DexCom, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. DexCom develops and sells continuous glucose monitoring (CGM) systems for people with diabetes and healthcare providers.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $184.4 million | $142.3 million |
| Gross profit / margin | $118.9 million / 64% | $94.1 million / 66% |
| Operating expenses | $149.6 million | $134.5 million |
| Operating loss | $30.7 million | $40.4 million |
| Net loss | $24.2 million | $41.7 million |
| Diluted loss per share | $0.28 | $0.49 |
| Cash used in operating activities | $8.7 million | Cash provided: $0.3 million |
Revenue rose 29.6%, primarily on higher disposable sensor sales as the installed customer base grew, as well as durable-system sales. Sensors and durable systems each represented approximately 70% and 30% of revenue, respectively, in both periods. Gross margin declined two percentage points. Selling, general and administrative expense increased $18.4 million, chiefly from increased headcount, marketing and commercialization costs; research and development expense fell $3.3 million, primarily due to lower share-based compensation.
Operating cash flow was negative $8.7 million; capital expenditures were $15.3 million. Cash flow from operations less capital expenditures was therefore approximately negative $24.0 million. Investing activities used $15.4 million and financing activities provided $4.2 million. Cash, cash equivalents and restricted cash ended the quarter at $420.7 million.
Balance sheet and liquidity
- Cash, cash equivalents and marketable securities totaled $533.9 million; working capital was $604.2 million. Current assets were $729.3 million and current liabilities were $125.1 million.
- Total liabilities were $475.1 million. Convertible notes had $400.0 million principal outstanding and a $331.3 million net carrying amount; stated coupon is 0.75%, with maturity in 2022. The notes’ fair value was $415.7 million.
- No borrowings were outstanding under the $200 million revolving credit facility; $195.6 million remained available, net of letters of credit.
- Management said resources were expected to fund operations through at least March 31, 2019 in its liquidity discussion. The accounting note separately says resources are sufficient through at least May 2, 2019.
Material changes and notable items
- Net loss improved by $17.5 million year over year, while revenue increased $42.1 million. Higher revenue and lower research and development costs were partly offset by increased SG&A and a lower gross margin.
- Q1 2018 included $7.4 million of unrealized income from the Tandem Diabetes Care equity investment. Interest expense rose to $4.8 million, principally due to the convertible notes.
- DexCom adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no material cumulative adjustment and expects no material ongoing impact.
- Inventory included a $2.6 million charge for excess and obsolete receiver inventory. Share-based compensation expense was $24.6 million.
- The G6 system received FDA De Novo classification in March 2018. The filing identifies expansion of Mesa, Arizona manufacturing capacity as a priority; the facility was expected to begin operations in Q2 2018, with expanded capacity potentially not fully available until year-end.
Outlook, risks and contingencies
Management expects continuing operating losses as DexCom expands commercialization, research and development, manufacturing and corporate infrastructure. No quantified revenue, earnings or margin guidance is provided in the filing. Management said available liquidity, expected commercial cash contributions and the credit facility should cover anticipated needs for the period stated above, but noted that additional capital could be required and may not be available on acceptable terms.
- Key business risks include reimbursement and coverage constraints, competition, product acceptance, regulatory approvals, manufacturing scale-up and reliance on certain single-source suppliers. Management also cites quarterly seasonality, including lower first-quarter sales associated with insurance deductible resets and flexible spending accounts.
- Patent disputes include litigation involving WaveForm/AgaMatrix and a separate Arbmetrics claim. Outcomes and potential costs could not be assessed; no amounts were accrued for these suits as of March 31, 2018. DexCom also appealed an adverse non-infringement ruling in its own patent case.
- Purchase commitments totaled $81.2 million, due within one year. Operating lease obligations totaled $54.9 million.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth continues and the gross-margin decline reverses, including the effects of inventory charges and product mix.
- Cash burn, capital spending and the timing and cost of bringing the Mesa manufacturing facility to qualified, full capacity.
- Coverage and reimbursement progress for CGM products, particularly the G6, and reliance on major distributors.
- Potential cash, dilution and balance-sheet effects of the $400 million convertible notes, including conversion or repurchase conditions.
- Developments in patent litigation, product quality or regulatory matters, and the accuracy of management’s liquidity runway statements, which differ in date between sections of the filing.