UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended | |||||
| or | |||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from to | |||||
Commission File Number: 000-51222
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(858 ) 200-0200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 19, 2023, there were 386,373,935 shares of the registrant’s common stock outstanding.
| DexCom, Inc. | ||||||||||||||
| Table of Contents | ||||||||||||||
| Page | ||||||||
Consolidated Balance Sheets (unaudited) as of September 30, 2023 and December 31, 2022 | ||||||||
Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2023 and 2022 | ||||||||
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2023 and 2022 | ||||||||
Consolidated Statements of Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2023 and 2022 | ||||||||
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2023 and 2022 | ||||||||
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | ||
Except for historical financial information contained herein, the matters discussed in this Quarterly Report on Form 10-Q may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding our intent, belief, or current expectations and those of our management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks, uncertainties and other factors, some of which are beyond our control; actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment; (ii) those risks and uncertainties identified under “Risk Factors”; and (iii) the other risks detailed from time-to-time in our reports and registration statements filed with the Securities and Exchange Commission, or the SEC. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
AVAILABLE INFORMATION | ||
Our website address is located at dexcom.com and our investor relations website is located at investors.dexcom.com. We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make available on our website, free of charge, copies of these reports and other information as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
We announce material information to the public about us, our products, and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, presentations, webcasts, and our investor relations website in order to achieve broad, non-exclusionary distribution of information to the public and to comply with our disclosure obligations under Regulation FD. Except as expressly set forth in this Quarterly Report on Form 10-Q, the contents of our website is not incorporated by reference into, or otherwise to be regarded as part of, this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our website is intended to be inactive textual references only.
The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above and review the information disclosed through such channels.
3
PART I. FINANCIAL INFORMATION | ||
ITEM 1. FINANCIAL STATEMENTS | ||
| DexCom, Inc. | ||
| Consolidated Balance Sheets | ||
| (Unaudited) | ||
| (In millions, except par value data) | September 30, 2023 | December 31, 2022 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term marketable securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||
| Accrued payroll and related expenses | |||||||||||
| Current portion of long-term senior convertible notes | |||||||||||
| Short-term operating lease liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term senior convertible notes | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes
4
| DexCom, Inc. | ||
| Consolidated Statements of Operations | ||
| (Unaudited) | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Income from equity investments | |||||||||||||||||||||||
Other income (expense), net | ( | ( | |||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic net income per share | $ | $ | $ | $ | |||||||||||||||||||
| Shares used to compute basic net income per share | |||||||||||||||||||||||
| Diluted net income per share | $ | $ | $ | $ | |||||||||||||||||||
| Shares used to compute diluted net income per share | |||||||||||||||||||||||
See accompanying notes
5
| DexCom, Inc. | ||
| Consolidated Statements of Comprehensive Income | ||
| (Unaudited) | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Translation adjustments and other | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized gain (loss) on marketable debt securities | ( | ||||||||||||||||||||||
| Total other comprehensive loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes
6
| DexCom, Inc. | ||
| Consolidated Statements of Stockholders’ Equity | ||
| (Unaudited) | ||
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock under equity incentive plans | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Employee Stock Purchase Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock, including excise tax | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Conversions of 2023 Notes | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Benefit of note hedge upon conversions of 2023 Notes | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Employee Stock Purchase Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
See accompanying notes
7
| DexCom, Inc. | ||
| Consolidated Statements of Stockholders’ Equity | ||
| (Unaudited) | ||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock under equity incentive plans | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Employee Stock Purchase Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock, including excise tax | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Conversions of 2023 Notes | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Benefit of note hedge upon conversions of 2023 Notes | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Purchase of capped call transactions, net of tax | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock under equity incentive plans | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Employee Stock Purchase Plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with achievement of regulatory approval milestone, net of issuance costs | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Conversions of 2023 Notes | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Benefit of note hedge upon conversions of 2023 Notes | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
See accompanying notes
8
| DexCom, Inc. | ||
| Consolidated Statements of Cash Flows | ||
| (Unaudited) | ||
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | $ | |||||||||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Non-cash interest expense | |||||||||||
| Realized (gain) loss on equity investment | ( | ( | |||||||||
| Deferred income taxes | ( | ( | |||||||||
| Other non-cash income and expenses | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Inventory | ( | ||||||||||
| Prepaid and other assets | ( | ||||||||||
| Operating lease right-of-use assets and liabilities, net | ( | ( | |||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Accrued payroll and related expenses | ( | ||||||||||
| Deferred revenue and other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Proceeds from sale and maturity of marketable securities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Other investing activities | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Net proceeds from issuance of common stock | |||||||||||
| Purchases of treasury stock | ( | ( | |||||||||
| Proceeds from issuance of senior convertible notes, net of issuance costs | |||||||||||
| Purchases of capped call transactions | ( | ||||||||||
Payments for conversions of senior convertible notes | ( | ||||||||||
| Other financing activities | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash, end of period: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing and financing transactions: | |||||||||||
| Shares issued for conversions of 2023 Notes | $ | $ | |||||||||
| Shares received under note hedge upon conversion of 2023 Notes | $ | ( | $ | ( | |||||||
| Acquisition of property and equipment included in accounts payable and accrued liabilities | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ( | ||||||||
| Right-of-use assets obtained in exchange for finance lease liabilities | $ | $ | |||||||||
9
See accompanying notes
10
| DexCom, Inc. | ||
| Notes to Consolidated Financial Statements | ||
| (Unaudited) | ||
| 1. Organization and Significant Accounting Policies | ||
| Organization and Business | ||||||||||||||
DexCom, Inc. is a medical device company that develops and markets continuous glucose monitoring, or CGM, systems for the management of diabetes by patients, caregivers, and clinicians around the world. Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “Dexcom” refer to DexCom, Inc. and its subsidiaries.
| Basis of Presentation and Principles of Consolidation | ||||||||||||||
We have prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.
Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2022 included in the Annual Report on Form 10-K that we filed with the SEC on February 9, 2023.
These consolidated financial statements include the accounts of DexCom, Inc. and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation.
On June 10, 2022, the Company effected a four -for-one forward stock split of its common stock to shareholders of record as of May 19, 2022. The par value of the common stock remains $0.001 per share. Accordingly, an amount equal to the par value of the increased shares resulting from the stock split was reclassified from “Additional paid-in capital” to “Common stock.” All share and per share information has been retroactively adjusted to reflect the stock split for all periods presented.
We determine the functional currencies of our international subsidiaries by reviewing the environment where each subsidiary primarily generates and expends cash. For international subsidiaries whose functional currencies are the local currencies, we translate the financial statements into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. We include translation-related adjustments in comprehensive income and in accumulated other comprehensive loss in the equity section of our consolidated balance sheets. We record gains and losses resulting from transactions with customers and vendors that are denominated in currencies other than the functional currency and from certain intercompany transactions in other income (expense), net in our consolidated statements of operations.
| Seasonality | ||||||||||||||
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. This seasonal sales pattern relates to U.S. annual insurance deductible resets and unfunded flexible spending accounts.
| Significant Accounting Policies | ||||||||||||||
11
| Use of Estimates | ||||||||||||||
The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Areas requiring significant estimates include rebates, excess or obsolete inventories and the valuation of inventory, accruals for litigation contingencies, and the amount of our worldwide tax provision and the realizability of deferred tax assets. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
| Concentration of Credit Risk | ||||||||||||||
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term marketable securities, and accounts receivable. We limit our exposure to credit risk by placing our cash and investments with a few major financial institutions. We have also established guidelines regarding diversification of our investments and their maturities that are designed to maintain principal and maximize liquidity. We review these guidelines periodically and modify them to take advantage of trends in yields and interest rates and changes in our operations and financial position.
Contract Balances | ||||||||||||||
Contract balances represent amounts presented in our consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable and deferred revenue. Payment terms vary by contract type and type of customer and generally range from 30 to 90 days.
Accounts receivable as of September 30, 2023 included unbilled accounts receivable of $8.8 million. We expect to invoice and collect all unbilled accounts receivable within twelve months.
We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation.
Our performance obligations are generally satisfied within twelve months of the initial contract date. The deferred revenue balances related to performance obligations that will be satisfied after twelve months was $21.3 million as of September 30, 2023 and $19.0 million as of December 31, 2022. These balances are included in other long-term liabilities in our consolidated balance sheets. Revenue recognized in the period from performance obligations satisfied in previous periods was not material for the periods presented.
| Net Income Per Share | ||||||||||||||
Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents.
Potentially dilutive common shares consist of shares issuable from restricted stock units, or RSUs, performance stock units, or PSUs, warrants, and our senior convertible notes. Potentially dilutive common shares issuable upon vesting of RSUs, PSUs, and exercise of warrants are determined using the average share price for each period under the treasury stock method. Potentially dilutive common shares issuable upon conversion of our senior convertible notes are determined using the if-converted method. In periods of net losses, we exclude all potentially dilutive common shares from the computation of the diluted net loss per share for those periods as the effect would be anti-dilutive.
12
The following table sets forth the computation of basic and diluted net income per share for the periods shown:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Add back interest expense, net of tax attributable to assumed conversion of senior convertible notes | |||||||||||||||||||||||
| Net income - diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net income per common share | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Dilutive potential common stock outstanding: | |||||||||||||||||||||||
| Restricted stock units and performance stock units | |||||||||||||||||||||||
| Warrants | |||||||||||||||||||||||
| Senior convertible notes | |||||||||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
Outstanding anti-dilutive securities not included in the diluted net income per share attributable to common stockholders calculations were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Restricted stock units and performance stock units | |||||||||||||||||||||||
| Recent Accounting Guidance | ||||||||||||||
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance is intended improve the accounting for acquired revenue contracts with customers in a business combination. The new guidance requires that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. ASU 2021-08 is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The amendments should be applied prospectively to business combinations occurring on or after the adoption date. We adopted ASU 2021-08 in the first quarter of 2023 and there was no impact to our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
13
| 2. Development and Other Agreements | ||||||||||||||
| Collaboration with Verily Life Sciences | ||||||||||||||
On November 20, 2018, we entered into an Amended and Restated Collaboration and License Agreement with Verily Life Sciences LLC (an Alphabet Company) and Verily Ireland Limited (collectively, “Verily”), which we refer to as the Restated Collaboration Agreement. This replaced our original Collaboration and License Agreement with Verily dated August 10, 2015, as amended in October 2016, including the royalty obligations provisions under that original agreement. Pursuant to the Restated Collaboration Agreement, we and Verily have agreed to continue to jointly develop a certain next-generation CGM product, and potentially one or more additional CGM products, for which we will have exclusive commercialization rights.
The Restated Collaboration Agreement also provides us with an exclusive license to use intellectual property of Verily resulting from the collaboration, and certain Verily patents, in the development, manufacture and commercialization of blood-based or interstitial glucose monitoring products more generally (subject to certain exclusions, which are outside of the CGM field as it is commonly understood). It also provides us with non-exclusive license rights under Verily’s other intellectual property rights to develop, manufacture and commercialize those kinds of glucose monitoring products and certain CGM-product companion software functionalities. The Restated Collaboration Agreement requires us to use commercially reasonable efforts to develop, launch and commercialize the CGM product(s) that are the subject of the collaboration according to certain timing and other objectives, and provides for one executive sponsor from each of Dexcom and Verily to meet periodically and make decisions related to the collaboration (within a limited scope of authority) by consensus.
