DEXCOM INC 10-Q

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This document, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are not purely historical regarding Dexcom’s or its management’s intentions, beliefs, expectations and strategies for the future. These forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. 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 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. We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results. You should read the following discussion and analysis together with our consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report. Overview WHO WE ARE We are a medical device company primarily focused on the design, development and commercialization of continuous glucose monitoring, or CGM, systems for the management of diabetes by patients, caregivers, and clinicians around the world. We received approval from the Food and Drug Administration, or FDA, and commercialized our first product in 2006. We launched our latest generation system, the Dexcom G6 ® integrated Continuous Glucose Monitoring System, or G6, in 2018. Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “Dexcom” refer to DexCom, Inc. and its subsidiaries. 30 Table of Contents Global Presence We have built a direct sales organization in the North America, Asia Pacific, Europe and the Middle East 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. Future Developments Product Development: We plan to develop future generations of technologies that are focused on improved performance and convenience and that will enable intelligent insulin administration. Over the longer term, we plan to continue to develop and improve networked platforms with open architecture, connectivity and transmitters capable of communicating with other devices. We also intend to expand our efforts to accumulate CGM patient data and metrics and apply predictive modeling and machine learning to generate interactive CGM insights that can inform patient behavior. Partnerships: We also continue to pursue and support development partnerships with insulin pump companies and companies or institutions developing insulin delivery systems, including automated insulin delivery systems. New Opportunities: We are also exploring how to extend our offerings to other opportunities, including for people with Type 2 diabetes that are non-insulin using, people with pre-diabetes, people who are obese, people who are pregnant, and people in the hospital setting. Eventually, we may apply our technological expertise to products beyond glucose monitoring. 31 Table of Contents Impact of the Ongoing 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 and its variants, 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. Costs incurred include items like incremental payroll costs, consulting support, IT infrastructure and facilities-related costs. As the result of the COVID-19 pandemic, and in coordination with an FDA communication of enforcement discretion, we made Dexcom CGM systems available for use in hospital settings and other healthcare facilities. The extent of the impact of the ongoing 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 ongoing 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. We have experienced and may experience constrained supply or curtailed customer demand, including due to customer loss of private health insurance coverage for our products, that could materially adversely impact our business, results of operations and overall financial performance in future periods. 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 ongoing COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities. Disruptions relating to the ongoing COVID-19 pandemic, including shelter-in-place orders in the U.S. and other countries, could prevent employees, suppliers, distributors, and others from accessing manufacturing facilities and from transporting our products or the components required to manufacture our products. For example, we have experienced some supply chain disruption due to the global restrictions resulting from the ongoing COVID-19 pandemic in the manufacturing of our next-generation CGM product. Further, worldwide supply chain disruption relating to the ongoing COVID-19 pandemic has resulted in product shortages that has and may continue to impact our ability to manufacture our devices. As of the filing date of this Form 10-Q, the extent to which the ongoing COVID-19 pandemic may impact our financial condition or results of operations or guidance is uncertain. The effect of the ongoing COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See “Risk Factors” in Part II, Item 1A of this Quarterly Report for further discussion of the possible impact of the ongoing COVID-19 pandemic on our business. 32 Table of Contents 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. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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 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 six months ended June 30, 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 June 30, 2022 include the following: Revenue Gross Profit Operating Income Net Income Operating Cash Flow $696.2 million $449.5 million $77.0 million $50.9 million $172.8 million up 17% from the same period 2021 up 8% from the same period 2021 down 24% from the same period 2021 down 35% from the same period 2021 up 181% from the same period 2021 We ended the second quarter of 2022 with cash, cash equivalents and short-term marketable securities totaling $2.75 billion. Business Trends In addition to the general impacts of the ongoing COVID-19 pandemic 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. • An expected interest in empowering consumers to make better-informed decisions about their own health and new potential 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 marketing authorization of and commercialize the products within our pipeline, in particular, our next generation G7 CGM system. 