canada, New Zealand, and some countries in Europe to call on health care professionals, such as endocrinologists, physicians and diabetes educators, who can educate and influence patient adoption of continuous glucose monitoring.

To complement our direct sales efforts, we have entered into distribution arrangements in the United States, and certain countries in Africa, Asia, Europe, Latin America, and the Middle East, as well as Australia, Canada, and New Zealand that allow distributors to sell our products.

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Eventually, we may apply our technological expertise to products beyond glucose monitoring.

Impact of COVID-19 Pandemic

During 2020 and 2021, we have been subject to challenging social and economic conditions created as a result of the novel strain of coronavirus, SARS-CoV-2 (COVID-19).

Impact of the COVID-19 Pandemic

During 2020, 2021, and 2022, we have been subject to challenging social and economic conditions created as a result of the novel strain of coronavirus, SARS-CoV-2, or COVID-19.

These conditions continue to create various financial impacts to our operations by necessitating precautions for our personnel to operate safely both in person as well as remotely.

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As the result of the COVID-19 pandemic, we made Dexcom CGM systems available for use in hospital settings and other healthcare facilities to assist frontline workers.

The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted.

The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business and as a result, we have experienced moderate disruptions in our global operations.

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We currently utilize third parties to, among other things, manufacture components and materials for our devices, and to provide services such as sterilization services and we purchase these materials and services from numerous suppliers worldwide.

The global COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities.

The COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities.

Disruptions relating to the COVID-19 pandemic, including shelter-in-place orders in the U.S.

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See “Risk Factors” in Part II, Item 1A of this Quarterly Report for further discussion of the possible impact of the COVID-19 pandemic on our business.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with U.S.

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Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

The accounting policies and estimates that are most critical to a full understanding and evaluation of our reported financial results are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

There were no material changes to our critical accounting policies during the nine months ended September 30, 2021.

Results of Operations

Key Highlights for the Three Months Ended September 30, 2021

Revenues Gross Profit Operating Income

$650.2 million $446.9 million $118.3 million

up 30% from the same period 2020

The critical accounting estimates that are most critical to a full understanding and evaluation of our reported financial results are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

There were no material changes to our critical accounting estimates during the three months ended March 31, 2022.

Overview of Financial Results

The most important financial indicators that we use to assess our business are revenue growth, gross profit, operating income, net income, and cash flow from operations.

Key Highlights for the Three Months Ended March 31, 2022 include the following:

Revenue Gross Profit Operating Income Net Income Operating Cash Flow

$628.8 million $398.1 million $41.3 million $97.3 million $71.0 million

up 25% from the same period 2021

up 16% from the same period 2021

Net Income Operating Cash Flow Cash, Cash Equivalents, &

Short-Term Marketable Securities

$70.9 million $247.3 million $2.70 billion

down 10% from the same period 2021

up 72% from the same period 2021

down .4% from fiscal year 2020

Financial Overview

up 155% from the same period 2021

We ended the first quarter of 2022 with cash, cash equivalents and short-term marketable securities totaling $2.69 billion.

Business Trends

In addition to the general impacts of COVID-19 on our company as described in the Overview, looking ahead we expect our business could be affected by the following:

• Increase in the worldwide incidence of people diagnosed with diabetes and costs related to the management and treatment of diabetes.

• Changes in medical reimbursement policies and programs.

• Growing demand for digital health technologies by both healthcare providers and consumers to reduce costs, empower consumers to make better-informed decisions about their own health and provide new options for facilitating prevention, early diagnosis of life-threatening diseases, and management of chronic conditions outside of traditional health care settings.

• Continued product innovation and competition from other CGM device makers.

• Our ability to scale efficiently with the construction of our production facility in Malaysia.

• Our ability to successfully develop, obtain regulatory approval of and commercialize the products within our pipeline, in particular, our next generation G7 CGM system.

