Quarterly Report (10-q)

Date : 07/31/2019 @ 9:14PM
Source : Edgar (US Regulatory)
Stock : DexCom Inc (DXCM)
Quote : 281.48  3.23 (1.16%) @ 1:00AM
DexCom share price Chart
After Hours
Last Trade
Last $ 281.48 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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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 June 30, 2019
 
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
DEXCOM, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
Delaware
 
33-0857544
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
6340 Sequence Drive
San Diego,
CA
 
92121
(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
Common Stock, $0.001 Par Value Per Share
 
DXCM
 
Nasdaq Global Select Market
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, 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 (Check one):
Large Accelerated Filer
 
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 July 26, 2019 , there were 91,185,989 shares of the Registrant’s common stock outstanding.
 



DexCom, Inc.
Table of Contents
 
 
 
Page
Number
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

2



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DexCom, Inc.
Consolidated Balance Sheets
(In millions, except par value and share data)
 

June 30, 2019

December 31, 2018
Assets
(Unaudited)


Current assets:



Cash and cash equivalents
$
709.2


$
1,137.0

Short-term marketable securities
668.3


248.6

Accounts receivable, net
217.3


226.7

Inventory
117.9


70.7

Prepaid and other current assets
31.5


16.5

Total current assets
1,744.2


1,699.5

Property and equipment, net
253.2


183.1

Operating lease right-of-use assets
35.8

 

Goodwill
18.7


18.7

Other assets
14.0


14.7

Total assets
$
2,065.9


$
1,916.0

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable and accrued liabilities
$
196.7


$
147.1

Accrued payroll and related expenses
73.9


72.4

Operating lease liabilities, current portion
14.1

 

Deferred revenue
3.5


2.9

Total current liabilities
288.2


222.4

Long-term senior convertible notes
1,034.7

 
1,010.3

Operating lease liabilities, net of current portion
37.2

 

Other long-term liabilities
17.5

 
20.0

Total liabilities
1,377.6


1,252.7

Commitments and contingencies



Stockholders’ equity:



Preferred stock, $0.001 par value, 5.0 million shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018



Common stock, $0.001 par value, 200.0 million shares authorized; 92.0 million and 91.2 million shares issued and outstanding, respectively, at June 30, 2019; and 91.1 million and 90.0 million shares issued and outstanding, respectively, at December 31, 2018
0.1


0.1

Additional paid-in capital
1,620.4


1,560.6

Accumulated other comprehensive income
2.0


1.5

Accumulated deficit
(834.2
)

(798.9
)
Treasury stock, at cost; 0.8 million shares at June 30, 2019 and December 31, 2018
(100.0
)
 
(100.0
)
Total stockholders’ equity
688.3


663.3

Total liabilities and stockholders’ equity
$
2,065.9


$
1,916.0

See accompanying notes

3


DexCom, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)


Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
336.4

 
$
242.5

 
$
616.9

 
$
426.9

Cost of sales
129.9

 
88.9

 
241.6

 
154.4

Gross profit
206.5

 
153.6


375.3

 
272.5

Operating expenses:

 

 

 

Research and development
69.0

 
47.2

 
128.0

 
92.0

Selling, general and administrative
138.3

 
111.3

 
262.5

 
216.1

Total operating expenses
207.3

 
158.5


390.5

 
308.1

Operating loss
(0.8
)
 
(4.9
)

(15.2
)
 
(35.6
)
Interest expense
(15.0
)
 
(4.8
)
 
(29.9
)
 
(9.6
)
Income (loss) from equity investments

 
42.7

 
(4.2
)
 
50.1

Interest and other income (expense), net
6.5

 
(3.4
)
 
13.4

 
0.7

Income (loss) before income taxes
(9.3
)
 
29.6

 
(35.9
)
 
5.6

Income tax expense (benefit)
1.2

 
(0.6
)
 
1.5

 
(0.4
)
Net income (loss)
$
(10.5
)
 
$
30.2

 
$
(37.4
)
 
$
6.0

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
(0.12
)
 
$
0.34

 
$
(0.41
)
 
$
0.07

Shares used to compute basic net income (loss) per share
91.1

 
88.2

 
90.7

 
87.7

Diluted net income (loss) per share
$
(0.12
)
 
$
0.34

 
$
(0.41
)
 
$
0.07

Shares used to compute diluted net income (loss) per share
91.1

 
89.4

 
90.7

 
88.8

See accompanying notes

4


DexCom, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(10.5
)
 
$
30.2

 
$
(37.4
)
 
$
6.0

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(0.1
)
 
3.6

 
(0.1
)
 
1.3

Unrealized income on marketable debt securities
0.5

 

 
0.6

 

Total other comprehensive income, net
0.4

 
3.6

 
0.5

 
1.3

Comprehensive income (loss)
$
(10.1
)
 
$
33.8

 
$
(36.9
)
 
$
7.3


See accompanying notes

5


DexCom, Inc.
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended June 30, 2019 and 2018
(In millions)
(Unaudited)

 
 
Three Months Ended June 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at March 31, 2019
 
91.0

 
$
0.1

 
$
1,590.6

 
$
1.6

 
$
(823.7
)
 
$
(100.0
)
 
$
668.6

Issuance of common stock under equity incentive plans
 
0.2

 

 
0.1

 

 

 

 
0.1

Issuance of common stock for Employee Stock Purchase Plan
 

 

 

 

 

 

 

Share-based compensation expense
 

 

 
29.7

 

 

 

 
29.7

Net loss
 

 

 

 

 
(10.5
)
 

 
(10.5
)
Other comprehensive income
 

 

 

 
0.4

 

 

 
0.4

Balance at June 30, 2019
 
91.2

 
$
0.1

 
$
1,620.4

 
$
2.0

 
$
(834.2
)
 
$
(100.0
)
 
$
688.3




 
 
Three Months Ended June 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at March 31, 2018
 
88.1

 
$
0.1

 
$
1,122.5

 
$
(4.9
)
 
$
(696.0
)
 
$

 
$
421.7

Issuance of common stock under equity incentive plans
 
0.3

 

 
1.0

 

 

 

 
1.0

Issuance of common stock for Employee Stock Purchase Plan
 

 

 

 

 

 

 

Share-based compensation expense
 

 

 
25.6

 

 

 

 
25.6

Net income
 

 

 

 

 
30.2

 

 
30.2

Other comprehensive income
 

 

 

 
3.6

 

 

 
3.6

Balance at June 30, 2018
 
88.4

 
$
0.1

 
$
1,149.1

 
$
(1.3
)
 
$
(665.8
)
 
$

 
$
482.1



See accompanying notes

6


DexCom, Inc.
Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2019 and 2018
(In millions)
(Unaudited)

 
 
Six Months Ended June 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2018
 
90.0

 
$
0.1

 
$
1,560.6

 
$
1.5

 
$
(798.9
)
 
$
(100.0
)
 
$
663.3

Cumulative-effect adjustment from adoption of new lease accounting standard (Note 2)
 

 

 

 

 
2.1

 

 
2.1

Issuance of common stock under equity incentive plans
 
1.1

 

 
0.3

 

 

 

 
0.3

Issuance of common stock for Employee Stock Purchase Plan
 
0.1

 

 
4.8

 

 

 

 
4.8

Share-based compensation expense
 

 

 
54.7

 

 

 

 
54.7

Net loss
 

 

 

 

 
(37.4
)
 

 
(37.4
)
Other comprehensive income
 

 

 

 
0.5

 

 

 
0.5

Balance at June 30, 2019
 
91.2

 
$
0.1

 
$
1,620.4

 
$
2.0

 
$
(834.2
)
 
$
(100.0
)
 
$
688.3




 
 
Six Months Ended June 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2017
 
87.0

 
$
0.1

 
$
1,093.7

 
$
(2.6
)
 
$
(671.8
)
 
$

 
$
419.4

Issuance of common stock under equity incentive plans
 
1.3

 

 
1.1

 

 

 

 
1.1

Issuance of common stock for Employee Stock Purchase Plan
 
0.1

 

 
4.1

 

 

 

 
4.1

Share-based compensation expense
 

 

 
50.2

 

 

 

 
50.2

Net income
 

 

 

 

 
6.0

 

 
6.0

Other comprehensive income
 

 

 

 
1.3

 

 

 
1.3

Balance at June 30, 2018
 
88.4

 
$
0.1

 
$
1,149.1

 
$
(1.3
)
 
$
(665.8
)
 
$

 
$
482.1



See accompanying notes


7


DexCom, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(37.4
)
 
$
6.0

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
21.5

 
12.7

Share-based compensation
54.7

 
50.2

Non-cash interest expense
24.5

 
7.5

(Income) loss from equity investments
4.2

 
(50.1
)
Other non-cash income and expenses
(1.9
)
 
4.7

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
9.2

 
(28.1
)
Inventory
(47.2
)
 
(1.0
)
Prepaid and other assets
(3.4
)
 
(5.0
)
Accounts payable and accrued liabilities
53.9

 
32.9

Accrued payroll and related expenses
1.6

 
(2.0
)
Deferred revenue and other liabilities
(3.4
)
 
4.9

Net cash provided by operating activities
76.3

 
32.7

Cash flows from investing activities:
 
 
 
Purchase of marketable securities
(934.5
)
 
(224.1
)
Proceeds from sale and maturity of marketable securities
513.8

 
75.4

Purchase of other equity investments
(1.2
)
 
(1.0
)
Purchase of property and equipment
(86.2
)
 
(25.6
)
Net cash used in investing activities
(508.1
)
 
(175.3
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common stock
5.1

 
5.2

Other financing activities
(0.3
)
 
(1.8
)
Net cash provided by financing activities
4.8

 
3.4

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(0.3
)
 
(1.8
)
Decrease in cash, cash equivalents and restricted cash
(427.3
)
 
(141.0
)
Cash, cash equivalents and restricted cash, beginning of period
1,137.1

 
441.5

Cash, cash equivalents and restricted cash, end of period
$
709.8

 
$
300.5

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash, end of period:
 
 
 
Cash and cash equivalents
$
709.2

 
$
300.2

Restricted cash
0.6

 
0.3

Total cash, cash equivalents and restricted cash
$
709.8

 
$
300.5

 
 
 
 
Supplemental disclosure of non-cash investing and financing transactions:
 
 
 
Acquisition of property and equipment included in accounts payable and accrued liabilities
$
7.1

 
$
6.3

Right-of-use assets obtained in exchange for lease liabilities
$
55.8

 
$

See accompanying notes

8


DexCom, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies
Organization and Business
DexCom, Inc. is a medical device company focused on the design, development and commercialization of continuous glucose monitoring, or CGM, systems for use by people with diabetes and by healthcare providers. 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 (the “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 six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 . We expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter. We experience seasonality that is typical in our industry, with lower sales in the first quarter of each year compared to the fourth quarter of the previous year.
These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2018 included in the Annual Report on Form 10-K that we filed with the SEC on February 21, 2019 .
These 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investment securities, and accounts receivable. We limit our exposure to credit risk by placing our cash and investments with high credit quality 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.
Two of our distributors are significant customers. Each of them accounted for more than 10% of revenue in each of the past three fiscal years and each of them accounted for more than 10% of accounts receivable as of the end of the past two fiscal years. The following table sets forth the percentage of total revenues that the revenues of Distributor A and Distributor B represented for the periods shown.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Distributor A
17
%
 
17
%
 
16
%
 
15
%
Distributor B
13
%
 
15
%
 
12
%
 
14
%


9


Distributor A and Distributor B accounted for 20% and 12% , respectively, of our accounts receivable as of June 30, 2019 and for 19% and 15% , respectively, of our accounts receivable as of December 31, 2018 .
Revenue Recognition
We generate our revenue from the sale of our durable systems and disposable sensors (the Components). Our durable systems include a reusable transmitter and receiver. Disposable sensors are sold separately. We also provide free-of-charge software and mobile applications for use with our durable systems and disposable sensors. The initial durable system price is generally not dependent upon the subsequent purchase of any amount of disposable sensors.
We sell our durable systems and disposable sensors through two main sales channels: 1) directly to customers who use our products or organizations (the Direct Channel) and 2) to distribution partners who resell our products (the Distributor Channel).
In the Direct Channel, we sell the Components to customers and we receive payment directly from customers, organizations and third-party payors. Third-party payors primarily include commercial insurance companies and federal and state agencies (under Medicare and Medicaid programs).
Policy elections and ASC Topic 606 practical expedients taken
We report revenue net of taxes collected from customers, which are subsequently remitted to governmental authorities;
We account for shipping and handling activities that are performed after a customer has obtained control of a good as fulfillment costs rather than as separate performance obligations;
We do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; and
If we expect, at contract inception, that the period between the transfer of control and corresponding payment from the customer will be one year or less, we do not adjust the amount of consideration for the effects of a significant financing component.
Contracts and performance obligations
We consider customer purchase orders, which in most cases are governed by agreements with distributors or third-party payors, to be contracts with a customer. For each contract, we consider the obligation to transfer Components to the customer, each of which are distinct, to be separate performance obligations. Components are individually priced and can be purchased separately or bundled in a contract. We also provide free-of-charge software, mobile applications and updates for our DexCom Share ® remote monitoring system. The standalone selling prices of our mobile applications and updates are based on an expected cost plus a margin approach.
Transaction price
Transaction price for the Components reflects the net consideration to which we expect to be entitled. Transaction price is typically based on contracted rates less any estimates of claim denials and historical reimbursement experience, which would include current and future expectations regarding reimbursement contracts, guidelines and payor mix, and less estimated variable consideration adjustments.
Variable consideration
Rebates. We estimate reductions to our revenues for rebates paid to payors, healthcare providers and distributors. Rebates are based on contractual arrangements or statutory requirements, which may vary by product, payor and individual payor plans. Our estimates are based on products sold, historical payor mix and, as available, known market events or trends and channel inventory data. We also take into consideration, as available, new information regarding changes in programs’ regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future payor mix for these programs.
Product Returns. We generally provide a “ 30 -day money back guarantee” program whereby first-time end-user customers may return the durable system. In accordance with the terms of their distribution agreements, most distributors do not have rights of return outside of our limited warranty. The distributors typically have a limited time frame to notify us of any missing, damaged, defective or non-conforming products. Our returns have historically been immaterial.
Revenue recognition
We recognize revenue when control is transferred to our customers. The timing of revenue recognition is based on the satisfaction of performance obligations. Substantially all of the performance obligations associated with the Components are satisfied at a point in time, which typically occurs at shipment. Terms of direct and distributor orders are generally Freight on Board (FOB) shipping point for U.S. orders or Free Carrier (FCA) shipping point for international orders. For certain of our distributors, control transfers at delivery of the product to the customer.

10


In cases where our free-of-charge software, mobile applications and updates are deemed to be separate performance obligations, revenue is recognized over time on a ratable basis over the estimated life of the durable system.
Our sales of the durable components of our CGM systems include an assurance-type warranty which is accounted for based on the cost accrual method recognized as expense when the products are sold and is not considered a separate performance obligation.
See Note 9, “Business Segment and Geographic Information,” for revenues disaggregated by geographic region and by sales channel.
Contract balances
The timing of revenue recognition, billing and cash collections results in the recording of trade receivables and deferred revenue in our balance sheets. We recognize a receivable in the period in which our right to the consideration is unconditional. We generally do not have any contracts or performance obligations with a term of more than one year.
Payment terms vary by contract type and type of customer and generally range from 30 to 90 days.
Accounts receivable as of June 30, 2019 and December 31, 2018 included unbilled accounts receivable of $4.6 million and $5.1 million , respectively. Unbilled accounts receivable consist of revenue recognized for Components we have delivered but not yet invoiced to customers. We expect to invoice and collect all unbilled accounts receivable within twelve months.
Substantially all of our deferred revenue as of June 30, 2019 is associated with certain of our free-of-charge software and mobile applications and will be recognized during 2019 . The table below shows revenue that we recognized as a result of changes in the contract liability balances in the periods shown.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2019
 
2018
 
2019
 
2018
Revenue recognized in the period from:
 
 
 
 
 
 
 
Amounts included in contract liabilities at the beginning of the period
$
2.0

 
$
2.0

 
$
2.6

 
$
1.9


Deferred cost of sales
Deferred cost of sales are associated with sales for which revenue recognition criteria are not met but product has shipped and released from inventory. These costs are recognized in cost of sales when the associated revenue is recognized. Deferred cost of sales are included in prepaid and other current assets in our balance sheets.
Incentive compensation costs
We generally expense incentive compensation associated with our internal sales force when incurred because the amortization period for such costs, if capitalized, would have been one year or less. We record these costs in selling, general and administrative expense in our statement of operations.
Leases
We adopted Accounting Standards Codification Topic 842 (ASC 842) utilizing the modified retrospective transition method at the beginning of the first quarter of 2019. Under ASC 842, w e determine if an arrangement is a lease at inception. We record operating lease right-of-use assets and liabilities based on the present value of the lease payments over the lease term. In determining the present value of the lease payments, we use our incremental borrowing rate at the lease commencement date. We define the initial lease term to include the construction build-out period but to exclude lease extension periods when we are not reasonably certain to exercise our extension option. We record lease expense on a straight-line basis over the expected lease term. Lease costs which are variable and dependent on a rate, an index, or on usage of the asset are expensed in the period they are incurred.
We have facilities lease agreements with lease and non-lease components, such as common area maintenance. We generally account for the lease and non-lease components of these agreements as a single lease component.
We account for short-term lease expense on a straight-line basis over the lease term.

11


Net Income (Loss) Per Share
Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents.
Common share equivalents that we calculate using the treasury stock method include outstanding stock options and unvested RSUs that are settleable in shares of common stock and potential common shares from convertible securities that we intend to settle using a combination of shares of our common stock and cash. Common share equivalents that we calculate using the if-converted method include potential common shares from convertible securities that we intend to settle using only shares of our common stock.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods shown.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(10.5
)
 
$
30.2

 
$
(37.4
)
 
$
6.0

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.12
)
 
$
0.34

 
$
(0.41
)
 
$
0.07

Diluted
$
(0.12
)
 
$
0.34

 
$
(0.41
)
 
$
0.07

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
91.1

 
88.2

 
90.7

 
87.7

Effect of potentially dilutive stock options

 
0.2

 

 
0.3

Effect of potentially dilutive restricted stock units

 
1.0

 

 
0.8

Diluted weighted average shares outstanding
91.1

 
89.4

 
90.7

 
88.8


Outstanding anti-dilutive securities not included in the diluted net income (loss) per share attributable to common stockholders calculations were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2019
 
2018
 
2019
 
2018
Options outstanding to purchase common stock

 

 

 

Unvested restricted stock units
2.1

 

 
2.1

 
0.4

Senior convertible notes due 2022
4.0

 
4.0

 
4.0

 
4.0

Senior convertible notes due 2023
5.2

 

 
5.2

 

2023 Warrants
5.2

 

 
5.2

 

Total
16.5

 
4.0

 
16.5

 
4.4


Recent Accounting Guidance
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires a lessee to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets. We adopted ASU 2016-02 utilizing the modified retrospective transition method at the beginning of the first quarter of 2019. See Note 2, “Leases,” for more information on the impact of our adoption of ASU 2016-02 and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (ASU 2017-12), which is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency regarding the scope and results of hedging programs. The guidance in this update is applied using a cumulative-effect adjustment to retained earnings at the beginning of the fiscal year of adoption. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

12


Our adoption of ASU 2017-12 at the beginning of the first quarter of 2019 did not have a significant impact on our financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (ASU 2016-13), which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-14). This new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-14 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13,  Fair Value Measurement: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public business entities will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. ASU 2018-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted.  We are currently evaluating the impact that this guidance will have on our financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-05). This new guidance requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-05 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. Application of this guidance can be applied either prospectively or retrospectively. We are currently evaluating the impact that this guidance will have on our financial statements.


2. Leases
Impact of Adoption of ASC 842
We adopted ASC 842 utilizing the modified retrospective transition method through a $2.1 million cumulative-effect adjustment to retained earnings at the beginning of the first quarter of 2019. We will continue to report financial information for fiscal years prior to 2019 under the previous lease accounting standards. We elected the package of practical expedients permitted under the transition guidance in the new standard, which allowed us to carry forward the historical classification of leases that were in place as of January 1, 2019.
Under the previous lease accounting standards we were deemed the owner of our Mesa, Arizona building during the construction period. As a result of our adoption of ASC 842, we have de-recognized the estimated fair value of the building shell and the related lease liability as of December 31, 2018 and recorded the difference between the asset and liability as an adjustment to retained earnings at the beginning of the first quarter of 2019.
In addition, as a result of our adoption of ASC 842 we recorded operating lease right-of-use assets of $26.7 million , finance lease right-of-use assets of $15.3 million , operating lease liabilities of $40.4 million and finance lease liabilities of $15.9 million in our balance sheet at the beginning of the first quarter of 2019, with no material impact to our statement of operations.

13



Operating lease right-of-use assets and liabilities are presented separately in our consolidated balance sheets. Finance lease right-of-use assets are included in property and equipment and finance lease liabilities are included in accounts payable and accrued liabilities and in other long-term liabilities in our consolidated balance sheets.
Information About Our Leases
Our corporate headquarters and primary manufacturing facilities are located in San Diego, California. We lease approximately 219,000 square feet of space in San Diego under leases that expire in February and March 2022. We have the option to renew each of these leases for two additional five-year terms. In San Diego we also lease approximately 87,000 square feet of space under a lease that expires in February 2022 with no renewal options and approximately 132,600 square feet of space under a sublease that expires in January 2022. We lease approximately 148,800 square feet of space in Mesa, Arizona under a lease that expires in March 2028. We have the option to renew this lease for four additional five-year terms. We have also entered into other domestic and international operating lease agreements, primarily for office and warehouse space, that expire at various times through September 2029.
The components of lease expense for the three and six months ended June 30, 2019 were as follows:
(In millions)
Three Months Ended 
 June 30, 2019
 
Six Months Ended 
 June 30, 2019
Finance lease cost:
 
 
 
Amortization of right-of-use assets
$
0.2

 
$
0.5

Interest on lease liabilities
0.2

 
0.4

Operating lease cost
3.1

 
5.6

Short-term lease cost
0.7

 
2.0

Variable lease cost (1)
1.2

 
2.0

Total lease cost
$
5.4

 
$
10.5

(1) Variable lease costs are primarily related to common area maintenance charges and property taxes.  

Other information related to leases was as shown in the table below. All figures include the leases recorded at the beginning of the first quarter of 2019 as a result of our adoption of ASC 842.
(Dollars in millions)
Three Months Ended 
 June 30, 2019
 
Six Months Ended 
 June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
3.5

 
$
6.0

Operating cash flows from finance leases
$
0.2

 
$
0.4

Financing cash flows from finance leases
$
0.1

 
$
0.3

Right-of-use assets obtained in exchange for lease liabilities:
 
 
 
Operating leases
$
10.9

 
$
40.3

Finance leases
$

 
$
15.5

Weighted average remaining lease term in years:
 
 
 
Operating leases
4.0

 
4.0

Finance leases
13.8

 
13.8

Weighted average discount rate:
 
 
 
Operating leases
5.0
%
 
5.0
%
Finance leases
5.0
%
 
5.0
%


14


Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as shown in the table below.
(In millions)
Operating Leases
 
Finance Leases
 
 
 
 
2019
$
8.3

 
$
0.6

2020
16.8

 
1.3

2021
16.9

 
1.3

2022
6.0

 
1.4

2023
4.2

 
1.4

Thereafter
5.0

 
15.3

Total future lease cost
57.2

 
21.3

Less: Amount representing interest
(5.4
)
 
(6.1
)
Present value of future payments
51.8

 
15.2

Less: Short-term leases not recorded as a liability
(0.5
)
 

Revised present value of future lease payments
51.3

 
15.2

Less: Current portion
(14.1
)
 
(0.5
)
Long-term portion
$
37.2

 
$
14.7



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 of our Level 2 marketable securities portfolio balance provided by our investment managers.
The following table summarizes financial assets that we measured at fair value on a recurring basis as of June 30, 2019 , classified in accordance with the fair value hierarchy. We sold the equity investment in Tandem Diabetes Care, Inc. that we held as of December 31, 2018 during the first quarter of 2019.
 
Fair Value Measurements Using
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
410.7

 
$
126.2

 
$

 
$
536.9

 
 
 
 
 
 
 
 
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies

 
531.6

 

 
531.6

Commercial paper

 
98.9

 

 
98.9

Corporate debt

 
37.8

 

 
37.8

Total debt securities, available for sale

 
668.3

 

 
668.3

 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
$
410.7

 
$
794.5

 
$

 
$
1,205.2


15


The following table summarizes financial assets that we measured at fair value on a recurring basis as of December 31, 2018 , classified in accordance with the fair value hierarchy.
 
Fair Value Measurements Using
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
199.3

 
$
66.7

 
$

 
$
266.0

 
 
 
 
 
 
 
 
Equity investment in Tandem Diabetes Care, Inc.
38.0

 

 

 
38.0

 
 
 
 
 
 
 
 
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies

 
173.1

 

 
173.1

Commercial paper

 
36.2

 

 
36.2

Corporate debt

 
1.3

 

 
1.3

Total debt securities, available for sale

 
210.6

 

 
210.6

 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
$
237.3

 
$
277.3

 
$

 
$
514.6


There were no transfers between Level 1 and Level 2 securities during the three and six months ended June 30, 2019 and 2018 . There were no transfers into or out of Level 3 securities during the three and six months ended June 30, 2019 and 2018 .
We hold certain other investments that we do not measure at fair value on a recurring basis. The carrying values of these investments are not significant and we include them in other assets in our 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 adverse effect on the fair values.
Financial liabilities whose fair values we measure on a recurring basis using Level 1 inputs consist of our outstanding 2022 Notes and 2023 Notes. We measure the fair value of the 2022 Notes and 2023 Notes based on their trading prices. The fair value of the 2022 Notes was $638.3 million as of June 30, 2019 and $540.2 million as of December 31, 2018 . The fair value of the 2023 Notes was $996.9 million as of June 30, 2019 and $859.6 million as of December 31, 2018 . For more information on the carrying values and fair values of our 2022 Notes and 2023 Notes, see Note 5, “Debt.”
Foreign Currency and Derivative Financial Instruments
From time to time we engage in limited hedging transactions to reduce foreign currency risks on certain intercompany balances. The fair values of these derivatives are based on quoted market prices, which are Level 1 inputs. As of June 30, 2019 , we had no outstanding currency hedging transactions.


16


4. Balance Sheet Details
Short-Term Marketable Securities
Short-term marketable securities, consisting of equity securities and debt securities, were as follows as of the dates indicated. We sold the equity investment in Tandem Diabetes Care, Inc. that we held as of December 31, 2018 during the first quarter of 2019.
 
June 30, 2019
(In millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies
$
531.2

 
$
0.4

 
$

 
$
531.6

Commercial paper
98.8

 
0.1

 

 
98.9

Corporate debt
37.8

 

 

 
37.8

Total debt securities, available for sale
667.8

 
0.5

 

 
668.3

 
 
 
 
 
 
 
 
Total marketable securities
$
667.8

 
$
0.5

 
$

 
$
668.3


 
December 31, 2018
(In millions)
Cost or Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Equity investment in Tandem Diabetes Care, Inc.
$
2.0

 
$
36.0

 
$

 
$
38.0

 
 
 
 
 
 
 
 
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies
173.2

 

 
(0.1
)
 
173.1

Commercial paper
36.2

 

 

 
36.2

Corporate debt
1.3

 

 

 
1.3

Total debt securities, available for sale
210.7

 

 
(0.1
)
 
210.6

 
 
 
 
 
 
 
 
Total marketable securities
$
212.7

 
$
36.0

 
$
(0.1
)
 
$
248.6


As of June 30, 2019 and December 31, 2018 , all of our debt securities had contractual maturities of less than 12 months. Gross realized gains and losses on sales of our debt securities during the three and six months ended June 30, 2019 and 2018 were not significant.
We periodically review our portfolio of debt securities to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at June 30, 2019 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at that date were not significant and were due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. We do not intend to sell these investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

Inventory
(In millions)
June 30,
2019
 
December 31, 2018
Raw materials
$
58.7

 
$
30.8

Work-in-process
11.4

 
11.2

Finished goods
47.8

 
28.7

Total inventory
$
117.9

 
$
70.7


During the three and six months ended June 30, 2019 we recorded excess and obsolete inventory charges of $1.7 million and $3.3 million , respectively, in cost of goods sold as a result of our ongoing assessment of sales demand and inventory on hand for

17


each product line. During the three and six months ended June 30, 2018 we recorded excess and obsolete inventory charges of $3.5 million and $5.5 million , respectively, in cost of goods sold primarily as a result of the approval and launch of our G6 system and our ongoing assessment of sales demand and inventory on hand for each product line.
Property and Equipment
(In millions)
June 30,
2019
 
December 31, 2018
Building and land
$
15.5

 
$
6.0

Furniture and fixtures
10.0

 
9.0

Computer software and hardware
33.0

 
29.2

Machinery and equipment
102.2

 
80.7

Leasehold improvements
95.4

 
80.7

Construction in progress
96.1

 
57.3

Total cost
352.2

 
262.9

Less accumulated depreciation and amortization
(99.0
)
 
(79.8
)
Total property and equipment, net
$
253.2

 
$
183.1


Building and Land. Although we do not legally own these premises, under previous lease accounting standards we were deemed the owner of the construction project during the construction period of our manufacturing facility in Mesa, Arizona under a build-to-suit lease arrangement. As a result of our adoption of ASC 842, we de-recognized the estimated fair value of the building shell that was included in “building and land” in our balance sheet as of December 31, 2018 and the related lease liability and recorded the difference between the asset and liability as an adjustment to retained earnings at the beginning of the first quarter of 2019. The June 30, 2019 balance in “building and land” represents our finance lease right-of-use assets as a result of our adoption of ASC 842.
Construction in Progress. The increase in construction in progress as of June 30, 2019 compared to December 31, 2018 is primarily due to continued investment in the expansion and automation of our production capabilities.
Accounts Payable and Accrued Liabilities
(In millions)
June 30,
2019
 
December 31, 2018
Accounts payable trade
$
97.1

 
$
75.5

Accrued tax, audit, and legal fees
16.6

 
11.7

Accrued rebates
55.3

 
36.1

Accrued warranty
6.8

 
6.8

Restructuring reserve
1.8

 

Other accrued liabilities
19.1

 
17.0

Total accounts payable and accrued liabilities
$
196.7

 
$
147.1


Accrued Rebates. The increase in the balance of accrued rebates as of June 30, 2019 compared with December 31, 2018 is due to increased sales volume in the pharmacy channel and to a lesser extent to pausing payments pending the outcome of ongoing discussions regarding the terms of one of our rebate agreements.
Restructuring Reserve. In February 2019, our Board of Directors approved a restructuring plan that will result in the transition of certain of our operations to the Philippines. We estimate that we will incur total pre-tax charges and costs of approximately $9.0 million , primarily for employee severance benefits under both ongoing and one-time benefit arrangements. We expect to incur these costs throughout 2019 but primarily in the first half of 2019, and we expect the restructuring activities to be substantially complete by the end of 2019.



18


Other Long-Term Liabilities
(In millions)
June 30,
2019
 
December 31, 2018
Finance lease liabilities
$
14.7

 
$
7.3

Deferred rent

 
9.4

Other liabilities
2.8

 
3.3

Total other long-term liabilities
$
17.5

 
$
20.0


Our adoption of ASC 842 during the first quarter of 2019 affected the balances of finance lease liabilities and deferred rent. See Note 2, “Leases,” for more information.


5. Debt
Senior Convertible Notes
The following table shows the carrying values, fair values, and if-converted values in excess of principal amounts for each of our senior convertible notes.
(In millions)
June 30,
2019
 
December 31, 2018
0.75% Senior Convertible Notes due 2022:
 
 
 
Principal amount
$
400.0

 
$
400.0

Unamortized debt discount
(44.2
)
 
(51.1
)
Unamortized debt issuance costs
(5.5
)
 
(6.3
)
Net carrying amount of Senior Convertible Notes due 2022
350.3

 
342.6

 
 
 
 
0.75% Senior Convertible Notes due 2023:
 
 
 
Principal amount
850.0

 
850.0

Unamortized debt discount
(156.1
)
 
(171.8
)
Unamortized debt issuance costs
(9.5
)
 
(10.5
)
Net carrying amount of Senior Convertible Notes due 2023
684.4

 
667.7

 
 
 
 
Total net carrying amount of senior convertible notes
$
1,034.7

 
$
1,010.3

 
 
 
 
Fair value of outstanding senior convertible notes:
 
 
 
Senior Convertible Notes due 2022
$
638.3

 
$
540.2

Senior Convertible Notes due 2023
996.9

 
859.6

Total fair value of outstanding senior convertible notes
$
1,635.2

 
$
1,399.8

 
 
 
 
Amount by which the notes' if-converted value exceeds their principal amount:
 
 
 
Senior Convertible Notes due 2022
$
225.5

 
$
125.4

Senior Convertible Notes due 2023
97.0

 

Total by which the notes' if-converted value exceeds their principal amount
$
322.5

 
$
125.4





19


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.
(In millions)
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Interest expense recognized:
 
 
 
 
 
 
 
0.75% Senior Convertible Notes due 2022:
 
 
 
 
 
 
 
Contractual coupon interest
$
0.8

 
$
0.7

 
$
1.5

 
$
1.5

Accretion of debt discount
3.4

 
3.3

 
6.9

 
6.6

Amortization of debt issuance costs
0.4

 
0.4

 
0.8

 
0.8

Interest expense recognized on 2022 Notes
4.6

 
4.4

 
9.2

 
8.9

 
 
 
 
 
 
 
 
0.75% Senior Convertible Notes due 2023:
 
 
 
 
 
 
 
Contractual coupon interest
1.6

 

 
3.2

 

Accretion of debt discount
7.9

 

 
15.7

 

Amortization of debt issuance costs
0.5

 

 
1.0

 

Interest expense recognized on 2023 Notes
10.0

 

 
19.9

 

 
 
 
 
 
 
 
 
Total interest expense recognized on senior notes
$
14.6

 
$
4.4

 
$
29.1

 
$
8.9

 
 
 
 
 
 
 
 
Effective interest rates:
 
 
 
 
 
 
 
0.75% Senior Convertible Notes due 2022
5.1
%
 
5.1
%
 
5.1
%
 
5.1
%
0.75% Senior Convertible Notes due 2023
5.6
%
 

 
5.6
%
 



The discount on the senior convertible notes due 2022 is being amortized through May 15, 2022 . Interest on the 2022 Notes began accruing upon issuance and is payable semi-annually on May 15 and November 15 of each year.
The discount on the senior convertible notes due 2023 is being amortized through December 1, 2023 . Interest on the 2023 Notes began accruing upon issuance and is payable semi-annually on June 1 and December 1 of each year.
0.75% Senior Convertible Notes due 2022
In June 2017, we completed an offering of $400.0 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.75% and a maturity date of May 15, 2022 (the 2022 Notes). The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $389.0 million . The 2022 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. It is our current intent and policy to settle all 2022 Notes conversions in shares of our common stock. The initial conversion rate of the 2022 Notes is 10.0918 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $99.09 per share, subject to adjustments. We use the if-converted method for assumed conversion of the 2022 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share.
Since upon conversion by the holders we may elect to settle such conversion in shares of our common stock, cash, or a combination thereof, we accounted for the cash conversion option as an equity instrument classified to stockholders’ equity. As a result, we recognized $72.6 million in additional paid-in-capital during 2017.
In the event of a fundamental change (as defined in the indenture related to the 2022 Notes), holders of the 2022 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 2022 Notes, plus any accrued and unpaid interest. Holders of the 2022 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.

20


Prior to 5:00 p.m., New York City time, on the business day immediately preceding February 15, 2022, holders of the 2022 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, 2017 (and only during such calendar quarter), if the last reported sale price of 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 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 on 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, 2022 , until 5:00 p.m., New York City time, on the business day immediately preceding the maturity date, holders of the 2022 Notes may convert all or a portion of their notes regardless of the foregoing circumstances.
DexCom may not redeem the 2022 Notes prior to May 15, 2020. On or after May 15, 2020, DexCom may redeem for cash all or part of the 2022 Notes, at its option, if the last reported sale price of our common stock has been at least 140% 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 2022 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
No principal payments are due on the 2022 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 2022 Notes includes customary terms and covenants, including certain events of default after which the 2022 Notes may be due and payable immediately.
Circumstance (1) listed above occurred during the quarter ended March 31, 2019. As a result, the 2022 Notes became convertible at the option of the holders from April 1, 2019 and remained convertible until June 30, 2019. Holders of 2022 Notes with an insignificant principal amount exercised their option to convert their 2022 Notes during the second quarter of 2019 and we settled these conversions with shares of our common stock. We continue to classify the carrying value of the liability component of the 2022 Notes as long-term debt, and the equity component of the 2022 Notes as permanent equity in our balance sheet as of June 30, 2019 .
0.75% Senior Convertible Notes due 2023
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 2023 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. It is our current intent and policy to settle all 2023 Notes conversions through combination settlement, satisfying the principal amount outstanding with cash and any note conversion value in excess of the principal amount in shares of our common stock. The initial conversion rate of the 2023 Notes is  6.0869  shares per  $1,000 principal amount of notes, which is equivalent to a conversion price of approximately  $164.29  per share, subject to adjustments. We use the treasury stock method for assumed conversion of the 2023 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share. We entered into transactions for a convertible note hedge (the 2023 Note Hedge) and warrants (the 2023 Warrants) concurrently with the issuance of the 2023 Notes.
Since upon conversion by the holders we may elect to settle such conversion in shares of our common stock, cash, or a combination thereof, we accounted for the cash conversion option as an equity instrument classified to stockholders’ equity. As a result, we recognized $174.4 million in additional paid-in capital during 2018.
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.

21


Holders of the 2023 Notes may 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 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 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.
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.
DexCom may not redeem the 2023 Notes prior to December 1, 2021. On or after December 1, 2021 and prior to September 1, 2023, DexCom may 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 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 2023 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
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. As of the date of these financial statements, we are unaware of any current events or market conditions that would allow holders to convert the 2023 Notes.
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  5.2 million  shares of our common stock at an initial price of  $164.29  per share, each of which is subject to adjustment. The cost of the 2023 Note Hedge was  $218.9 million and 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.
2023 Warrants
In November 2018, we also sold warrants to the 2023 Counterparties to acquire up to  5.2 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 $198.38 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.

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Revolving Credit Agreement
In December 2018, we entered into a five-year $200.0 million revolving credit agreement (the Credit Agreement) with JPMorgan Chase Bank, NA, as administrative agent, Bank of America, Silicon Valley Bank, Union Bank and Bank of the West. The Credit Agreement provides a $50.0 million sublimit for borrowings in Canadian Dollars, Euros, British Pounds, Swedish Krona, Japanese Yen and any other currency that is subsequently approved by the lenders and a sub-facility of up to $10.0 million for letters of credit. Subject to customary conditions and the approval of any lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $300.0 million , resulting in a maximum available principal amount of $500.0 million . However, at this time none of the lenders have committed to provide any such increase in their commitments.
Revolving loans under the Credit Agreement bear interest at our choice of one of two base rates plus a range of applicable margin rates that are based on our leverage ratio. The first base rate is the highest of (a) the publicly announced JPMorgan Chase prime rate, (b) the federal funds rate, or (c) the overnight bank funding rate, and the applicable margin rate ranges from 0.375% to 1.000% . The second base rate is a LIBOR-based rate, and the applicable margin rate ranges from 1.375% to 2.000% . We will also pay a commitment fee of between 0.2% and 0.3% , payable quarterly in arrears, on the average daily unused amount of the revolving facility based on our leverage ratio.
The Credit Agreement requires us to maintain a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with these covenants as of June 30, 2019 .
We drew no loans under the Credit Agreement during the three and six months ended June 30, 2019 . As of June 30, 2019 , we had no outstanding borrowings, letters of credit totaling $4.4 million , and a total available balance of $195.6 million under the Credit Agreement.

6. Contingencies
Litigation
On March 28, 2016, AgaMatrix, Inc., or AgaMatrix, filed a patent infringement lawsuit against us in the United States District Court for the District of Oregon, asserting that certain of our products infringe certain patents held by AgaMatrix. On June 6, 2016, AgaMatrix filed a First Amended Complaint asserting the same three patents. On February 24, 2017, the Court granted AgaMatrix’s motion to substitute WaveForm Technologies, Inc., or WaveForm, as the new plaintiff following AgaMatrix’s transfer of the three patents to its newly formed entity. On August 25, 2016, we filed petitions for inter partes review with the Patent Trial and Appeal Board, or PTAB, of the U.S. Patent and Trademark Office seeking a determination that two of the three asserted patents are invalid under U.S. patent law and those petitions were granted on March 6, 2017. On March 8, 2017, we filed a petition for inter partes review with the PTAB seeking a determination that the third of the three asserted patents is invalid under U.S. patent law. This petition was granted on September 15, 2017. The PTAB issued a Final Written Decision for each of the first two patents on February 28, 2018, where the PTAB found the majority of asserted claims from the first patent unpatentable and the remaining claims under review not unpatentable. The PTAB found all claims under review from the second patent not unpatentable. On April 3, 2019, the Federal Circuit affirmed the PTAB’s finding that certain claims were not unpatentable. The PTAB issued a Final Written Decision for the third patent on September 12, 2018, where the PTAB found all claims of the third patent asserted against us in the District of Oregon litigation unpatentable. WaveForm did not appeal this decision. Most activity in the patent infringement lawsuit against us in the District of Oregon was stayed until the PTAB completed the inter partes review proceedings. That stay was lifted on October 10, 2018. The remaining claims and counterclaims will continue with an estimated date of trial in February 2020. It is our position that Waveform’s assertions of infringement have no merit.
We have also filed several lawsuits against AgaMatrix. We filed a patent infringement lawsuit against Agamatrix in the United States District Court for the Central District of California, or C.D. Cal., in which a Final Judgment of non-infringement was entered by the C.D. Cal judge on February 23, 2018 and affirmed on appeal by the Federal Circuit on March 7, 2019. AgaMatrix sought attorneys' fees for this lawsuit, which the C.D. Cal. judge granted and entered on February 22, 2019. As of June 30, 2019 , we have accrued an immaterial amount for those fees. The fee decision is currently on appeal to the Federal Circuit. On September 15, 2017, we filed a patent infringement lawsuit against AgaMatrix in the United States District Court for the District of Delaware, asserting certain single-point blood glucose monitoring products of AgaMatrix infringe two patents held by us. In addition, on September 18, 2017, we filed a Complaint against AgaMatrix in the International Trade Commission, referred to as the ITC, requesting that the ITC institute an investigation and issue an order excluding certain products of AgaMatrix from importation into or sale in the United States based on AgaMatrix’s infringement of the same two patents asserted in the Delaware litigation. The investigation was terminated by the ITC on April 4, 2019 with a finding of non-infringement. On May 31, 2019, we filed a Petition for Review with the United States Court of Appeals for the Federal Circuit appealing the ITC’s termination of the investigation and its finding of non-infringement. On September 14, 2018, AgaMatrix

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filed two petitions for inter partes review for each of the same two patents we asserted in the District of Delaware and the ITC. The PTAB denied AgaMatrix’s petitions.
Neither the outcome of these lawsuits nor the amount and range of potential loss associated with the lawsuits can be assessed at this time. Other than the attorneys’ fees described above, as of June 30, 2019 we have accrued no amounts for contingent losses associated with these suits.
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 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. We do not expect that the resolution of these matters would, or will, have a material adverse effect or material impact on our financial position or results of operations.

7. Income Taxes
Our effective tax rates for the three and six months ended June 30, 2019 were negative rates of 12.9% and 4.2% , compared to negative rates of 2.0% and 7.1% for the same periods of 2018 . The income tax expense in the current periods is foreign income tax in jurisdictions with current taxable income. No income tax benefit was recorded on losses in jurisdictions where valuation allowances are recorded against net deferred tax assets.
We maintain a full valuation allowance against our net deferred tax assets as of June 30, 2019 based on our assessment that it is not more likely than not these future benefits will be realized before expiration.


8. Stockholders’ Equity

Share-Based Compensation Expense
The following table summarizes share-based compensation expense, net of capitalized amounts, for the periods shown.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Cost of sales
$
2.4

 
$
2.4

 
$
4.7

 
$
4.6

Research and development
9.2

 
8.2

 
17.7

 
16.7

Selling, general and administrative
18.1

 
15.0

 
32.3

 
28.9

Total share-based compensation expense included in net income (loss)
$
29.7

 
$
25.6

 
$
54.7

 
$
50.2


As of June 30, 2019 , unrecognized estimated compensation costs related to unvested restricted stock units, or RSUs, and performance stock units, or PSUs, totaled $161.7 million and is expected to be recognized through 2022 .
Restricted Stock Units
A summary of our RSU and PSU activity for the six months ended June 30, 2019 is as follows:
 
 
 
Weighted
 
 
 
 
 
Average
 
Aggregate
 
 
 
Grant Date
 
Intrinsic
(In millions, except weighted average grant date fair values)
Shares
 
Fair Value
 
Value
Nonvested at December 31, 2018
2.7

 
$
69.19

 
$
319.0

Granted
0.6

 
141.76