In consideration of Verily’s performance of its obligations under the joint development plan of the Restated Collaboration Agreement, the licenses granted to us and the amendment of the original agreement, we made upfront, incentive, and the product regulatory approval payments, and will make potential payments for contingent sales-based milestones upon the achievement of certain revenue targets.
We account for the contingent milestones payable in shares of our common stock as equity instruments within the scope of ASC Topic 718. The product regulatory approval and sales-based milestones are accounted for as performance-based awards that vest when the performance conditions have been achieved and are recognized when the achievement of the respective contingent milestone is deemed probable. The value of the contingent milestones is based on our closing stock price on December 28, 2018, which was $29.57 per share.
Upfront and Incentive payments
In the fourth quarter of 2018, we made an initial payment for an upfront fee of $250.0 million through the issuance of 7,363,772 shares of our common stock. We recorded a $217.7 million charge in our consolidated statements of operations during 2018 relating to the issuance of this common stock because this milestone payment did not meet the capitalization criteria. The value of the charge was based on our closing stock price of $29.57 per share on December 28, 2018, the date on which we obtained the necessary regulatory approvals and represents the date the performance- based awards were issued. In 2019, we made a cash incentive payment of $3.2 million due to the completion of certain development obligations and we recorded these payments as research and development expense in our consolidated statements of operations.
Contingent milestones
In the fourth quarter of 2021, we determined the achievement of the regulatory approval milestone to be probable and recorded an $87.1 million research and development charge in our consolidated statements of operations. This charge is associated with IPR&D obtained in an asset acquisition prior to regulatory approval and therefore does not have an alternative future use.
In the first quarter of 2022, we received regulatory approval and issued 2,945,508 shares of our common stock in connection with our achievement of the related milestone.
In the fourth quarter of 2022, we received FDA approval and determined the achievement of the sales-based milestones to be probable. As such, we capitalized the full value of the sales-based milestones, $152.4 million, as an intangible asset. The sales-based milestones are contingent upon the achievement of certain revenue targets. The value of the sales-based milestones is based on: 1) 5,154,640 shares of our common stock, as agreed upon in November 2018 and 2) our closing stock price on December 28, 2018 of $29.57 per share. December 28, 2018 is the date on which we obtained the necessary regulatory approvals and represents the date the performance- based awards were issued. The intangible asset will be amortized using the straight-line method over its estimated useful
14
life of 64 months through March 2028. The related amortization expense is recognized in Cost of Sales in our consolidated statements of operations.
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, and adjusted to give effect to any stock splits, dividends, or similar events. We intend to pay the sales-based contingent milestones in shares of our common stock.
The Restated Collaboration Agreement will continue until December 31, 2028, unless terminated by either party upon uncured material breach of the Restated Collaboration Agreement by the other party. Upon achievement of the first sales-based milestone event and payment of the corresponding milestone fee by us, the term of the Restated Collaboration Agreement will be extended until December 31, 2033, unless terminated by either party upon uncured material breach of the Restated Collaboration Agreement by the other party.
| 3. Fair Value Measurements | ||||||||||||||
Assets and Liabilities Measured at Fair Value on a Recurring Basis
We estimate the fair value of our Level 1 financial instruments, which are in active markets, using unadjusted quoted market prices for identical instruments.
We obtain the fair values for our Level 2 financial instruments, which are not in active markets, from a primary professional pricing source that uses quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. Fair values obtained from this professional pricing source can also be based on pricing models whereby all significant observable inputs, including maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers or other market related data, are observable or can be derived from, or corroborated by, observable market data for substantially the full term of the asset. We validate the quoted market prices provided by our primary pricing service by comparing the fair values of our Level 2 marketable securities portfolio balance provided by our primary pricing service against the fair values provided by our investment managers.
The following table summarizes financial assets that we measured at fair value on a recurring basis as of September 30, 2023, classified in accordance with the fair value hierarchy:
| Fair Value Measurements Using | |||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Debt securities, available-for-sale: | |||||||||||||||||||||||
U.S. government agencies (1) | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate debt | |||||||||||||||||||||||
| Total debt securities, available-for-sale | |||||||||||||||||||||||
Other assets (2) | |||||||||||||||||||||||
| Total assets measured at fair value on a recurring basis | $ | $ | $ | $ | |||||||||||||||||||
15
The following table summarizes financial assets that we measured at fair value on a recurring basis as of December 31, 2022, classified in accordance with the fair value hierarchy:
| Fair Value Measurements Using | |||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Debt securities, available-for-sale: | |||||||||||||||||||||||
U.S. government agencies (1) | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate debt | |||||||||||||||||||||||
| Total debt securities, available-for-sale | |||||||||||||||||||||||
Other assets (2) | |||||||||||||||||||||||
| Total assets measured at fair value on a recurring basis | $ | $ | $ | $ | |||||||||||||||||||
(1) Includes debt obligations issued by U.S. government-sponsored enterprises or U.S. government agencies.
(2) Includes assets which are held pursuant to a deferred compensation plan for senior management, which consist mainly of mutual funds.
There were no
Fair Value of Senior Convertible Notes
The fair value, based on trading prices (Level 1 inputs), of our senior convertible notes were as follows as of the dates indicated:
| Fair Value Measurements Using Level 1 | |||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Senior Convertible Notes due 2023 | $ | $ | |||||||||
| Senior Convertible Notes due 2025 | |||||||||||
| Senior Convertible Notes due 2028 | |||||||||||
| Total fair value of outstanding senior convertible notes | $ | $ | |||||||||
For more information on the carrying values of our senior convertible notes, see Senior Convertible Notes in Note 5 “Debt” to the consolidated financial statements.
Foreign Currency and Derivative Financial Instruments
We enter into foreign currency forward contracts to hedge monetary assets and liabilities denominated in foreign currencies. Our foreign currency forward contracts are not designated as hedging instruments. Therefore, changes in the fair values of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The duration of these contracts is generally one month. The derivative gains and losses are included in other income (expense), net in our consolidated statements of operations.