Results of Operations

Financial Overview

Three Months Ended

September 30, 2021 - 2020

(In millions, except per share amounts) 2021 2020 $ Change % Change

Revenues $ 650.2 $ 500.9 $ 149.3 30 %

Cost of sales 203.3 160.5 42.8 27 %

Gross profit $ 446.9 $ 340.4 $ 106.5 31 %

Gross profit as a percent of total revenue 68.7 % 68.0 %

Operating income $ 118.3 $ 94.1 $ 24.2 26 %

Net income 70.9 72.2 (1.3) (2) %

Basic net income per share 0.73 0.75 (0.02) (3) %

Diluted net income per share $ 0.71 $ 0.73 $ (0.02) (3) %

Nine Months Ended

September 30, 2021 - 2020

(In millions, except per share amounts) 2021 2020 $ Change % Change

Revenues $ 1,750.3 $ 1,357.8 $ 392.5 29 %

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three Months Ended March 31, 2022 - 2021

(In millions, except per share amounts) 2022 % of Revenue (1)

2021 % of Revenue (1)

$ Change % Change

(As Adjusted)*

Revenue $ 628.8 100 % $ 505.0 100 % $ 123.8 25 %

Cost of sales 230.7 37 % 161.1 32 % 69.6 43 %

Gross profit 398.1 63.3 % 343.9 68.1 % 54.2 16 %

Gross profit as a percent of total revenue 69.0 % 64.9 %

Operating expenses:

Research and development 135.9 22 % 109.4 22 % 26.5 24 %

Selling, general and administrative 220.9 35 % 188.6 37 % 32.3 17 %

Total operating expenses 356.8 57 % 298.0 59 % 58.8 20 %

Operating income 41.3 7 % 45.9 9 % (4.6) (10) %

Interest expense (4.6) (1) % (4.7) (1) % 0.1 (2) %

Income from equity investments 0.2 — % — — % 0.2 *

Interest and other income (expense), net (0.8) — % 0.1 — % (0.9) *

Income before income taxes 36.1 6 % 41.3 8 % (5.2) (13) %

Income tax benefit (61.2) (10) % (15.2) (3) % (46.0) *

Net income $ 97.3 15 % $ 56.5 11 % $ 40.8 72 %

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Diluted net income per share $ 0.93 ** $ 0.56 ** $ 0.37 66 %

Revenue, Cost of Sales and Gross Profit

We expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter.

(1) The sum of the individual percentages may not equal the total due to rounding.

* We adjusted our 2021 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted on a full retrospective basis.

Refer to Note 1 “Organization and Significant Accounting Policies” for further information.

** Not meaningful

We expect that revenue we generate from the sales of our products will fluctuate from quarter to quarter.

We typically experience seasonality, with lower sales in the first quarter of each year compared to the immediately preceding fourth quarter.

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annual insurance deductible resets and unfunded flexible spending accounts.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The revenue increase was primarily driven by increased sales volume of our disposable sensors due to the continued growth of our worldwide customer base, partially offset by increased volumes in the U.S.

pharmacy channel at a lower price aligned with the evolution of our U.S.

channel strategy.

Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware revenue comprised approximately 16% of total revenue for the three months ended September 30, 2021.

Disposable sensor and other revenue comprised approximately 81% of total revenue and Reusable Hardware revenue comprised approximately 19% of total revenue for the three months ended September 30, 2020.

Cost of sales increased primarily due to increased sales volume.

The increase in gross profit and gross profit margin in the third quarter of 2021 compared to the third quarter of 2020 were primarily driven by increased revenues and cost savings associated with incremental improvements to product design and manufacturing efficiencies.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

pharmacy channel at a lower price aligned with the evolution of our U.S.

channel strategy.

Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware revenue comprised approximately 16% of total revenue for the nine months ended

September 30, 2021.

Disposable sensor and other revenue comprised approximately 81% of total revenue and Reusable Hardware revenue comprised approximately 19% of total revenue for the nine months ended September 30, 2020.

