What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-09 compared with 2022-02-14 · 103 added, 81 removed, 204 unchanged (47% 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 that could cause actual results to differ materially are more fully described under “Risk Factors” and elsewhere in this report and in our other reports filed with the SEC.

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 I, Item 1A of this Annual Report, elsewhere in this Annual 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.

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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.

We launched our latest generation system, the Dexcom G6 ® integrated Continuous Glucose Monitoring System, or G6, in 2018 and more recently received marketing clearance from the FDA on the Dexcom G7 ® in December 2022.

Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “Dexcom” refer to DexCom, Inc.

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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.

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.

We have built a direct sales organization in North America and certain international markets 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 North America and several international markets that allow distributors to sell our products.

Future Developments

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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, or COVID-19.

Impact of Current Events

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, 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 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.

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 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.

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 COVID-19 pandemic in the manufacturing of our next-generation CGM product.

Further, worldwide supply chain disruption relating to the 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 Annual Report, the extent to which COVID-19 may impact our financial condition or results of operations or guidance is uncertain.

The effect of the 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 I, Item 1A of this Annual Report for further discussion of the possible impact of the COVID-19 pandemic on our business.

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 Annual Report, 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 I, Item 1A of this Annual Report for further discussion of the possible impact of the ongoing COVID-19 pandemic on our business.

In addition, the global supply chain shortages and disruptions are impacting our ability to obtain certain raw materials and components used in our products.

We depend on single- or sole-source suppliers to obtain sufficient quantities of these components that are critical to manufacturing our products.

Disruptions at these suppliers could lead to a similar disruption in our ability to manufacture products on time to meet consumer demand.

In addition, these supply chain constraints may result in higher costs due to a more competitive supply environment.

These conditions may impact our gross margin.

Critical Accounting Estimates

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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.

Variability reflected in the sensitivity analysis presented below is based on our recent historical experience.

Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report, we believe that the following accounting estimates are most critical to a full understanding and evaluation of our reported financial results.

While our significant accounting policies are described in Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part II, Item 8 of this Annual Report, we believe that the following accounting estimates are most critical to a full understanding and evaluation of our reported financial results.

Members of our senior management have discussed the development and selection of these critical accounting estimates and their disclosure in this Annual Report with the Audit Committee of our Board of Directors.

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We estimate provisions for pharmacy rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data.

Estimates associated with rebates on products sold through our distributors under pharmacy benefits are the most significant component of our variable consideration estimates and most at risk for material adjustment because of the time delay between the recording of the accrual estimate and its ultimate settlement, an interval that generally ranges from 30 to 90 days, but can last up to one year.

Estimates associated with rebates on products sold through our distributors under pharmacy benefits are the most significant component of our variable consideration estimates and most at risk for material adjustment because of the time delay between the recording of the provision and its ultimate settlement, an interval that generally ranges from 30 to 90 days, but can last up to one year.

Due to this time lag, in any given period, our adjustments to reflect actual amounts can incorporate changes of estimates related to prior periods.

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An increase or decrease of 1% in our estimate of products sold subject to rebate during 2022, holding all other assumptions constant, would increase or decrease revenue by approximately $19.1 million.

For more information, see Revenue Recognition in Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report.

For more information, see Revenue Recognition in Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Excess and Obsolete Inventory

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We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable, and deferred taxes in the period in which the facts that give rise to a revision become known.

We use the asset and liability approach to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities as described in Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report.

We use the asset and liability approach to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities as described in Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Significant judgment is required to evaluate the need for a valuation allowance against deferred tax assets.

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Realization of deferred tax assets is dependent upon future earnings in applicable tax jurisdictions.

We maintain a valuation allowance on our California research and

development tax credits, foreign tax credits, and certain foreign intangible assets, as it is more likely than not that those deferred tax assets will not be realized.

We recognize and measure benefits for uncertain tax positions using a two-step approach as described in Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report.

We maintain a valuation allowance on our California research and development tax credits and certain foreign intangible assets, as it is more likely than not that those deferred tax assets will not be realized.