As of September 30, 2023 and December 31, 2022, the notional amounts of outstanding foreign currency forward contracts were $89.0 million and $62.0 million, respectively. The resulting impact on our consolidated financial statements from currency hedging activities was not significant for the three and nine months ended September 30, 2023 and September 30, 2022.
Our foreign currency exposures vary but are primarily concentrated in the Australian Dollar, the British Pound, the Canadian Dollar, the Euro, and the Malaysian Ringgit. We monitor the costs and the impact of foreign currency risks upon our financial results as part of our risk management program. We do not use derivative financial instruments for speculation or trading purposes or for activities other than risk management. We do not require and are not required to pledge collateral for these financial instruments and we do not carry any master netting arrangements to mitigate the credit risk.
16
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
In accordance with authoritative guidance, we measure certain non-financial assets and liabilities at fair value on a non-recurring basis. These measurements are usually performed using the discounted cash flow method or cost method and Level 3 inputs. These include items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets, and property and equipment, are measured at fair value when there are indicators of impairment and are recorded at fair value only when an impairment is recognized.
We hold certain other investments that we do not measure at fair value on a recurring basis. The carrying values of these investments are $38.5 million as of September 30, 2023 and $19.0 million as of December 31, 2022. We include them in other assets in our consolidated balance sheets. It is impracticable for us to estimate the fair value of these investments on a recurring basis due to the fact that these entities are privately held and limited information is available. We monitor the information that becomes available from time to time and adjust the carrying values of these investments if there are identified events or changes in circumstances that have a significant effect on the fair values.
There were no
4. Balance Sheet Details and Other Financial Information | ||||||||||||||
| Short-Term Marketable Securities | ||||||||||||||
Short-term marketable securities, consisting of available-for-sale debt securities, were as follows as of the dates indicated:
| September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||||||||||||
| Debt securities, available-for-sale: | |||||||||||||||||||||||
U.S. government agencies (1) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial paper | ( | ||||||||||||||||||||||
| Corporate debt | ( | ||||||||||||||||||||||
| Total debt securities, available-for-sale | $ | $ | $ | ( | $ | ||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| (In millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||||||||||||
| Debt securities, available-for-sale: | |||||||||||||||||||||||
U.S. government agencies (1) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial paper | ( | ||||||||||||||||||||||
| Corporate debt | ( | ||||||||||||||||||||||
| Total debt securities, available-for-sale | $ | $ | $ | ( | $ | ||||||||||||||||||
(1) Includes debt obligations issued by U.S. government-sponsored enterprises or U.S. government agencies.
As of September 30, 2023, the estimated market value of our short-term debt securities with contractual maturities up to 12 months was $2.60 billion. As of December 31, 2022, the estimated market value of our short-term debt securities with contractual maturities up to 12 months was $1.81 billion. Gross realized gains and losses on sales of our short-term debt securities for the three and nine months ended September 30, 2023 and September 30, 2022 were not significant.
We periodically review our portfolio of debt securities to determine if any investment is impaired due to credit loss or other potential valuation concerns. For debt securities where the fair value of the investment is less than the amortized cost basis, we have assessed at the individual security level for various quantitative factors including, but not limited to, the nature of the investments, changes in credit ratings, interest rate fluctuations, industry analyst
17
Inventory | ||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
| Prepaid and Other Current Assets | ||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Prepaid expenses | $ | $ | |||||||||
| Prepaid inventory | |||||||||||
| Deferred compensation plan assets | |||||||||||
| Income tax receivables | |||||||||||
| Other current assets | |||||||||||
| Total prepaid and other current assets | $ | $ | |||||||||
Property and Equipment | ||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Land and land improvements | $ | $ | |||||||||
| Building | |||||||||||
| Furniture and fixtures | |||||||||||
| Computer software and hardware | |||||||||||
| Machinery and equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Total cost | |||||||||||
| Less accumulated depreciation and amortization | ( | ( | |||||||||
| Total property and equipment, net | $ | $ | |||||||||
Other Assets | ||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Long-term investments | $ | $ | |||||||||
| Long-term deposits | |||||||||||
| Other assets | |||||||||||
| Total other assets | $ | $ | |||||||||
18
Accounts Payable and Accrued Liabilities | ||||||||||||||
(In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Accounts payable trade | $ | $ | |||||||||
| Accrued tax, audit, and legal fees | |||||||||||
| Accrued rebates | |||||||||||
| Accrued warranty | |||||||||||
| Deferred compensation plan liabilities | |||||||||||
| Other accrued liabilities | |||||||||||
| Total accounts payable and accrued liabilities | $ | $ | |||||||||
Accrued Payroll and Related Expenses | ||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Accrued wages, bonus and taxes | $ | $ | |||||||||
| Other accrued employee benefits | |||||||||||
| Total accrued payroll and related expenses | $ | $ | |||||||||
Other Long-Term Liabilities | ||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
Finance lease obligations | $ | $ | |||||||||
| Deferred revenue, long-term | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other tax liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total other long-term liabilities | $ | $ | |||||||||
Other Income (Expense), Net | ||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Interest and dividend income | $ | $ | $ | $ | |||||||||||||||||||
Interest expense | ( | ( | ( | ( | |||||||||||||||||||
Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
Total other income (expense), net | $ | $ | ( | $ | $ | ( | |||||||||||||||||
19
| 5. Debt | ||||||||||||||
| Senior Convertible Notes | ||||||||||||||
The carrying amounts of our senior convertible notes were as follows as of the dates indicated:
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Principal amount: | |||||||||||
| Senior Convertible Notes due 2023 | $ | $ | |||||||||
| Senior Convertible Notes due 2025 | |||||||||||
| Senior Convertible Notes due 2028 | |||||||||||
| Total principal amount | |||||||||||
| Unamortized debt issuance costs | ( | ( | |||||||||