Cost of sales increased primarily due to increased sales volume.

The increase in gross profit and gross profit margin in the first nine months of 2021 compared to the first nine months of 2020 were primarily driven by increased revenues and cost savings associated with incremental improvements to product design and manufacturing efficiencies.

Operating Expenses

Quarter Ended September 30, 2021 Compared to Quarter Ended September 30, 2020

Three Months Ended

September 30, 2021 - 2020

(In millions) 2021 2020 $ Change % Change

Research and development $ 128.8 $ 87.7 $ 41.1 47 %

as a % of total revenue 20 % 18 %

Selling, general and administrative 199.8 158.6 41.2 26 %

as a % of total revenue 31 % 32 %

Total operating expenses $ 328.6 $ 246.3 $ 82.3 33 %

as a % of total revenue (1)

(1) The sum of the individual percentages may not equal the total due to rounding.

Research and Development Expense

Research and development expense increased primarily due to $20.0 million in additional third party and consulting fees primarily related to software, $14.1 million in additional salaries, bonuses, and payroll-related costs, and $2.6 million in additional clinical trials costs.

We continue to believe that focused investments in research and development are critical to our future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to our core business strategy.

Selling, General and Administrative Expense

Selling, general and administrative expense increased primarily due to $13.4 million in additional salaries, bonuses, and payroll-related costs, $12.1 million in additional advertising and marketing costs, and $5.2 million in additional legal costs partially offset by $4.7 million in lower third party service provider fees.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Nine Months Ended

September 30, 2021 - 2020

(In millions) 2021 2020 $ Change % Change

Cost of sales

Cost of sales includes direct labor and materials costs related to each product sold or produced, including assembly, test labor and scrap, as well as factory overhead supporting our manufacturing operations.

Factory overhead includes facilities, material procurement and control, manufacturing engineering, quality assurance, supervision and management.

These costs are primarily salary, fringe benefits, share-based compensation, facility expense, supplies and purchased services.

All of our manufacturing costs are included in cost of sales.

Research and development

as a % of total revenue 21 % 18 %

Our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology, clinical trials, regulatory expenses, quality assurance programs, materials and products for clinical trials.

Research and development expenses are primarily related to employee compensation, including salary, fringe benefits, share-based compensation, and temporary employee expenses.

We also incur significant expenses to operate our clinical trials including clinical site reimbursement, clinical trial product and associated travel expenses.

Our research and development expenses also include fees for design services, contractors and development materials.

Selling, general and administrative

as a % of total revenue 33 % 33 %

Total operating expenses $ 942.7 $ 685.5 $ 257.2 38 %

as a % of total revenue 54 % 50 %

(1) The sum of the individual percentages may not equal the total due to rounding.

Research and Development Expense

Research and development expense increased primarily due to $51.3 million in additional third party and consulting fees primarily related to software, $42.1 million in additional salaries, bonuses, and payroll-related costs, and $11.7 million in additional clinical trials costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased primarily due to $56.5 million in additional advertising and marketing costs, $46.7 million in additional salaries, bonuses, and payroll-related costs, $8.7 million of investments in customer experience, partially offset by $9.2 million in lower third party service provider fees.

Non-Operating Income and Expenses

Our selling, general and administrative expenses primarily consist of salary, fringe benefits and share-based compensation for our executive, financial, sales, marketing, information technology and administrative functions.

Other significant expenses include commissions, marketing and advertising, IT software license costs, insurance, professional fees for our outside legal counsel and independent auditors, litigation expenses, patent application expenses and consulting expenses.

Interest expense

Interest expense is comprised primarily of costs related to our senior convertible notes.

Interest expense increased $0.7 million to $25.1 million for the three months ended September 30, 2021 compared to $24.4 million for the same period of 2020.

Interest expense increased $15.0 million to $75.1 million for the nine months ended September 30, 2021 compared to $60.1 million for the nine months ended September 30, 2020.