We recognize and measure benefits for uncertain tax positions using a two-step approach as described in Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part II, Item 8 of this Annual Report.

Significant judgment is required to evaluate uncertain tax positions and is based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues.

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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.

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

Key Highlights for fiscal 2022 include the following:

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up 12% from 2021

down 11% from 2020

down 69% from 2020

down 7% from 2020

up 47% from 2021

up 57% from 2021

up 51% from 2021

We ended fiscal 2022 with cash, cash equivalents and short-term marketable securities totaling $2.46 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:

In addition to the general impacts of current events 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.

• 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.

• Growing research and interest in the use of CGM technology outside of the ambulatory care setting, including use by hospital systems.

• 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

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Twelve Months Ended December 31, 2022 - 2021

(In millions, except per share amounts) 2021 % of Revenue (1)

2022 % of Revenue (1)

2021 % of Revenue (1)

$ Change % Change

(In millions, except per share amounts) (As Adjusted)*

Revenue $ 2,909.8 100 % $ 2,448.5 100 % $ 461.3 19 %

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Collaborative research and development fee — — % 87.1 4 % (87.1) **

Amortization of intangible assets 7.5 — % 3.7 — % 3.8 **

Selling, general and administrative 1,000.2 34 % 806.8 33 % 193.4 24 %

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Income before income taxes 390.8 13 % 256.8 10 % 134.0 52 %

Income tax expense (benefit) 19.2 1 % (268.6) (14) % 287.8 *

Income tax expense 49.6 2 % 39.9 2 % 9.7 24 %

Net income $ 341.2 12 % $ 216.9 9 % $ 124.3 57 %

Basic net income per share $ 0.88 ** $ 0.56 ** $ 0.32 57 %

Diluted net income per share $ 0.82 ** $ 0.53 ** $ 0.29 55 %

(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,” to the consolidated financial statements in Part II, Item 8 of this Annual Report for further information.

** Not meaningful

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

In addition, amortization of certain licensing related intangibles are also included in cost of sales.

Research and development

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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.

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

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

Amortization of intangible assets

Our amortization expense primarily relates to acquired technology and intellectual property and other acquired intangible assets.

Selling, general and administrative

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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.

Twelve Months Ended December 31, 2021 Compared to

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 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 cash, cash equivalents and short-term marketable securities portfolio and foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

Twelve Months Ended December 31, 2022

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.

Twelve Months Ended December 31, 2021

Disposable sensor and other revenue comprised approximately 87% of total revenue and Reusable Hardware revenue comprised approximately 13% of total revenue for the twelve months ended December 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 twelve months ended December 31, 2021.

Cost of Sales & Gross Profit Cost of sales increased primarily due to an increase in sales volume.

The increase in gross profit and gross profit margin in 2021 compared to 2020 were primarily driven by increased revenue and cost savings associated with incremental improvements to product design, manufacturing efficiencies and economies of scale.

Research and Development Expense Research and development expense increased primarily due to $62.7 million in additional third party and consulting fees primarily related to software development for new products and significant enhancements, $49.1 million in additional salaries, bonuses, and payroll-related costs primarily due to higher headcount, and $13.2 million in additional clinical trials costs related to pivotal trials.

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, product, and channel mix changes and impact of foreign currencies on revenue.

Research and Development Expense Research and development expense decreased primarily due to $43.0 million in lower third party and consulting fees most notably related to software development for new products and significant enhancements, $19.9 million in lower costs related to set-up and validation costs for new CGM equipment, and $9.7 million in lower clinical trials costs, partially offset by $26.5 million in compensation-related costs 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.

Collaborative Research and Development Fee Collaborative research and development fees of $87.1 million for the twelve months ended December 31, 2021 represents expense incurred in the fourth quarter of 2021 associated with a contingent milestone under the 2018 collaboration and license agreement with Verily.

See Note 2 “Development and Other Agreements” to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.