| Carrying amount of senior convertible notes | $ | $ | |||||||||
For our senior convertible notes for which the if-converted value exceeded the principal amount, the amount in excess of principal was as follows as of the dates indicated:
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Senior Convertible Notes due 2023 | $ | $ | |||||||||
| Senior Convertible Notes due 2025 | |||||||||||
| Senior Convertible Notes due 2028 | |||||||||||
Total by which the notes’ if-converted value exceeds their principal amount | $ | $ | |||||||||
The following table summarizes the components of interest expense and the effective interest rates for each of our senior convertible notes for the periods shown:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cash interest expense: | |||||||||||||||||||||||
Contractual coupon interest (1) | $ | $ | $ | $ | |||||||||||||||||||
| Non-cash interest expense: | |||||||||||||||||||||||
| Amortization of debt issuance costs | |||||||||||||||||||||||
| Total interest expense recognized on senior notes | $ | $ | $ | $ | |||||||||||||||||||
| Effective interest rate: | |||||||||||||||||||||||
| Senior Convertible Notes due 2023 | % | % | % | % | |||||||||||||||||||
| Senior Convertible Notes due 2025 | % | % | % | % | |||||||||||||||||||
| Senior Convertible Notes due 2028 | % | * | % | * | |||||||||||||||||||
(1) Interest on the 2023 Notes began accruing upon issuance and is payable semi-annually on June 1 and December 1 of each year. Interest on the 2025 Notes began accruing upon issuance and is payable semi-annually on May 15 and November 15 of each year. Interest on the 2028 Notes began accruing upon issuance and is payable semi-annually on May 15 and November 15 of each year. | |||||||||||||||||||||||
* Not applicable as no notes were outstanding at this date. | |||||||||||||||||||||||
In November 2018, we completed an offering of $850.0 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.75 % and a maturity date of December 1, 2023 (the “2023 Notes”). The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $836.6 million. The initial conversion rate of the 2023 Notes is 24.3476 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $41.07 per share, subject to adjustments. We entered into transactions for a convertible note hedge (the “2023 Note Hedge”) and
20
warrants (the “2023 Warrants”) concurrently with the issuance of the 2023 Notes. The 2023 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. We use the if-converted method for assumed conversion of the 2023 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share.
No principal payments are due on the 2023 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2023 Notes includes customary terms and covenants, including certain events of default after which the 2023 Notes may be due and payable immediately.
For the twelve months ended December 31, 2022, holders of $17.5 million in aggregate principal amount of the 2023 Notes elected conversion at their option. We settled these conversions using treasury stock. We issued 425,552 shares to settle the converted 2023 Notes. We received 287,492 shares of common stock from the exercise of a portion of the 2023 Note Hedge that we purchased concurrently with the issuance of the 2023 Notes, as described below.
For the three and nine months ended September 30, 2023, we settled $650.5 650.5 10,599,907 10,585,850
The remaining outstanding principal of $124.3 million as of September 30, 2023 and any amount in excess of the principal amount will settle on or before the maturity date of December 1, 2023.
Conversion Rights at the Option of the Holders
Holders of the 2023 Notes have the right to require us to repurchase for cash all or a portion of their notes at 100 % of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the indenture relating to the notes). We will also be required to increase the conversion rate for holders who convert their 2023 Notes in connection with certain fundamental changes occurring prior to the maturity date or following the delivery by Dexcom of a notice of redemption.
Holders of the 2023 Notes had the ability to convert all or a portion of their notes at their option prior to 5:00 p.m., New York City time, on the business day immediately preceding September 1, 2023, in multiples of $1,000 principal amount, only under the following circumstances:
(1)during any calendar quarter commencing after March 31, 2019 (and only during such calendar quarter), if the last reported sale price of Dexcom’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the 2023 Notes on each such trading day;
(2)during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each day of that five -day consecutive trading day period was less than 98 % of the product of the last reported sale price of Dexcom’s common stock and the applicable conversion rate of the 2023 Notes on such trading day;
(3)if we call any or all of the 2023 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(4)upon the occurrence of specified corporate transactions.
Circumstance (1) listed above occurred during the quarters ended December 31, 2022, March 31, 2023, and June 30, 2023. As a result, the 2023 Notes were convertible at the option of the holder from January 1, 2023 through August 31, 2023.
On or after September 1, 2023, until 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date, holders of the 2023 Notes may convert all or a portion of their notes regardless of the foregoing circumstances. See above for a description of conversion activity related to the 2023 Notes.
Conversion Rights at Our Option
Dexcom did not have a right to redeem the 2023 Notes prior to December 1, 2021. On or after December 1, 2021 and prior to September 1, 2023, Dexcom was permitted to redeem for cash all or part of the 2023 Notes, at its option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in
21
effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Dexcom provides notice of redemption. The redemption price was equal to 100 % of the principal amount of the 2023 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
2023 Note Hedge
In connection with the offering of the 2023 Notes, in November 2018 we entered into convertible note hedge transactions with two of the initial purchasers of the 2023 Notes (the “2023 Counterparties”) entitling us to purchase up to 20.7 million shares of our common stock at an initial price of $41.07 per share, each of which is subject to adjustment. The cost of the 2023 Note Hedge was $218.9 million and we accounted for it as an equity instrument by recognizing $218.9 million in additional paid-in capital during 2018. The 2023 Note Hedge will expire on December 1, 2023. The 2023 Note Hedge is expected to reduce the potential equity dilution upon any conversion of the 2023 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2023 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2023 Note Hedge. The strike price of the 2023 Note Hedge initially corresponds to the conversion price of the 2023 Notes and is subject to certain adjustments under the terms of the 2023 Note Hedge. An assumed exercise of the 2023 Note Hedge by us is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. See above for a description of conversion activity related to the 2023 Notes and shares received as the result of exercising a portion of the 2023 Note Hedge.