The increase in interest expense for the periods presented is primarily due to the May 2020 issuance of our 2025 Notes.

Loss on Extinguishment of Debt

We recorded a $0.8 million loss on extinguishment of debt during the three and nine months ended September 30, 2021 in connection with the conversions of a portion of our 2023 Notes.

We recorded losses on extinguishment of debt of $0.5 million and $5.9 million during the three and nine months ended September 30, 2020, respectively, in connection with the repurchase and conversions of our 2022 Notes.

See Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more information about these transactions.

Income from equity investments

Income from equity investments is comprised of of realized gains from the sale of an equity investment.

Interest and other income (expense), net

Interest and other income (expense), net consists primarily of interest income on our marketable debt securities portfolio and foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

Interest income was $0.3 million and $1.2 million for the three and nine months ended September 30, 2021, respectively, compared to $2.4 million and $12.0 million for the three and nine months ended September 30, 2020, respectively.

The decrease in interest income for the three months ended September 30, 2021 was primarily related to a decrease in average invested balances compared to the same period in 2020.

The decrease in interest income for the nine months ended September 30, 2021 was primarily related to a decline in market interest rates, partially offset by an increase in average invested balances compared to the same period in 2020.

Income Tax Expense

We recorded income tax expense of $19.8 million on pre-tax income of $90.7 million for the three months ended September 30, 2021 compared to income tax expense of $2.9 million on pre-tax income of $75.1 million for the three months ended September 30, 2020.

We recorded income tax expense of $14.5 million on pre-tax income of $188.6 million for the nine months ended September 30, 2021 and income tax expense of $5.3 million on pre-tax income of $143.7 million for the nine months ended September 30, 2020.

Our estimated annual effective tax rate from normal, recurring operations did not change materially during the three months ended September 30, 2021.

Our income tax expense for the three months ended September 30, 2021 also includes the discrete impact of excess tax benefits from stock compensation.

Our income tax expense for the prior period is attributable to foreign and state income tax expense in taxable jurisdictions with no net operating losses.

We maintained a valuation allowance on our deferred tax assets during the prior period, most of which was released in the fourth quarter of 2020.

Our income tax expense for the nine months ended September 30, 2021 is primarily attributable to income tax expense from normal, recurring operations at an estimated annual effective tax rate of 27.8%, offset by excess tax benefits from stock compensation net of disallowed executive compensation and a one-time tax benefit related to the revaluation of our U.K.

net operating loss deferred tax asset resulting from the increase in the U.K.

corporate tax rate from 19% to 25%, effective April 2023.

Income tax expense in the prior period is primarily related to foreign income taxes in jurisdictions with current taxable income.

We maintained a valuation allowance on our deferred tax assets during the prior period, most of which was released in the fourth quarter of 2020.

Three Months Ended March 31, 2022 Compared to

Three Months Ended March 31, 2021

Revenue The revenue increase was primarily due to increased sales volume of our disposable sensors due to the continued growth of our worldwide customer base, partially offset by mix shift and price associated with the evolution of our channel strategy.

Disposable sensor and other revenue comprised approximately 86% of total revenue and Reusable Hardware revenue comprised approximately 14% of total revenue for the three months ended March 31, 2022.

Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware revenue comprised approximately 16% of total revenue for the three months ended March 31, 2021.

Cost of Sales Cost of sales and gross profit increased primarily due to an increase in sales volume.

The decrease in gross profit margin in the first quarter of 2022 compared to the first quarter of 2021 was primarily driven by price and channel mix changes and increases in excess and obsolescence reserves related to the phase out of older generation CGMs.

Research and Development Expense Research and development expense increased primarily due to $11.4 million in additional salaries, bonuses, share-based compensation, and payroll-related costs primarily due to higher headcount, $4.7 million in additional costs related to set-up and validation costs for new CGM equipment, and $4.5 million in additional depreciation expense for equipment in service relating to new products prior to regulatory approval.