Selling, General and Administrative Expense Selling, general and administrative expense increased primarily due to $84.0 million in additional advertising and marketing costs due to an increase in worldwide marketing campaigns, $60.5 million in additional salaries, bonuses, and payroll-related costs primarily due to higher headcount primarily related to an expansion in our sales force, $16.3 million in additional legal expense related to litigation, $7.4 million of investments in customer experience, partially offset by $12.9 million in lower third party service provider fees due to a change in our channel strategy.

Loss on Extinguishment of Debt The loss on extinguishment of debt of $1.5 million and $5.9 million is primarily related to the conversions and/or repurchases of our senior convertible notes for the twelve months ended December 31, 2021 and December 31, 2020, respectively.

See Note 5 “Debt” to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information about these transactions.

Collaborative Research and Development Fee Collaborative research and development fees of $87.1 million for the twelve months ended December 31, 2021 represents expense incurred in the fourth quarter of 2021 associated with a contingent milestone for regulatory approval under the Restated Collaboration Agreement.

See Note 2 “Collaboration with Verily Life Sciences” to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.

Selling, General and Administrative Expense Selling, general and administrative expense increased primarily due to $54.1 million in compensation-related costs most notably due to higher headcount, $26.0 million in advertising and marketing costs due to an increase in worldwide marketing campaigns, $23.0 million in long-lived asset impairment charges, $21.5 million in legal expense related to litigation, $13.0 million in travel and entertainment expenses, and $5.8 million in depreciation expense due to higher property and equipment balances and accelerated depreciation related to business transition activities.

Income from Equity Investments Income from equity investments of $11.6 million for the twelve months ended December 31, 2021 consisted solely of realized gains from the sale of an equity investment.

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

Interest expense increased primarily due to the May 2020 issuance of our 2025 Notes.

Interest and Other Income (Expense), Net Interest and other income (expense), net, consists primarily of interest income on our short-term marketable securities portfolio and foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

The decrease in interest income was primarily related to a decline in market interest rates.

Income Tax Expense (Benefit) We recorded pre-tax income for the twelve months ended December 31, 2021 and December 31, 2020.

Interest and Other Income (Expense), Net Interest and other income (expense), net, increased primarily due to $22.1 million in interest income on our short-term marketable securities portfolio, partially offset by foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

The increase in interest income was primarily related to a significant increase in market interest rates, as well as an increase in the average invested balances during 2022 compared to 2021.

Income Tax Expense We recorded income tax expense on pre-tax book income for the twelve months ended December 31, 2022 and December 31, 2021.

The income tax expense we recorded for 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 2021 is primarily attributable to income tax expense from normal, recurring operations offset by excess tax benefits recognized for employee share-based compensation, generation of research and development tax credits, and a one-time tax benefit related to tax law changes.

The income tax benefit we recorded for 2020 is primarily attributable to the release of our valuation allowance on specific U.S.

and foreign deferred tax assets.

Liquidity and Capital Resources

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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.

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.

We will be exposed to additional foreign currency exchange risk related to our foreign operations when we begin manufacturing in Malaysia and as our business continues to increase in

markets outside of the United States.

See “Foreign Currency Exchange Risk” in Part II, Item 7A of this Annual Report for more information.

Main Sources of Liquidity

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Our cash, cash equivalents and short-term marketable securities totaled $2.46 billion as of December 31, 2022.

None of those funds were restricted and approximately 95% of those funds were located in the United States.

None of those funds were restricted and $2.29 billion (approximately 93%) of those funds were located in the United States.

Cash flow from Operations

For the twelve months ended December 31, 2021, we had positive cash inflows of $442.5 million from operating activities.

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

For the twelve months ended December 31, 2022, we had positive cash flows of $669.5 million from operating activities.

We anticipate that we will continue to generate positive cash flow from operations for the foreseeable future.

Senior Convertible Notes

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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.

We may use cash to repurchase Dexcom shares or for strategic initiatives that strengthen our foundation for long-term growth.

On July 26, 2022, a duly authorized committee of our Board of Directors authorized a share repurchase program of up to $700.0 million of our outstanding common stock, with a repurchase period ending no later than June 30, 2023.

As of December 31, 2022, approximately $142.3 million remained available for repurchase pursuant to our share repurchase program.

See Note 9 “Employee Benefit Plans and Stockholders’ Equity” to the consolidated financial statements in Part II, Item 8 of this Annual Report for more details.

As of December 31, 2022, we have outstanding senior convertible notes that will mature in December 2023.

We may elect to settle the remaining principal amount outstanding of the 2023 Notes with cash and/ or shares of Dexcom common stock prior to maturity once certain conditions are met.

Long-term Liquidity Requirements

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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 December 31, 2021, we have outstanding senior convertible notes that will mature in December 2023 for the 2023 Notes and November 2025 for the 2025 Notes.

As of December 31, 2022, we have outstanding senior convertible notes that will mature in 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 II, Item 8 of this Annual Report for information on conversion rights prior to maturity.

See Note 5 “Debt” to the consolidated financial statements in Part II, Item 8 of this Annual 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 Purchase Commitments in Note 6 to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.

See Purchase Commitments in Note 6 “Leases and Other Commitments” to the consolidated financial statements in Part II, Item 8 of this Annual 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 have increased in the current year.

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.

The aforementioned obligations 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 December 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.

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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 24 months.

See Leases in Note 6 to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.

Under our Restated Collaboration Agreement with Verily, upon the first regulatory approval of our next generation G7 CGM system, a regulatory approval milestone payment equivalent to 736,377 shares of our common stock, calculated based on the $100.0 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, will become payable.

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.

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.

See Leases in Note 6 “Leases and Other Commitments” to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information.

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.

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See Note 2 “Development and Other Agreements” to the consolidated financial statements in Part II, Item 8 of this Annual Report for further discussion of the Collaboration Agreement with Verily.

See Note 5 “Debt” to the consolidated financial statements in Part II, Item 8 of this Annual Report for more information about the terms of the Credit Agreement, our senior convertible notes, the 2023 Note Hedge, and the 2023 Warrants.

The following table sets forth a summary of our cash flows for the periods indicated.

See the consolidated financial statements in Part II, Item 8 of this Annual Report for complete statements of cash flows for these periods.

As of December 31, 2021, we had $2.73 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $23.5 million compared to $2.71 billion as of December 31, 2020.

As of December 31, 2022, we had $2.46 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $275.0 million compared to $2.73 billion as of December 31, 2021.

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

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Operating Cash Flows + $341.2 million of net income and $301.6 million of net non-cash adjustments, partially offset by $26.7 million of net changes in working capital balances

+ $493.6 million of net income and $2.8 million of net non-cash adjustments, including $285.5 million of net benefit to tax expense associated with the release of the valuation allowance related to deferred tax assets, partially offset by $20.8 million of net changes in working capital balances

+ $216.9 million of net income and $357.6 million of net non-cash adjustments, partially offset by $132.0 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 collaborative research and development fees, share-based compensation, non-cash interest expense for our senior convertible notes, and depreciation and amortization.

Net non-cash adjustments were primarily related to a net benefit to tax expense associated with the release of the valuation allowance related to deferred tax assets, share-based compensation, non-cash interest expense for our senior convertible notes, and depreciation and amortization.

Investing Cash Flows + $193.2 million net proceeds from marketable securities

Investing Cash Flows - $364.8 million capital expenditures

+ $193.2 million net proceeds from marketable securities

- $138.5 million net purchases of marketable securities

+ $15.7 million in proceeds from the sale of an equity investment - $199.0 million capital expenditures

+ $15.7 million in proceeds from the sale of an equity investment

- $14.5 million in purchases of equity investments

- $389.2 million capital expenditures

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Financing Cash Flows + $22.5 million in proceeds from the issuance of common stock under our employee stock plans

+ $1.19 billion in proceeds from issuance of our 2025 Notes, net of issuance costs

- $9.9 million in payments for financing leases

+ $20.3 million in proceeds from the issuance of common stock under our employee stock plans

- $282.6 million cash outflow for repurchase of a portion of our 2022 Notes

- $557.7 million in purchases of treasury stock

- $9.9 million in payments for financing leases

- $15.6 million in payments for financing leases

Recent Accounting Guidance

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis