What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-27 compared with 2022-10-27 · 64 added, 133 removed, 172 unchanged (53% 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 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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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 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.

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 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.

Critical Accounting Estimates

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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 nine months ended September 30, 2022.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

There were no material changes to our critical accounting estimates during the three months ended March 31, 2023.

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 September 30, 2022 include the following:

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 the Three Months Ended March 31, 2023 include the following:

Revenue Gross Profit Operating Income Net Income Operating

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up 14% from the same period 2022

up 16% from the same period 2021

down 50% from the same period 2022

up 119% from the same period 2022

We ended the third quarter of 2022 with cash, cash equivalents and short-term marketable securities totaling $2.37 billion.

We ended the first quarter of 2023 with cash, cash equivalents and short-term marketable securities totaling $2.57 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:

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.

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• 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 marketing authorization of and commercialize the products within our pipeline, in particular, our next generation G7 CGM system.

• Our ability to scale efficiently with our Malaysia manufacturing facility, currently under construction.

Results of Operations

Financial Overview

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Three Months Ended September 30, 2022 - 2021

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Three Months Ended March 31, 2023 - 2022

(In millions, except per share amounts) 2023 % of Revenue (1)

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$ Change % Change

(As Adjusted)*

Revenue $ 741.5 100 % $ 628.8 100 % $ 112.7 18 %

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Interest expense (4.6) (1) % (4.6) (1) % — — %

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

Interest and other income (expense), net 21.9 3 % (0.8) — % 22.7 **

Income before income taxes 64.5 9 % 36.1 6 % 28.4 79 %

Income tax expense 45.0 6 % 24.7 4 % 20.3 82 %

Income tax expense (benefit) 15.9 2 % (61.2) (10) % 77.1 **

Net income $ 48.6 7 % $ 97.3 15 % $ (48.7) (50) %

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(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

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

We expect that the 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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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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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.

Three Months Ended September 30, 2022 Compared to

Three Months Ended September 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 and product strategy.

Disposable sensor and other revenue comprised approximately 87% of total revenue and Reusable Hardware revenue comprised approximately 13% of total revenue for the three months ended September 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 three months ended September 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 third quarter of 2022 compared to the third quarter of 2021 was primarily driven by price, product, and channel mix changes and pressure on revenue due to sales in foreign currencies.

Research and Development Expense Research and development expense decreased primarily due to $13.5 million in lower third party and consulting fees related to software development for new products and significant enhancements,$3.8 million in lower costs related to set-up and validation costs for new CGM equipment, and $2.6 million in lower 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 $12.3 million in compensation-related costs primarily due to higher headcount, $6.7 million in advertising and marketing costs due to an increase in worldwide marketing campaigns, $4.9 million in legal expense related to litigation, and $1.6 million in travel and entertainment expenses.

Income Tax Expense Our estimated annual effective tax rate from normal, recurring operations decreased from 31.4% to 31.1% during the three months ended September 30, 2022 primarily due to impacts of foreign operations.

There were no significant discrete items recognized for the three months ended September 30, 2022.

The income tax expense recorded for the three months ended September 30, 2021 is primarily attributable to excess tax benefits recognized for employee share-based compensation, offset by income tax expense from normal, recurring operations.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2022 - 2021

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

2021 % of Revenue (1)

$ Change % Change

(As Adjusted)*

Revenue $ 2,094.6 100 % $ 1,750.3 100 % $ 344.3 20 %

Cost of sales 752.8 36 % 542.4 31 % 210.4 39 %

Gross profit 1,341.8 64.1 % 1,207.9 69.0 % 133.9 11 %

Operating expenses:

Research and development 367.9 18 % 367.3 21 % 0.6 — %

Amortization of intangible assets 5.7 — % 2.3 — % 3.4 **

Selling, general and administrative 702.4 34 % 573.1 33 % 129.3 23 %

Total operating expenses 1,076.0 51 % 942.7 54 % 133.3 14 %

Operating income 265.8 13 % 265.2 15 % 0.6 — %

Interest expense (13.9) (1) % (14.1) (1) % 0.2 (1) %

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

Interest and other income (expense), net 5.5 — % (0.7) — % 6.2 **

Income before income taxes 257.6 12 % 250.4 14 % 7.2 3 %

Income tax expense 8.2 — % 28.2 2 % (20.0) (71) %

Net income $ 249.4 12 % $ 222.2 13 % $ 27.2 12 %

Basic net income per share $ 0.64 ** $ 0.57 ** $ 0.07 12 %

Diluted net income per share $ 0.60 ** $ 0.54 ** $ 0.06 11 %

(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

Nine Months Ended September 30, 2022 Compared to

Nine Months Ended September 30, 2021

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.

Three Months Ended March 31, 2023 Compared to

Three Months Ended March 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 and product strategy.

Disposable sensor and other revenue comprised approximately 86% of total revenue and Reusable Hardware revenue comprised approximately 14% of total revenue for the nine months ended September 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 nine months ended September 30, 2021.

Disposable sensor and other revenue comprised approximately 88% of total revenue and Reusable Hardware revenue comprised approximately 12% of total revenue for the three months ended March 31, 2023.

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.

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 pressure on revenue due to sales in foreign currencies.

Research and Development Expense Research and development expense increased primarily due to $17.9 million in compensation-related costs primarily due to higher headcount and various increases to individually insignificant items, partially offset by $20.8 million in lower third party and consulting fees primarily related to software development for new products and significant enhancements.

The decrease in gross profit margin percentage in the first quarter of 2023 compared to the first quarter of 2022 was primarily driven by price, product, and channel mix changes, amortization of an intangible asset, and impact of foreign currencies on revenue.