Selling, General and Administrative Expense Selling, general and administrative expense increased primarily due to $9.8 million in additional salaries, bonuses, share-based compensation, and payroll-related costs primarily due to higher headcount, $4.3 million in additional advertising and marketing costs due to an increase in worldwide marketing campaigns, $3.6 million in additional travel and entertainment expenses, $2.7 million in additional legal expense related to litigation, and $1.5 million in additional amortization expense related to acquired intangibles.

Income Tax Benefit The income tax benefit for the three months ended March 31, 2022 is primarily attributable to excess tax benefits recognized for employees share-based compensation for employees and the Verily Milestone payment recorded discretely during the quarter, offsetting income tax expense from normal, recurring operations at an estimated annual effective rate of 30.2%.

The income tax benefit we recorded for the three months ended March 31, 2021 is primarily attributable to excess tax benefits recognized for employee share-based compensation offset by income tax expense from normal, recurring operations.

Liquidity and Capital Resources

Overview, Capital Resources, and Capital Requirements

Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations, proceeds from our senior convertible notes issuances, and access to our revolving line of credit.

Our primary uses of cash have been for research and development programs, selling and marketing activities, capital expenditures, acquisitions of businesses, and debt service costs.

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dollar-denominated, investment grade, highly liquid obligations of U.S.

government-sponsored enterprises, commercial paper, corporate debt, and money market funds.

government agencies, commercial paper, corporate debt, and money market funds.

Certain of these investments are subject to general credit, liquidity and other market risks.

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Our future capital requirements will depend on many factors, including but not limited to:

The revenue generated by sales of our approved products and other future products;

The evolution of the international expansion of our business and the revenue generated by sales of our approved products and other future products;

Our ability to efficiently scale our operations to meet demand for our current and any future products;

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The costs, timing and risks of delays of additional regulatory approvals;

The emergence of competing or complementary technological developments;

The quality levels of our products and services;

The costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

The quality levels of our products and services;

The emergence of competing or complementary technological developments;

The terms and timing of any collaborative, licensing and other arrangements that we may establish;

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The acquisition of businesses, products and technologies and our ability to integrate and manage any acquired businesses, products and technologies.

The evolution of the international expansion of our business.

We expect that existing cash and cash flows from our future operations will generally be sufficient to fund our ongoing core business.

We expect that existing cash and short-term investments and cash flows from our future operations will generally be sufficient to fund our ongoing core business.

As current borrowing sources become due, we may be required to access the capital markets for additional funding.

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Fluctuations in the rate of exchange between the U.S.

dollar and foreign currencies, primarily the Australian Dollar, the British Pound, the Canadian Dollar, and the Euro, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

dollar and foreign currencies, primarily the Australian Dollar, the British Pound, the Canadian Dollar, the Euro and the Malaysian Ringgit, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

We currently engage in hedging transactions to reduce foreign currency risks.

We will continue to monitor and manage our financial exposures due to exchange rate fluctuations as an integral part of our overall risk management

Our cash, cash equivalents and short-term marketable securities totaled $2.70 billion as of September 30, 2021.

We will continue to monitor and manage our financial exposures due to exchange rate fluctuations as an integral part of our overall risk management program.

Main Sources of Liquidity

Cash, cash equivalents and short-term marketable securities

Our cash, cash equivalents and short-term marketable securities totaled $2.69 billion as of March 31, 2022.

None of those funds were restricted and approximately 96% of those funds were located in the United States.

Our cash, cash equivalents and short-term marketable securities as of September 30, 2021 decreased by $9.8 million from December 31, 2020 due to the factors described in “Cash Flows” below.

We believe that our cash, cash equivalents, and marketable securities balances, projected cash contributions from our commercial operations, and our $200.0 million revolving line of credit, of which $193.6 million remains available, will be sufficient to meet our anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months.

Revolving Credit Agreement

On December 19, 2018, we entered into an amended and restated revolving credit agreement which was subsequently amended on May 11, 2020 (as amended, the Credit Agreement).

The Credit Agreement provides for available principal amount of $200.0 million which can be increased up to $500.0 million at our option subject to customary conditions and approval of our lenders.

As of September 30, 2021, we had no outstanding borrowings, $6.4 million in outstanding letters of credit, and a total available balance of $193.6 million under the Credit Agreement.

On October 13, 2021, we amended and restated the Credit Agreement (as amended and restated, the Amended Credit Agreement).

The Amended Credit Agreement also includes a subfacility of up to $25.0 million for letters of credit.

Subject to customary conditions and the approval of any lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Amended Credit Agreement by up to an additional $300.0 million, resulting in a maximum available principal amount of $500.0 million.

However, at this time none of the lenders have committed to provide any such increase in their commitments.

Revolving loans under the Amended Credit Agreement will be available for general corporate purposes, including working capital and capital expenditures.

We monitor counterparty risk associated with the institutional lenders that are providing this credit facility.

We currently believe that this credit facility will be available to us should we choose to borrow under it.

Cash flow from Operations

For the three months ended March 31, 2022, we had positive cash inflows of $71.0 million from operating activities.

We anticipate that we will continue to generate positive cash inflows for the foreseeable future.

Senior Convertible Notes

The following table summarizes our outstanding senior convertible note obligations as of September 30, 2021:

Issuance Date Coupon Rate Aggregate

(in millions) Maturity Date Initial Conversion

Rate per Share of

Common Stock Conversion Price per Share of Common Stock

November 2018 0.75% $ 817.4 December 1, 2023 6.0869 $164.29

May 2020 0.25% 1,207.5 November 15, 2025 1.6655 $600.42

We used a portion of the net proceeds from the offering of the 2023 Notes to repurchase 0.8 million shares of our common stock for $100.0 million in 2018.

We used $282.6 million of the net proceeds from the offering of the 2025 Notes to repurchase a portion of our 2022 Notes;

the remaining 2022 Notes were converted for shares of our common stock during 2020.

We intend to use the remainder of the net proceeds from the Notes offerings for general corporate purposes and capital expenditures, including working capital needs.

We received net proceeds of $836.6 million in November 2018 from the 2023 Notes offering and net proceeds of $1.19 billion in May 2020 from the 2025 Notes offering.

We used $100.0 million of the net proceeds from the offering of the 2023 Notes to repurchase a portion of our common stock in 2018.

We used $282.6 million of the net proceeds from the offering of the 2025 Notes to repurchase a portion of our senior convertible notes due 2022, or 2022 Notes.

We intend to use the remainder of the net proceeds from the 2023 Notes and 2025 Notes offerings for general corporate purposes and capital expenditures, including working capital needs.

We may also use the net proceeds to expand our current business through in-licensing or acquisitions of, or investments in, other businesses, products or technologies;

however, we do not have any significant commitments with respect to any such acquisitions or investments at this time.

2023 Note Hedge

In connection with the offering of the 2023 Notes, in November 2018 we entered into convertible note hedge transactions (the 2023 Note Hedge) with two of the initial purchasers of the 2023 Notes (the 2023 Counterparties) entitling us to purchase up to 5.2 million shares of our common stock at an initial price of $164.29 per share, each of which is subject to adjustment.

The cost of the 2023 Note Hedge was $218.9 million and it will expire on December 1, 2023.

The 2023 Note Hedge is expected to reduce the potential equity dilution upon any conversion of the 2023 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2023 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2023 Note Hedge.

The strike price of the 2023 Note Hedge initially corresponds to the conversion price of the 2023 Notes and is subject to certain adjustments under the terms of the 2023 Note Hedge.

Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to the 2023 Notes and shares received as the result of exercising a portion of the 2023 Note Hedge.