2023 Warrants
In November 2018, we also sold warrants to the 2023 Counterparties to acquire up to 20.7 million shares of our common stock. The 2023 Warrants require net share settlement and a pro rated number of warrants will expire on each of the 60 scheduled trading days starting on March 1, 2024. We received $183.8 million in cash proceeds from the sale of the 2023 Warrants, which we recorded in additional paid-in capital during 2018. The 2023 Warrants could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period exceeds the strike price of the 2023 Warrants. The strike price of the 2023 Warrants is initially $49.60 per share and is subject to certain adjustments under the terms of the warrant agreements. We use the treasury share method for assumed conversion of the 2023 Warrants when computing the weighted average common shares outstanding for diluted earnings per share.
In May 2020, we completed an offering of $1.21 billion aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.25 % and a maturity date of November 15, 2025 (the “2025 Notes”). The net proceeds from the offering, after deducting initial purchasers’ discounts and estimated costs directly related to the offering, were approximately $1.19 billion. The initial conversion rate of the 2025 Notes is 6.6620 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $150.11 per share, subject to adjustments. The 2025 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. We use the if-converted method for assumed conversion of the 2025 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share.
No principal payments are due on the 2025 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2025 Notes includes customary terms and covenants, including certain events of default after which the 2025 Notes may be due and payable immediately.
Conversion Rights at the Option of the Holders
In the event of a fundamental change (as defined in the indenture related to the 2025 Notes), holders of the 2025 Notes have the right to require us to repurchase for cash all or a portion of their notes at a price equal to 100 % of the principal amount of the 2025 Notes, plus any accrued and unpaid interest. Holders of the 2025 Notes who convert their notes in connection with a make-whole fundamental change (as defined in the indenture) or following the delivery by Dexcom of a notice of redemption are, under certain circumstances, entitled to an increase in the conversion rate.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding August 15, 2025, holders of the 2025 Notes may convert all or a portion of their notes, in multiples of $1,000 principal amount, only under the following circumstances:
(1)during any calendar quarter commencing after September 30, 2020 (and only during such calendar quarter), if the last reported sale price of Dexcom’s common stock for at least 20 trading days (whether or
22
not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the Notes on each such trading day;
(2)during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five day consecutive trading day period was less than 98 % of the product of the last reported sale price of Dexcom’s common stock and the applicable conversion rate of the Notes on such trading day;
(3)if we call any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(4)upon the occurrence of specified corporate transactions.
On or after August 15, 2025, until 5:00 p.m., New York City time, on the business day immediately preceding the maturity date, holders of the 2025 Notes may convert all or a portion of their notes regardless of the foregoing circumstances.
Conversion Rights at Our Option
Dexcom was not permitted to redeem the 2025 Notes prior to May 20, 2023. On or after May 20, 2023 and prior to August 15, 2025, Dexcom may redeem for cash all or part of the 2025 Notes, at its option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Dexcom provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
In May 2023, we completed an offering of $1.25 billion aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.375 % and a maturity date of May 15, 2028 (the “2028 Notes”). The net proceeds from the offering, after deducting initial purchasers’ discounts and estimated costs directly related to the offering, were approximately $1.23 billion. The initial conversion rate of the 2028 Notes is 6.1571 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $162.41 per share, subject to adjustments. The 2028 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. We use the if-converted method for assumed conversion of the 2028 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share.
No principal payments are due on the 2028 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2028 Notes includes customary terms and covenants, including certain events of default after which the 2028 Notes may be due and payable immediately.
Conversion Rights at the Option of the Holders
In the event of a fundamental change (as defined in the indenture related to the 2028 Notes), holders of the 2028 Notes have the right to require us to repurchase for cash all or a portion of their notes at a price equal to 100 % of the principal amount of the 2028 Notes, plus any accrued and unpaid interest. Holders of the 2028 Notes who convert their notes in connection with a make-whole fundamental change (as defined in the indenture) or following the delivery by Dexcom of a notice of redemption are, under certain circumstances, entitled to an increase in the conversion rate.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding February 15, 2028, holders of the 2028 Notes may convert all or a portion of their notes, in multiples of $1,000 principal amount, only under the following circumstances:
(1)during any calendar quarter commencing after September 30, 2023 (and only during such calendar quarter), if the last reported sale price of Dexcom’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the Notes on each such trading day;
(2)during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five day consecutive trading day period was less than 98 % of the product of the last reported sale price of Dexcom’s common stock and the applicable conversion rate of the Notes on such trading day;
23
(3)if we call any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(4)upon the occurrence of specified corporate transactions.
On or after February 15, 2028, until 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date, holders of the 2028 Notes may convert all or a portion of their notes regardless of the foregoing circumstances.
Conversion Rights at Our Option
Dexcom may not redeem the 2028 Notes prior to May 20, 2026. On or after May 20, 2026 and prior to February 15, 2028, Dexcom may redeem for cash all or part of the 2028 Notes, at its option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Dexcom provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the 2028 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
2028 Capped Call Transactions
In May 2023, in connection with the offering of the 2028 Notes, we entered into privately negotiated capped call transactions (the “2028 Capped Calls”) with certain financial institutions. The 2028 Capped Calls will cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2028 Notes, the number of shares of our common stock that will initially underlie the 2028 Notes. The 2028 Capped Calls are expected generally to reduce potential dilution to our common stock upon conversion of the 2028 Notes and/or offset any cash payments that we are required to make in excess of the principal amount of converted 2028 Notes, as the case may be, with such reduction and/or offset subject to a cap. The 2028 Capped Calls have an initial cap price of $212.62 per share, subject to adjustments, which represents a premium of 80 % over the closing price of our common stock of $118.12 per share on the Nasdaq Global Select Market on May 2, 2023. The cost to purchase the 2028 Capped Calls of $101.3 million was recorded as a reduction to additional paid-in capital in our consolidated balance sheets as the 2028 Capped Calls met the criteria for classification in stockholders’ equity.
| Revolving Credit Agreement | ||||||||||||||
Terms of the Revolving Credit Agreement
In June 2023, we entered into the First Amendment to the Second Amended and Restated Credit Agreement (the "Amended Credit Agreement"), which we had previously entered into in October 2021. The Amended Credit Agreement is a five-year revolving credit facility, that provides for an available principal amount of $200.0 million which can be increased up to $500.0 million at our option subject to customary conditions and approval of our lenders (the “Credit Facility”). The Amended Credit Agreement will mature on October 13, 2026. Borrowings under the Amended Credit Agreement are available for general corporate purposes, including working capital and capital expenditures.
Information related to availability and outstanding borrowings on our Amended Credit Agreement is as follows as of the date indicated:
| (In millions) | September 30, 2023 | ||||
| Available principal amount | |||||
| Letters of credit sub-facility | |||||
| Outstanding borrowings | |||||
| Outstanding letters of credit | |||||
| Total available balance | $ | ||||
Revolving loans under the Amended Credit Agreement bear interest at our choice of one of three base rates plus a range of applicable rates that are based on our leverage ratio. The first base rate is the Alternate Base Rate (“ABR”) and loans comprising each ABR borrowing shall bear interest at the ABR plus the applicable rate between 0.375 % to 1.000 %. The ABR is the highest of (a) the prime rate last quoted by The Wall Street Journal, (b) the Federal Reserve Bank of New York rate plus one half of 1%, and (c) the Adjusted Term Secured Overnight Financing Rate (“Term SOFR”) for a one month interest period plus 1 %. The second base rate is the Term Benchmark rate and loans comprising each Term Benchmark borrowing shall bear interest at the Adjusted Term
24
SOFR, the Adjusted Euro Interbank Offered Rate, the Adjusted Stockholm Interbank Offered Rate, the Adjusted Canadian Dollar Offered Rate, Adjusted Australian Dollar Rate, the Adjusted Bank Bill Benchmark Rate or the Adjusted Tokyo Interbank Offered Rate, as applicable based on the currency denomination borrowed, plus the applicable rate between 1.375 % to 2.000 %. The third base rate is the Adjusted Daily Simple RepoFunds Rate (“RFR”) and loans comprising each Daily Simple RFR Loan shall bear interest at a rate per annum equal to the applicable Daily Simple RFR for Sterling or Dollars (as applicable) plus the applicable rate between 0.0326 % to 0.100 % depending on the loan denomination. We will also pay a commitment fee of between 0.175 % and 0.250 %, payable quarterly in arrears, on the average daily unused amount of the revolving facility based on our leverage ratio.
Our obligations under the Amended Credit Agreement are guaranteed by our existing and future wholly-owned domestic subsidiaries, and are secured by a first-priority security interest in substantially all of the assets of Dexcom and the guarantors, including all or a portion of the equity interests of our domestic subsidiaries and first-tier foreign subsidiaries but excluding real property and intellectual property (which is subject to a negative pledge). The Amended Credit Agreement contains covenants that limit certain indebtedness, liens, investments, transactions with affiliates, dividends and other restricted payments, subordinated indebtedness and amendments to subordinated indebtedness documents, and sale and leaseback transactions of Dexcom or any of its domestic subsidiaries. The Amended Credit Agreement also requires us to maintain a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with these covenants as of September 30, 2023.
As of September 30, 2023, we also have a guarantee facility related to our international operations which is collateralized by a $5.3 million term deposit that is included in non-current “Other assets” on our consolidated balance sheets.
| 6. Contingencies | ||||||||||||||
| Litigation | ||||||||||||||
We are subject to various claims, complaints and legal actions that arise from time to time in the normal course of business, including commercial insurance, product liability, intellectual property and employment related matters. In addition, from time to time we may bring claims or initiate lawsuits against various third parties with respect to matters arising out of the ordinary course of our business, including commercial and employment related matters.
Between June 2021 through the nine months ended September 30, 2023, we and certain Abbott Diabetes Care, Inc. (“Abbott”) entities have served complaints against each other in multiple jurisdictions, including in the United States (United States District Court ("U.S.D.C.”), District of Delaware), the United Kingdom (Business and Property Courts of England and Wales), France (United Patent Court (“UPC”) in Paris), Spain (Commercial Courts of Barcelona) and Germany (National Courts (“N.C.”) of Munich, Mannheim, Dusseldorf and Hamburg and the UPC in Munich), primarily involving claims of patent infringement, invalidity and other patent related actions. In June and July of 2021, we initiated patent infringement litigation against Abbott in the United States (U.S.D.C., Western District of Texas) and Germany (N.C. in Mannheim) and filed additional patent infringement actions in May 2023 in Germany (N.C. in Munich) over certain of Abbott's continuous glucose monitoring products. In July and August 2023, we initiated patent infringement litigation in France and Germany in the UPC and in Spain (Commercial Courts of Barcelona).
Between July 2021 through the nine months ended September 30, 2023, Abbott initiated patent infringement litigation against Dexcom in multiple jurisdictions, including the United States (U.S.D.C., Delaware), the United Kingdom (Business and Property Courts of England and Wales), and in Germany (N.C. in Mannheim, Dusseldorf and Hamburg) over certain of Dexcom's continuous glucose monitoring products. In response to the lawsuits initiated by Abbott in the United Kingdom, Dexcom also filed patent infringement counterclaims in that jurisdiction. Three trials on liability have already been conducted in the United Kingdom. On October 18, judgment was handed down in favor of Dexcom in one of these trials. The parties are awaiting rulings on the remaining two . Dexcom and Abbott seek injunctive relief and monetary damages as a result of their respective claims.
In December 2021, Abbott filed a breach of contract lawsuit against Dexcom in the U.S.D.C., District of Delaware alleging that Dexcom breached the parties' Settlement and License Agreement dated July 2, 2014 (“SLA”). The U.S.D.C., District of Delaware consolidated Abbott’s breach of contract lawsuit with Dexcom’s patent infringement lawsuit which had been transferred from the U.S.D.C., Western District of Texas. Dexcom asserted counterclaims that Abbott also breached the SLA. A jury trial on Abbott’s breach of contract claims commenced on July 10, 2023. On July 14, 2023, the jury verdict determined that Abbott was not licensed to thirteen claims of certain Dexcom patents and that Abbott was licensed to five claims. Dexcom’s patent infringement claims in Delaware are stayed until November 10, 2023, at which point the U.S. Patent and Trademark Office will have issued
25
its final written decisions on certain patents involved in the lawsuit. We will continue to enforce the remaining claims of the patents asserted in Delaware.
Abbott’s patent infringement action against Dexcom is currently scheduled for trial in the U.S.D.C., District of Delaware on March 11, 2024. In the lead up to trial, the U.S.D.C., District of Delaware invalidated one of Abbott’s patents and Abbott dropped four other patents from the litigation.
Commencing in December 2023, Abbott has several patent infringement hearings against Dexcom in the National Court in Hamburg and Munich wherein Abbott is seeking damages and injunctive relief. In March and April of 2024, Dexcom has several patent infringement hearings in Munich against Abbott, wherein Dexcom is seeking damages and injunctive relief.
Due to uncertainty surrounding patent litigation procedures initiated by Dexcom and Abbott throughout multiple jurisdictions, we are unable to reasonably estimate the ultimate outcome of any of the litigation matters at this time. We intend to protect our intellectual property and defend against Abbott’s claims vigorously in all of these actions.
We do not believe we are party to any other currently pending legal proceedings, the outcome of which could have a material adverse effect on our business, financial condition, or results of operations. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, financial condition, or results of operations.
| 7. Income Taxes | ||||||||||||||
We estimate our annual effective tax rate to be 24.7 % for the full year 2023, which differs from the U.S. federal statutory rate due to state and foreign income taxes, nondeductible executive compensation, increases to unrecognized tax benefits, and impact of foreign operations, partially offset by federal tax credits generated. Our actual effective tax rate of 38.6 % for the nine months ended September 30, 2023 was primarily due to income tax expense from normal, recurring operations, increased by discrete foreign taxes related to an intra-entity transfer of certain intellectual property, and decrease in the state tax rate applied to beginning of year deferred tax assets, partially offset by tax benefits recognized for share-based compensation for employees, net of disallowed executive compensation.
In August 2023, we completed an intra-entity asset transfer of certain intellectual property between two of our wholly owned foreign subsidiaries to align our structure with the expansion of international business operations. We recorded a $186.6 million deferred tax asset, which represents the difference between the basis of the intellectual property for financial statement and tax purposes, applying the appropriate enacted statutory tax rate. Based on available evidence, management believes it is not more-likely-than-not that the additional foreign deferred tax asset will be realizable, and is therefore, fully offset by a valuation allowance.
The transfer resulted in $65.2 million of net tax expense, which increased our actual effective tax rate for the nine months ended September 30, 2023.
| 8. Stockholders’ Equity | ||||||||||||||
Share-Based Compensation
Our share-based compensation expense is associated with RSUs, PSUs, and our Employee Stock Purchase Plan, or ESPP. The following table summarizes our share-based compensation expense included in our consolidated statements of operations for the periods shown:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
At September 30, 2023, unrecognized estimated compensation costs related to RSUs, PSUs and ESPP totaled $238.4 million and are expected to be recognized through 2027.
26
Equity Award Activity
The total vest date fair value of RSUs and PSUs that vested during the nine months ended September 30, 2023 was $138.5 million and $9.9 million, respectively.
Share Repurchase Program and Treasury Shares
On July 26, 2022, a duly authorized committee of our Board of Directors authorized and approved a share repurchase program of up to $700.0 million of our outstanding common stock, with a repurchase period that ended on June 30, 2023 (the “2022 Share Repurchase Program”). Shares of common stock repurchased under the 2022 Share Repurchase Program became treasury shares.
We repurchased approximately $557.7 million of our outstanding common stock throughout the duration of the 2022 Share Repurchase Program. The 2022 Share Repurchase Program and the remaining authorization of approximately $142.3 million expired on June 30, 2023. There were no share repurchases under the 2022 Share Repurchase Program in 2023.
In May 2023, we used a portion of the proceeds of the 2028 Notes to repurchase 1.6 million shares of our common stock for $188.7 million, excluding excise tax due under the Inflation Reduction Act of 2022, for an average per share price of $118.12 , via privately negotiated transactions, independent of the 2022 Share Repurchase Program.
| 9. Business Segment and Geographic Information | ||||||||||||||
Reportable Segments
An operating segment is identified as a component of a business that has discrete financial information available and for which the chief operating decision maker must decide the level of resource allocation. In addition, the guidance for segment reporting indicates certain quantitative materiality thresholds. None of the components of our business meet the definition of an operating segment.
We currently consider our operations to be, and manage our business globally within, one reportable segment, which is consistent with how our President and Chief Executive Officer, who is our chief operating decision maker, reviews our business, makes investment and resource allocation decisions, and assesses operating performance.
Disaggregation of Revenue
We disaggregate revenue by geographic region and by major sales channel. We have determined that disaggregating revenue into these categories achieves the ASC Topic 606 disclosure objectives of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
27
Revenue by geographic region
During the three and nine months ended September 30, 2023 and September 30, 2022, no individual country outside the United States generated revenue that represented more than 10% of our total revenue. The following table sets forth revenue by our two primary geographical markets, the United States and International, based on the geographic location to which we deliver the components, for the periods shown:
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
| (In millions) | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
| United States | $ | ||||||||||||||||||||||