Research and development expense Research and development expense decreased primarily due to $8.5 million in lower costs related to set-up and validation costs for new CGM equipment and $8.2 million in lower third party and consulting fees, most notably related to software development for new products and significant enhancements.

Selling, General and Administrative Expense Selling, general and administrative expense increased primarily due to $35.0 million in compensation-related costs primarily due to higher headcount, $30.1 million in advertising and marketing costs due to an increase in worldwide marketing campaigns, $13.5 million in legal expense related to litigation, $9.3 million in travel and entertainment expenses, and $9.1 million in depreciation expense primarily due to higher property and equipment balances and accelerated depreciation related to business transition activities.

Income Tax Expense The income tax expense recorded for the nine months ended September 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 recorded for the nine months ended September 30, 2021 is primarily attributable to normal, recurring operations, partially offset by excess tax benefits recognized for share-based compensation for employees (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.

Selling, general and administrative expense Selling, general and administrative expense increased primarily due to $21.7 million in advertising and marketing costs as a result of an increase in worldwide marketing campaigns, $19.3 million in compensation-related costs primarily due to higher headcount, and $16.9 million in legal expense primarily related to a patent infringement lawsuit.

Interest and other income (expense), net Interest and other income (expense), net, increased primarily due to $21.3 million in interest income on our short-term marketable securities portfolio.

The increase in interest income was primarily related to a significant increase in market interest rates, partially offset by a decrease in the average invested balances compared to the same period in 2022.

Income tax expense (benefit) The income tax expense recorded for the three months ended March 31, 2023 was primarily due to income tax expense from normal, recurring operations at an estimated annual effective rate of 30.9%, partially offset by discrete excess tax benefits recognized for share-based compensation for employees.

The income tax benefit recorded for the three months ended March 31, 2022 was primarily attributable to discrete excess tax benefits recognized for share-based compensation for employees and the Verily milestone payment.

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 international operations when we begin manufacturing internationally and as our business continues to increase in international markets.

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

Main Sources of Liquidity

Cash, cash equivalents and short-term marketable securities

Our cash, cash equivalents and short-term marketable securities totaled $2.37 billion as of September 30, 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 totaled $2.57 billion as of March 31, 2023.

None of those funds were restricted and $2.38 billion (approximately 93%) of those funds were located in the United States.

Cash flow from Operations

For the nine months ended September 30, 2022, we had positive cash inflows of $537.0 million from operating activities.

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

For the three months ended March 31, 2023, we had positive cash flows of $155.4 million from operating activities.

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

Senior Convertible Notes

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Revolving Credit Agreement

As of September 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.

As of March 31, 2023, 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.

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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 September 30, 2022, we had a working capital ratio of 3.77 and a quick ratio of 3.26, which indicates that our current assets are more than enough to cover our short-term liabilities.

As of March 31, 2023, we had a working capital ratio of 2.02 and a quick ratio of 1.72, 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.

We may use cash to repurchase Dexcom shares or for other 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.

For the nine months ended September 30, 2022, we have repurchased $557.7 million of our outstanding common stock.

As of March 31, 2023, approximately $142.3 million remained available for repurchase pursuant to our share repurchase program.

See Note 8 “Stockholders’ Equity” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more details.

As of March 31, 2023, 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 our common stock prior to maturity once certain conditions are met.

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 September 30, 2022, we had a debt-to-assets ratio of 0.40, which indicates that our total assets are more than enough to cover our short-term and long-term debts.

As of March 31, 2023, we had a debt-to-assets ratio of 0.36, 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 September 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.

As of March 31, 2023, 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.

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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.

These 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 September 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.

As of March 31, 2023, 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.

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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” and Note 2 “Collaboration with Verily Life Sciences” 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 6 “Leases and Other Commitments” to the consolidated financial statements in Part II, Item 8 of our Annual Report for more information about our leases.

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 September 30, 2022, we had $2.37 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $359.3 million compared to $2.73 billion as of December 31, 2021.

The primary cash flows during the nine months ended September 30, 2022 and September 30, 2021 are described below.

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

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, 2022 September 30, 2021

As of March 31, 2023, we had $2.57 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $110.8 million compared to $2.46 billion as of December 31, 2022.

The primary cash flows during the three months ended March 31, 2023 and March 31, 2022 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.

Three Months Ended

March 31, 2023 March 31, 2022

Operating Cash Flows + $48.6 million of net income, $55.3 million of net non-cash adjustments, and a net increase of $51.5 million in changes of working capital balances

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Investing Cash Flows - $112.0 million net purchases of marketable securities

+ $625.1 million net proceeds from marketable securities

- $304.7 million net purchases of marketable securities

- $74.7 million capital expenditures

- $101.6 million capital expenditures

- $3.9 million in acquisitions, net of cash acquired

- $31.6 million in acquisitions, net of cash acquired

- $12.5 million in purchases of equity investments

- $4.0 million in purchases of equity investments

Financing Cash Flows + $12.3 million in proceeds from the issuance of common stock under our employee stock plans

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- $3.4 million in payments for financing leases

- $557.7 million in purchases of treasury stock

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 nine months ended September 30, 2022.

As of September 30, 2022, we had approximately $394.5 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year.

We presented our contractual obligations as of December 31, 2022 in Note 6 “Leases and Other Commitments” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

There were no significant changes to our lease obligations during the three months ended March 31, 2023.

As of March 31, 2023, we had approximately $314.7 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.

For a description of recently issued accounting pronouncements and the potential impact on our consolidated financial statements, if any, see Note 1 “Organization and Significant Accounting Policies” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes to our quantitative and qualitative disclosures about market risk during the three months ended March 31, 2023.

See Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a detailed discussion of our market risks.

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