33 Table of Contents Results of Operations Financial Overview Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Three Months Ended June 30, 2022 - 2021 (In millions, except per share amounts) 2022 % of Revenue (1) 2021 % of Revenue (1) $ Change % Change (As Adjusted)* Revenue $ 696.2 100 % $ 595.1 100 % $ 101.1 17 % Cost of sales 246.7 35 % 178.0 30 % 68.7 39 % Gross profit 449.5 64.6 % 417.1 70.1 % 32.4 8 % Operating expenses: Research and development 121.7 17 % 129.1 22 % (7.4) (6) % Amortization of intangible assets 1.9 — % 0.5 — % 1.4 ** Selling, general and administrative 248.9 36 % 186.5 31 % 62.4 33 % Total operating expenses 372.5 54 % 316.1 53 % 56.4 18 % Operating income 77.0 11 % 101.0 17 % (24.0) (24) % Interest expense (4.7) (1) % (4.8) (1) % 0.1 (2) % Income from equity investments — — % — — % — ** Interest and other income, net 3.0 — % 0.9 — % 2.1 ** Income before income taxes 75.3 11 % 97.1 16 % (21.8) (22) % Income tax expense (benefit) 24.4 4 % 18.7 3 % 5.7 30 % Net income $ 50.9 7 % $ 78.4 13 % $ (27.5) (35) % Basic net income per share $ 0.13 ** $ 0.20 ** $ (0.07) (35) % Diluted net income per share $ 0.12 ** $ 0.19 ** $ (0.07) (37) % (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. All periods presented have also been adjusted to reflect the four-for-one stock split. Refer to Note 1, “Organization and Significant Accounting Policies,” for further information. ** Not meaningful 34 Table of Contents Revenue 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. This seasonal sales pattern relates to U.S. annual insurance deductible resets and unfunded flexible spending accounts. 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 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 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. 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, net Interest and other income, 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. 35 Table of Contents Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 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 June 30, 2022. Disposable sensor and other revenue comprised approximately 83% of total revenue and Reusable Hardware revenue comprised approximately 17% of total revenue for the three months ended June 30, 2021. Cost of Sales & Gross Profit Cost of sales and gross profit increased primarily due to an increase in sales volume. The decrease in gross profit margin in the second quarter of 2022 compared to the second quarter of 2021 was primarily driven by price and channel mix changes. Research and Development Expense Research and development expense decreased primarily due to $10.3 million in lower third party and consulting fees related to software development for new products and significant enhancements and $6.0 million in lower losses from disposal of assets related to the automation of our production capabilities, partially offset by $4.6 million in compensation-related costs primarily due to higher headcount. 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 $19.1 million in advertising and marketing costs due to an increase in worldwide marketing campaigns, $12.9 million in compensation-related costs primarily due to higher headcount, $6.1 million in depreciation expense primarily due to higher property and equipment balances and accelerated depreciation related to business transition activities, $5.9 million in legal expense related to litigation, $5.5 million in consulting fees, and $4.1 million in travel and entertainment expenses. Income Tax Expense (Benefit) Our estimated annual effective tax rate from normal, recurring operations increased from 30.2% to 31.4% during the three months ended June 30, 2022 primarily due to impacts of foreign operations. There were no significant discrete items recognized for the three months ended June 30, 2022. The income tax expense recorded for the three months ended June 30, 2021 is primarily attributable to excess tax benefits recognized for employee share-based 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 rate from 19% to 25%, effective April 2023, offset by income tax expense from normal, recurring operations. 36 Table of Contents Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Six Months Ended June 30, 2022 - 2021 (In millions, except per share amounts) 2022 % of Revenue (1) 2021 % of Revenue (1) $ Change % Change (As Adjusted)* Revenue $ 1,325.0 100 % $ 1,100.1 100 % $ 224.9 20 % Cost of sales 477.4 36 % 339.1 31 % 138.3 41 % Gross profit 847.6 64.0 % 761.0 69.2 % 86.6 11 % Operating expenses: Research and development 257.6 19 % 238.5 22 % 19.1 8 % Amortization of intangible assets 3.9 — % 1.0 — % 2.9 ** Selling, general and administrative 467.8 35 % 374.6 34 % 93.2 25 % Total operating expenses 729.3 55 % 614.1 56 % 115.2 19 % Operating income 118.3 9 % 146.9 13 % (28.6) (19) % Interest expense (9.3) (1) % (9.5) (1) % 0.2 (2) % Income from equity investments 0.2 — % — — % 0.2 ** Interest and other income, net 2.2 — % 1.0 — % 1.2 ** Income before income taxes 111.4 8 % 138.4 13 % (27.0) (20) % Income tax expense (benefit) (36.8) (3) % 3.5 — % (40.3) ** Net income $ 148.2 11 % $ 134.9 12 % $ 13.3 10 % Basic net income per share $ 0.38 ** $ 0.35 ** $ 0.03 9 % Diluted net income per share $ 0.36 ** $ 0.33 ** $ 0.03 9 % (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. All periods presented have also been adjusted to reflect the four-for-one stock split. Refer to Note 1, “Organization and Significant Accounting Policies,” for further information. ** Not meaningful 37 Table of Contents Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Revenue 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 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 six months ended June 30, 2022. Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware revenue comprised approximately 16% of total revenue for the six months ended June 30, 2021. Cost of Sales & Gross Profit Cost of sales and gross profit increased primarily due to an increase in sales volume. The decrease in gross profit margin in 2022 compared to 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 $16.0 million in compensation-related costs primarily due to higher headcount, $5.0 million in costs related to set-up and validation costs for new CGM equipment, and $4.5 million in depreciation expense for equipment in service relating to new products prior to regulatory approval, partially offset by $7.3 million in lower third party and consulting fees primarily related to software development for new products and significant enhancements and $5.2 million in lower losses from disposal of assets related to the automation of our production facilities. 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 $23.4 million in advertising and marketing costs due to an increase in worldwide marketing campaigns, $22.7 million in compensation-related costs primarily due to higher headcount, $8.6 million in legal expense related to litigation, $8.0 million in depreciation expense primarily due to higher property and equipment balances and accelerated depreciation related to business transition activities, and $7.7 million in travel and entertainment expenses. Income Tax Expense (Benefit) The income tax benefit we recorded for the six months ended June 30, 2022 is primarily attributable to income tax expense from normal, recurring operations offset by excess tax benefits recognized for share-based compensation for employees (net of disallowed executive compensation) and the Verily milestone payment, and generation of research and development tax credits. The income tax expense we recorded for the six months ended June 30, 2021 is primarily attributable to normal, recurring operations partially offset by excess tax benefits recognized for employee share-based 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 rate from 19% to 25%, effective April 2023. 38 Table of Contents 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 Credit Facility. 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. We expect that cash provided by our operations may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital requirements and capital deployment decisions. We have historically invested our cash primarily in U.S. dollar-denominated, investment grade, highly liquid obligations of U.S. government agencies, commercial paper, corporate debt, and money market funds. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets. Our future capital requirements will depend on many factors, including but not limited to: 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; The success of our research and development efforts; The expenses we incur in manufacturing, developing, selling and marketing our products; The costs, timing and risks of delays of additional regulatory approvals; 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; and The third-party reimbursement of our products for our customers; The rate of progress and cost of our clinical trials and other development activities; The acquisition of businesses, products and technologies and our ability to integrate and manage any acquired businesses, products and technologies. 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. As we assess inorganic growth strategies, we may need to supplement our internally generated cash flow with outside sources. In the event that we are required to access the debt market, we believe that we will be able to secure reasonable borrowing rates. As part of our liquidity strategy, we will continue to monitor our current level of earnings and cash flow generation as well as our ability to access the market in light of those earning levels. A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in U.S. dollars. Accordingly, our assessment is that we have no material net exposure to foreign currency exchange rate fluctuations at this time. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the U.S. 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 program. 39 Table of Contents Main Sources of Liquidity Cash, cash equivalents and short-term marketable securities Our cash, cash equivalents and short-term marketable securities totaled $2.75 billion as of June 30, 2022. None of those funds were restricted and approximately 96% of those funds were located in the United States. Cash flow from Operations For the six months ended June 30, 2022, we had positive cash inflows of $243.8 million from operating activities. We anticipate that we will continue to generate positive cash inflows for the foreseeable future. Senior Convertible Notes 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. 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. 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 June 30, 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 June 30, 2022, we had a working capital ratio of 4.72 and a quick ratio of 4.11, 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. On July 26, 2022, a duly authorized committee of our Board of Directors authorized a share repurchase program of up to $700 million of our outstanding common stock, with a repurchase period ending no later than June 30, 2023. See Note 10 “Subsequent Events” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more details. 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 June 30, 2022, we had a debt-to-assets ratio of 0.38, 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. 40 Table of Contents As of June 30, 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. As of January 1, 2022, for U.S. tax purposes, research and development expenses are required to be capitalized and amortized rather than immediately deducted. As a result, our annual cash tax payments to the United States Treasury may increase in the current year. Further, we may use cash to repurchase Dexcom shares or for strategic initiatives that strengthen our foundation for long-term growth. 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 December 2023 and November 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 of June 30, 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 land leases in Penang, Malaysia for the build-out of our international manufacturing facility lease that expire through 2082. 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 5,154,640 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. 41 Table of Contents Cash Flows As of June 30, 2022, we had $2.75 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $23.6 million compared to $2.73 billion as of December 31, 2021. The primary cash flows during the six months ended June 30, 2022 and June 30, 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. Six Months Ended June 30, 2022 June 30, 2021 As Adjusted Operating Cash Flows + $148.2 million of net income and $141.3 million of net non-cash adjustments, partially offset by $45.7 million of net changes in working capital balances + $134.9 million of net income and $124.3 million of net non-cash adjustments, partially offset by $169.8 million of net changes in working capital balances Net non-cash adjustments were primarily related to share-based compensation and depreciation and amortization. Net non-cash adjustments were primarily related to share-based compensation and depreciation and amortization. Investing Cash Flows - $358.1 million net purchases of marketable securities + $456.4 million net proceeds from marketable securities - $193.1 million capital expenditures - $200.9 million capital expenditures Financing Cash Flows + $10.1 million in proceeds from the issuance of common stock under our employee stock plans + $8.7 million in proceeds from the issuance of common stock under our employee stock plans - $7.7 million in payments for financing leases - $8.3 million in payments for financing leases 42 Table of Contents Contractual Obligations 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 during the six months ended June 30, 2022. As of June 30, 2022, we had approximately $461.2 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 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report.