2023 Warrants

In November 2018, we also sold warrants (the 2023 Warrants) to the 2023 Counterparties to acquire up to 5.2 million shares of our common stock for cash proceeds of $183.8 million.

The 2023 Warrants require net share settlement and a pro-rated number of warrants will expire on each of the 60 scheduled trading days starting on March 1, 2024.

See Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more information about the terms of the Credit Agreement, our senior convertible notes, the 2023 Note Hedge, and the 2023 Warrants.

As of September 30, 2021, we had $2.70 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $9.8 million compared to $2.71 billion as of December 31, 2020.

The primary cash flows during the nine months ended September 30, 2021 and 2020 are described below.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to the 2023 Notes and shares received as the result of exercising a portion of the 2023 Note Hedge as well as for more information about the 2023 Notes and the 2025 Notes, the 2023 Note Hedge, and the 2023 Warrants.

Revolving Credit Agreement

As of March 31, 2022, we had no outstanding borrowings, $7.3 million in outstanding letters of credit, and a total available balance of $192.7 million under the Amended Credit Agreement.

We monitor counterparty risk associated with the institutional lenders that are providing the Credit Facility.

We currently believe that the Credit Facility will be available to us should we choose to borrow under it.

Revolving loans will be available for general corporate purposes, including working capital and capital expenditures.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more details on the Revolving Credit Agreement.

Short-term Liquidity Requirements

Our short-term liquidity requirements primarily consist of regular operating costs, interest payments related to our senior convertible notes, capital expenditures for the development of our manufacturing facilities and office spaces, and short-term material cash requirements as described below.

As of March 31, 2022, we had a working capital ratio of 5.27 and a quick ratio of 4.54, which indicates that our current assets are more than enough to cover our short-term liabilities.

We expect to have significant capital expenditures for the next year to drive our strategic initiative of building out our manufacturing facility and equipment in Malaysia and the capacity scale-up in Mesa, Arizona.

We believe that our cash, cash equivalents, and marketable securities balances, projected cash contributions from our commercial operations, and borrowings under our Credit Facility will be sufficient to meet our anticipated seasonal working capital needs, all capital expenditure requirements, material cash requirements as described below, and other liquidity requirements associated with our operations for at least the next 12 months.

Long-term Liquidity Requirements

Our long-term liquidity requirements primarily consist of interest and principal payments related to our senior convertible notes, capital expenditures for the development of our manufacturing facilities and office spaces, and long-term material cash requirements as described below.

As of March 31, 2022, we had a debt-to-assets ratio of 0.39, which indicates that our total assets are more than enough to cover our short-term and long-term debts.

As demand grows for our products, we will continue to expand global operations to meet demand through investments in manufacturing and operations.

We expect to meet our long-term liquidity requirements from our main sources of liquidity as described above to support our future operations, capital expenditures, acquisitions, and other liquidity requirements associated with our operations beyond the next 12 months.

As of March 31, 2022, we have outstanding senior convertible notes that will mature in December 2023 for the 2023 Notes and November 2025 for the 2025 Notes.

However, the outstanding principal of our senior convertible notes could be converted into cash and/or shares of our common stock prior to maturity once certain conditions are met.

See Note 5 “Debt” to

the consolidated financial statements in Part I, Item 1 of this Quarterly Report for information on conversion rights prior to maturity.

Material Cash Requirements

From time to time in the ordinary course of business, we enter into a variety of purchase arrangements including but not limited to, purchase arrangements related to capital expenditures, components used in manufacturing for the United States and Malaysia, and research and development activities.

See “Contractual Obligations” below in Part I, Item 2 of this Quarterly Report for more information.

We issued senior convertible notes in November 2018 and May 2020.

The obligations presented above include both principal and interest for these notes.

Although these notes mature in 2023 and 2025, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met.

Any conversion prior to maturity can result in repayment of the principal amounts sooner than the scheduled repayment as indicated in the table.

As of March 31, 2022, we had outstanding letters of credit of $7.3 million for which we cannot forecast with certainty the amount and timing of repayments.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for further discussion of the terms of our senior convertible notes.

We are party to various leasing arrangements, primarily for office, manufacturing and warehouse space that expire at various times through December 2030, excluding any renewal options.

We also have a land lease in Penang, Malaysia for the build-out of our international manufacturing facility lease that expires in 2080.

We anticipate incurring significant expenditures related to the build-out of the Malaysia manufacturing facility and equipment in the next two years.

Under our Restated Collaboration Agreement with Verily, additional sales-based milestone payments equivalent to 1,288,660 shares of our common stock, calculated based on the $175.0 million initial milestone amount divided by the volume-weighted average trading price during the 15 consecutive days ending on the date of the Restated Collaboration Agreement, may become due and payable by us upon achievement of certain sales-based milestones.

All milestones may be paid in cash or shares of our common stock, at our election.

If we elect to make these milestone payments in cash, any such cash payment would be equal to the number of shares that would otherwise be issued for the given milestone payment multiplied by the value of our stock on the date the relevant milestone is achieved, adjusted for stock splits, dividends, and the like.

We intend to pay these milestones in shares of our common stock and as such we do not expect to have a material cash requirement for this agreement.

See Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for further discussion of the Collaboration Agreement with Verily.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more information about the terms of the Credit Agreement, our senior convertible notes, the 2023 Note Hedge, and the 2023 Warrants.

As of March 31, 2022, we had $2.69 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $43.0 million compared to $2.73 billion as of December 31, 2021.

The primary cash flows during the three months ended March 31, 2022 and March 31, 2021 are described below.

See the consolidated financial statements in Part I, Item 1 of this Quarterly Report for complete consolidated statements of cash flows for these periods.

Nine Months Ended

September 30, 2021 September 30, 2020

Three Months Ended

March 31, 2022 March 31, 2021

Operating Cash Flows + $97.3 million of net income and $71.2 million of net non-cash adjustments, partially offset by $97.5 million of net changes in working capital balances

+ $56.5 million of net income and $58.7 million of net non-cash adjustments, partially offset by $87.4 million of net changes in working capital balances

Net non-cash adjustments were primarily related to share-based compensation, non-cash interest expense for our senior convertible notes, and depreciation and amortization.

Investing Cash Flows $625.1 million net proceeds from marketable securities

Net non-cash adjustments were primarily related to share-based compensation and depreciation and amortization.

Investing Cash Flows + $304.7 million net purchases of marketable securities

- $12.0 million net purchases of marketable securities

1 unchanged sentence

- $99.7 million capital expenditures

$31.6 million in acquisitions, net of cash acquired

$4.0 million in minority equity investments

Financing Cash Flows + $10.1 million in proceeds from the issuance of common stock under our employee stock plans

$1.19 billion in proceeds from issuance of convertible notes, net of issuance costs

$9.1 million in payments for financing leases

+ $8.7 million in proceeds from the issuance of common stock under our employee stock plans

$282.6 million cash outflow for repurchase of convertible notes

- $3.4 million in payments for financing leases

- $7.9 million in payments for financing leases

Contractual Obligations

We presented our contractual obligations as of December 31, 2020 in our Annual Report on Form 10-K for the twelve months then ended.

There were no significant changes to our 2025 Notes and lease obligations.

See Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to our 2023 Notes.

As of September 30, 2021, we had approximately $503.9 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

We presented our contractual obligations as of December 31, 2021 in Note 6 “Leases And Other Commitments” in our Annual Report on Form 10-K for the twelve months then ended.

There were no significant changes to our lease obligations.

As of March 31, 2022, we had approximately $503.6 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to our senior convertible notes.

Recent Accounting Guidance

For a description of recently issued accounting guidance that is applicable to our consolidated financial statements, see Note 1 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report.

For a description of recently issued accounting guidance that is applicable to our consolidated financial statements, see Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis