DEXCOM INC 10-K

ITEM 9A - CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and timely communicated to management, including our Chief Executive Officer and Chief Financial Officer, recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures. Based on their evaluation as of December 31, 2020, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date for this purpose. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. As a result of the COVID-19 pandemic, certain employees began working remotely in March 2020. We have not identified any material changes in our internal control over financial reporting as a result of these changes to the working environment. We are continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls over financial reporting. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our management, with the participation of the Chief Executive and Chief Financial Officers, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria set forth by the 2013 Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, our management, with the participation of the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2020, our internal control over financial reporting is effective based on those criteria. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP an Independent Registered Public Accounting Firm, as stated in their report which is included herein. The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.01 and 31.02 to this report. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Limitation on Effectiveness of Controls It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other inherent limitations of control systems, we cannot guaranty that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 79 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of DexCom, Inc. Opinion on Internal Control over Financial Reporting We have audited DexCom, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, DexCom, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of DexCom, Inc. as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 11, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP San Diego, California February 11, 2021 80 ITEM 9B - OTHER INFORMATION None. PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information concerning our directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Proposal No. 1 – Election of Directors.” The information concerning our executive officers required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Executive Officers.” We have adopted a written code of ethics for financial employees that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and other employees of the finance department designated by our Chief Financial Officer. This code of ethics, titled the “Code of Conduct and Ethics for Chief Executive Officer and Senior Finance Personnel,” is publicly available on our Internet website at https://dexcom.gcs-web.com/corporate-governance. The information contained on our Internet website is not incorporated by reference into this Annual Report on Form 10-K. The information concerning the audit committee of the Board of Directors required by this Item is incorporated by reference to information set forth in the Proxy Statement. The information concerning material changes to the procedures by which stockholders may recommend nominees to the Board of Directors required by this Item is incorporated by reference to information set forth in the Proxy Statement. ITEM 11 - EXECUTIVE COMPENSATION The information required by this Item concerning executive compensation and our Compensation Committee is incorporated by reference to information set forth in the Proxy Statement under the heading “Executive Compensation.” ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference to information set forth in the Proxy Statement under the headings “Principal Stockholders and Stock Ownership by Management” and “Equity Compensation Plan Information.” ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item with respect to director independence is incorporated by reference to information set forth in the Proxy Statement. The information concerning certain relationships and related transactions required by the Item is incorporated by reference to the section in our Proxy Statement entitled “Certain Transactions.” ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information concerning principal accountant fees and services required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Ratification of Selection of Independent Registered Public Accounting Firm.” 81 PART IV ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Annual Report: 1. Financial Statements. The consolidated financial statements listed in Part II, Item 8 of this Annual Report. 2. Financial Statement Schedules. For the three fiscal years ended December 31, 2020, Schedule II – Valuation and Qualifying Accounts. Financial statement schedules not listed above have been omitted because information required to be set forth therein is not applicable, not required, or the information required by such schedules is shown in the consolidated financial statements or the notes thereto. 3. Exhibits. Exhibit Number Exhibit Description Incorporated by Reference Provided Herewith Form File No. Date of First Filing Exhibit Number 3.01 Registrant’s Restated Certificate of Incorporation. S-1/A 333-122454 March 3, 2005 3.03 3.02 Amendment No. 1 to Registrant’s Restated Certificate of Incorporation. DEF 14 A 000-51222 April 20, 2017 Appendix B 3.03 Registrant’s Amended and Restated Bylaws. 8-K 000-51222 September 9, 2020 3.1 4.01 Form of Specimen Certificate for Registrant’s common stock. S-1/A 333-122454 March 24, 2005 4.01 4.0 2 Indenture, dated as of November 30, 201 8 , between DexCom, Inc. and U.S. Bank National Association (including the form of 0.75% Convertible Senior Notes due 2023) 8-K 000-51222 December 3, 2018 4.1 4.03 Indenture, dated as of May 14, 2020, between DexCom, Inc. and U.S. Bank National Association (including the form of 0.25% Convertible Senior Notes due 2025) 8-K 000-51222 May 15, 2020 4.1 4.04 Description of Securities Registered Under Section 12 of the Exchange Act. X 10.01 Office Lease Agreement, dated March 31, 2006, between DexCom, Inc. and Kilroy Realty, L.P. 8-K 000-51222 April 7, 2006 99.01 10.02 Offer letter between DexCom, Inc. and Steven R. Pacelli dated April 10, 2006.* 8-K 000-51222 April 13, 2006 99.01 10.03 Form of Amended and Restated Executive Change of Control & Severance Agreement.* 10-K 000-51222 March 5, 2009 10.20 10.04 Non-Exclusive Distribution Agreement, between RGH Enterprises, Inc. and DexCom, Inc., dated April 30, 2008.** 10-Q 000-51222 August 3, 2009 10.23 10.05 Amended and Restated Development, Manufacturing, Licensing and Supply Agreement, between DSM PTG, Inc. and DexCom, Inc., dated February 19, 2010.** 10-K 000-51222 March 9, 2010 10.25 10.06 First Amendment to Office Lease between DexCom, Inc. and Kilroy Realty, L.P., dated August 18, 2010. 10-Q 000-51222 November 4, 2010 10.27 10.07 Amendment Number One to Non-Exclusive Distribution Agreement, between RGH Enterprises, Inc. and DexCom, Inc., dated March 29, 2011.** 10-Q/A 000-51222 July 1, 2011 10.26 82 Exhibit Number Exhibit Description Incorporated by Reference Provided Herewith Form File No. Date of First Filing Exhibit Number 10.08 Offer letter between DexCom, Inc. and Kevin Sayer dated May 3, 2011.* 10-Q 000-51222 August 3, 2011 10.28 10.09 Amendment Number Two to Non-Exclusive Distribution Agreement between RGH Enterprises, Inc. and DexCom, Inc., dated March 28, 2013.** 10-Q 000-51222 May 1, 2013 10.27 10.10 Amendment Number Three to Non-Exclusive Distribution Agreement between RGH Enterprises, Inc. and DexCom, Inc., dated December 4, 2013.** 10-K 000-51222 February 20, 2014 10.28 10.11 Non-Exclusive Distribution Agreement between Dex C om, Inc. and Diabetes Specialty Center, LLC dated October 12, 2009, as amended on September 30, 2010, October 11, 2011, November 14, 2012 and November 1, 2013.** 10-K 000-51222 February 20, 2014 10.29 10.12 Settlement and License Agreement by and among Abbott Diabetes Care, Inc. and DexCom, Inc., dated July 2, 2014. 10-Q 000-51222 August 6, 2014 10.31 10.13 Amendment No. 5 to Non-Exclusive Distribution Agreement between DexCom, Inc. and Diabetes Specialty Center, LLC, dated March 14, 2014. 10-Q 000-51222 August 6, 2014 10.32 10.14 Second Amendment to Office Lease between DexCom, Inc. and Kilroy Realty, L.P., dated October 1, 2014. 10-K 000-51222 February 25, 2015 10.32 10.15 2015 Employee Stock Purchase Plan DEF 14A 000-51222 April 13, 2015 Appendix A 10.16 Form of Subscription Agreement under 2015 Employee Stock Purchase Plan 8-K 000-51222 June 2, 2015 10.4 10.17 Sublease between DexCom, Inc. and Entropic Communications, LLC dated February 1, 2016. 10-Q 000-51222 April 27, 2016 10.36 10.18 Amended and Restated Non-Exclusive Distribution Agreement with Byram Healthcare dated February 1, 2016.** 10-Q 000-51222 April 27, 2016 10.37 10.19 Industrial Net Lease, Broadway dated April 28, 2016, by and between PRA/LB, L.L.C. and DexCom, Inc. 10-Q 000-51222 August 2, 2016 10.39 10.20 Standard Form of Agreement dated May 2, 2016, by and between DexCom, Inc. and Skanska USA Building Inc. 10-Q 000-51222 August 2, 2016 10.40 10.21 Amendment to Non-Exclusive Distribution Agreement dated April 30, 2016 by and between RGH Enterprises, Inc. d/b/a Cardinal Health at Home and DexCom, Inc. ** 10-Q 000-51222 August 2, 2016 10.41 10.22 Amendment No. 1 to Collaboration and License Agreement dated October 25, 2016 by and between DexCom, Inc. and Verily Life Sciences LLC (formerly Google Life Sciences LLC). 10-K 000-51222 February 28, 2017 10.42 10.23 Severance and Change in Control Plan. 8-K 000-51222 June 6, 2017 10.20 10.24 Form of Participation Agreement to the Severance and Change in Control Plan. 8-K 000-51222 June 6, 2017 10.30 83 Exhibit Number Exhibit Description Incorporated by Reference Provided Herewith Form File No. Date of First Filing Exhibit Number 10.25 First Amendment to Credit Agreement dated June 17, 2016 by and among DexCom, Inc., the Lenders, and JPMorgan Chase Bank, as Administrative Agent. 10-Q 000-51222 August 1, 2017 10.46 10.26 Standard Form of Agreement dated May 1, 2017, by and between DexCom, Inc. and Skanska USA Building Inc. 10-Q 000-51222 August 1, 2017 10.47 10.27 Offer Letter for Quentin S. Blackford dated July 28, 2017. * 8-K 000-51222 August 1, 2017 10.10 10.28 Form of Indemnity Agreement 10-Q 000-51222 August 1, 2017 10.43 10.29 Form of RSU Grant Agreement 2015 Plan Global Double Trigger 10-K 000-51222 February 27, 2018 10.51 10.30 Form of RSU Grant Agreement 2015 Plan Global General 10-K 000-51222 February 27, 2018 10.52 10.31 Amended and Restated Collaboration and License Agreement dated November 20, 2018 by and between DexCom, Inc., Verily Life Sciences LLC (an Alphabet Company) and Verily Ireland Limited.** 10-K 000-51222 February 21, 2019 10.60 10.32 Amended and Restated Credit Agreement dated December 19, 2018 by and among DexCom, Inc., Bank of America, Silicon Valley Bank and Union Bank, and JPMorgan Chase Bank, as Administrative Agent. 10-K 000-51222 February 21, 2019 10.61 10.33 Amended and Restated 2015 Equity Incentive Plan 8-K 000-51222 June 4, 2019 10.01 10.34 Executive Deferred Compensation Plan 8-K 000-51222 June 4, 2019 10.02 10.35 Form of RSU Grant Agreement 2015 Plan (Board Members - Annual Grant) 10-K 000-51222 February 13, 2020 10.36 10.36 Form of RSU Grant Agreement 2015 Plan (Board Members - Incoming Grant) 10-K 000-51222 February 13, 2020 10.37 10.37 Distribution Services Agreement dated November 7, 2015 between DexCom, Inc. and AmerisourceBergen Drug Corporation.**** 10-K 000-51222 February 13, 2020 10.38 10.38 Amendment to the Distribution Services Agreement between Dex C om Inc. and AmerisourceBergen Drug Corporation.**** 10-K 000-51222 February 13, 2020 10.39 10.39 Third Amendment to Office Lease between DexCom, Inc. and John Hancock Life Insurance Company, dated January 9, 2019.**** 10-K 000-51222 February 13, 2020 10.40 10.40 Fourth Amendment to Office Lease between DexCom, Inc. and Sequence Tech. Center CA LLC, dated September 9, 2019.**** 10-K 000-51222 February 13, 2020 10.41 10.41 Fifth Amendment to Office Lease between DexCom, Inc. and Sequence Tech. Center CA LLC, dated October 21, 2019. 10-K 000-51222 February 13, 2020 10.42 10.42 First Amendment to Amended and Restated Credit Agreement by and among DexCom, Inc., the Lenders, and JPMorgan Chase Bank as Administrative Agent, dated May 11, 2020 10-Q 000-51222 July 28, 2020 10.01 10.43 Form of Indemnity Agreement between Registrant and each of its directors and executive officers. X 84 Exhibit Number Exhibit Description Incorporated by Reference Provided Herewith Form File No. Date of First Filing Exhibit Number 10.44 2015 Employee Stock Purchase Plan, amended on December 13, 2019 X 10.45 Form of Subscription Agreement under 2015 Employee Stock Purchase Plan amended on December 13, 2019 X 10.46 Incentive Agreement between Dex C om, Inc. and Jeffrey Moy dated April 28, 2020 X 10.47 Transition and Consulting Agreement between Dex C om, Inc. and Richard B. Doubleday dated December 10, 2020 X 21.01 List of Subsidiaries X 23.01 Consent of Independent Registered Public Accounting Firm X 24.01 Power of Attorney (see signature page of this Form 10-K) X 31.01 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). X 31.02 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a). X 32.01 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*** X 32.02 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*** X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X — Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101) X * Represents a management contract or compensatory plan. ** Confidential treatment has been requested for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. Such portions are omitted from this filing and were filed separately with the Securities and Exchange Commission. *** This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Dexcom specifically incorporates it by reference. **** Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. 85 ITEM 16 - FORM 10-K SUMMARY None. 86 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DEXCOM, INC. (Registrant) Dated: February 11, 2021 By: /S/ QUENTIN S. BLACKFORD Quentin S. Blackford, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin Sayer and Quentin Blackford, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /S/ KEVIN R. SAYER Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) February 11, 2021 Kevin R. Sayer /S/ QUENTIN S. BLACKFORD Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) February 11, 2021 Quentin S. Blackford /S/ MARK FOLETTA Lead Independent Director February 11, 2021 Mark Foletta /S/ STEVE ALTMAN Director February 11, 2021 Steve Altman /S/ NICHOLAS AUGUSTINOS Director February 11, 2021 Nicholas Augustinos /S/ RICHARD COLLINS Director February 11, 2021 Richard Collins /S/ KAREN DAHUT Director February 11, 2021 Karen Dahut /S/ BRIDGETTE HELLER Director February 11, 2021 Bridgette Heller /S/ BARBARA KAHN Director February 11, 2021 Barbara Kahn /S/ KYLE MALADY Director February 11, 2021 Kyle Malady /S/ JAY SKYLER Director February 11, 2021 Jay Skyler, M.D. /S/ ERIC TOPOL Director February 11, 2021 Eric Topol, M.D. 87 DEXCOM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheets F- 5 Consolidated Statements of Operations F- 6 Consolidated Statements of Comprehensive Income (Loss) F- 7 Consolidated Statements of Stockholders’ Equity F- 8 Consolidated Statements of Cash Flows F- 9 Notes to Consolidated Financial Statements F- 11 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of DexCom, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of DexCom, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 11, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Estimation of transaction price and variable consideration for revenue recognition Description of the Matter As discussed in Note 1 of the consolidated financial statements, the Company recognizes revenue based on a transaction price which reflects the net consideration to which the Company expects to be entitled. The transaction price is typically based on the contracted rates less an estimate of claim denials and historical reimbursement experience by payor, which include current and future expectations regarding reimbursement rates and payor mix. The Company estimates reductions for rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data. F-2 Auditing management’s determination of transaction price including variable consideration involved a high degree of subjectivity in evaluating management’s estimates. In determining transaction price, management develops estimates based on the contracted rates less an estimate of claim denials and historical reimbursement experience by payor. In estimating rebates, management applies contracted rates to estimates of products sold subject to rebate, known market events or trends and channel inventory data. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s processes to determine transaction price and rebates, including the underlying assumptions. Our audit procedures also included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in management’s calculations. For transaction price, this included testing management’s estimate of the claim denials and historical reimbursement experience through a combination of underlying data validation by inspection of source documents and independent recalculation of management’s analysis. For rebates, this included testing contractual rates, management’s estimates of products sold subject to rebate, and inventory held by third parties at the end of the period, through a combination of underlying data validation by inspection of source documents, agreement to underlying contracts, review for consistency against historical data, and trending of inventory held at third parties versus inventory sold into the channel. In addition, we inspected the results of the Company’s retrospective review analysis of rebates claimed, evaluated the estimates made based on historical experience and performed sensitivity analyses over the Company's significant assumptions. Valuation allowances on deferred tax assets Description of the Matter As discussed in Note 8, significant judgment is required to evaluate the need for a valuation allowance against deferred tax assets. The Company reviews all available positive and negative evidence, including projections of pre-tax book income, earnings history, reliability of forecasting, and reversal of temporary differences. A valuation allowance is established when it is more likely than not that some or all of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon future earnings. Prior to 2020, due to the Company’s U.S. operating losses and earnings volatility in previous years, which did not allow sustainable profitability, the Company had established and maintained a full valuation allowance on its deferred tax assets. In 2020, the Company achieved three years of cumulative income. The Company analyzed both positive and negative evidence, and as a result, released its valuation allowance of $287.2 million on its deferred tax assets. The Company maintains a valuation allowance of $55.5 million against its California research and development tax credits and certain foreign intangible assets, as it is more likely than not that those deferred tax assets will not be realized. Auditing management's analysis of the realizability of the deferred tax assets was complex and highly judgmental because the assessment process involves significant judgment and subjective evaluation of assumptions that may be affected by future operations of the Company, market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to assess the realizability of the deferred tax assets and measurement of the valuation allowances, including controls over management’s scheduling of the future reversal of existing taxable temporary differences, identification and use of available tax planning strategies and projections of future taxable income. F-3 Among other audit procedures performed, we tested the reversal of the existing taxable temporary differences, including assessment of the completeness and accuracy of related schedules. We evaluated the assumptions used by the Company to develop projections of future taxable income by jurisdiction. For example, we compared the projections of future taxable income with the actual results from prior periods, as well as management’s consideration of current trends. We also considered the relevant tax laws and regulations in the various jurisdictions, including considering whether the estimated future sources of taxable income were of the appropriate character to utilize the deferred tax assets. We also considered the accuracy of management’s historical projections and performed sensitivity analyses of the significant assumptions to evaluate the changes in realizability of deferred tax assets that would result from changes in the assumptions. In addition, we evaluated the Company’s income tax disclosures related to the matters described above. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2000 San Diego, California February 11, 2021 F-4 DexCom, Inc. Consolidated Balance Sheets December 31, (In millions, except par value data) 2020 2019 Assets Current assets: Cash and cash equivalents $ 817.6 $ 446.2 Short-term marketable securities 1,890.1 1,087.1 Accounts receivable, net 428.5 286.3 Inventory 234.7 119.8 Prepaid and other current assets 53.9 30.0 Total current assets 3,424.8 1,969.4 Property and equipment, net 515.3 321.3 Operating lease right-of-use assets 93.3 71.5 Goodwill 19.3 18.6 Deferred tax assets 216.4 — Other assets 21.4 14.2 Total assets $ 4,290.5 $ 2,395.0 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued liabilities $ 481.1 $ 256.4 Accrued payroll and related expenses 114.3 88.5 Short-term operating lease liabilities 16.5 13.6 Deferred revenue 2.2 1.7 Total current liabilities 614.1 360.2 Long-term senior convertible notes 1,667.2 1,059.7 Long-term operating lease liabilities 101.8 72.4 Other long-term liabilities 80.9 20.1 Total liabilities 2,464.0 1,512.4 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.001 par value, 5.0 million shares authorized; no shares issued and outstanding at December 31, 2020 and December 31, 2019 — — Common stock, $ 0.001 par value, 200.0 million shares authorized; 96.9 million and 96.1 million shares issued and outstanding, respectively, at December 31, 2020; and 92.4 million and 91.6 million shares issued and outstanding, respectively, at December 31, 2019 0.1 0.1 Additional paid-in capital 2,125.3 1,675.9 Accumulated other comprehensive income 3.2 2.3 Accumulated deficit ( 202.1 ) ( 695.7 ) Treasury stock, at cost; 0.8 million shares at December 31, 2020 and December 31, 2019 ( 100.0 ) ( 100.0 ) Total stockholders’ equity 1,826.5 882.6 Total liabilities and stockholders’ equity $ 4,290.5 $ 2,395.0 See accompanying notes F-5 DexCom, Inc. Consolidated Statements of Operations Twelve Months Ended December 31, (In millions, except per share data) 2020 2019 2018 Revenue $ 1,926.7 $ 1,476.0 $ 1,031.6 Cost of sales 646.6 544.5 367.7 Gross profit 1,280.1 931.5 663.9 Operating expenses Research and development 359.9 273.5 199.7 Collaborative research and development fee — — 217.7 Selling, general and administrative 620.7 515.7 432.8 Total operating expenses 980.6 789.2 850.2 Operating income (loss) 299.5 142.3 ( 186.3 ) Interest expense ( 84.7 ) ( 60.3 ) ( 22.7 ) Loss on extinguishment of debt ( 5.9 ) — — Income (loss) from equity investments — ( 4.2 ) 80.1 Interest and other income, net 16.1 26.4 2.4 Income (loss) before income taxes 225.0 104.2 ( 126.5 ) Income tax expense (benefit) ( 268.6 ) 3.1 0.6 Net income (loss) $ 493.6 $ 101.1 $ ( 127.1 ) Basic net income (loss) per share $ 5.23 $ 1.11 $ ( 1.44 ) Shares used to compute basic net income (loss) per share 94.4 91.1 88.2 Diluted net income (loss) per share $ 5.06 $ 1.10 $ ( 1.44 ) Shares used to compute diluted net income (loss) per share 97.5 92.3 88.2 See accompanying notes F-6 DexCom, Inc. Consolidated Statements of Comprehensive Income (Loss) Twelve Months Ended December 31, (In millions) 2020 2019 2018 Net income (loss) $ 493.6 $ 101.1 $ ( 127.1 ) Other comprehensive income, net of tax: Foreign currency translation gain 1.1 0.4 4.0 Unrealized gain (loss) on marketable debt securities ( 0.2 ) 0.4 0.1 Total other comprehensive income, net of tax 0.9 0.8 4.1 Comprehensive income (loss) $ 494.5 $ 101.9 $ ( 123.0 ) See accompanying notes F-7 DexCom, Inc. Consolidated Statements of Stockholders’ Equity (In millions) 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 1.8 — 1.9 — — — 1.9 Issuance of common stock for Employee Stock Purchase Plan 0.2 — 8.9 — — — 8.9 Issuance of common stock for collaborative research and development fee 1.8 — 217.7 — — — 217.7 Convertible note hedge — — ( 218.9 ) — — — ( 218.9 ) Equity component of convertible 2023 Note issuance, net of issuance costs — — 171.6 — — — 171.6 Purchases of treasury stock ( 0.8 ) — — — — ( 100.0 ) ( 100.0 ) Sale of warrants — — 183.8 — — — 183.8 Share-based compensation expense — — 101.9 — — — 101.9 Net loss — — — — ( 127.1 ) — ( 127.1 ) Other comprehensive income, net of tax — — — 4.1 — — 4.1 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 6) — — — — 2.1 — 2.1 Issuance of common stock under equity incentive plans 1.4 — 0.3 — — — 0.3 Issuance of common stock for Employee Stock Purchase Plan 0.2 — 11.6 — — — 11.6 Realization of tax benefit related to 2023 Note Hedge — — 0.7 — — — 0.7 Share-based compensation expense — — 102.7 — — — 102.7 Net income — — — — 101.1 — 101.1 Other comprehensive income, net of tax — — — 0.8 — — 0.8 Balance at December 31, 2019 91.6 0.1 1,675.9 2.3 ( 695.7 ) ( 100.0 ) 882.6 Issuance of common stock under equity incentive plans 1.1 — 0.3 — — — 0.3 Issuance of common stock for Employee Stock Purchase Plan — — 15.0 — — — 15.0 Equity component of 2025 Notes issuance, net of issuance costs — — 289.4 — — — 289.4 Tax benefit related to Senior Convertible Notes — — ( 62.5 ) — — — ( 62.5 ) Repurchase and conversions of 2022 Notes 3.4 — 87.8 — — — 87.8 Share-based compensation expense — — 119.4 — — — 119.4 Net income — — — — 493.6 — 493.6 Other comprehensive income, net of tax — — — 0.9 — — 0.9 Balance at December 31, 2020 96.1 $ 0.1 $ 2,125.3 $ 3.2 $ ( 202.1 ) $ ( 100.0 ) $ 1,826.5 See accompanying notes F-8 DexCom, Inc. Consolidated Statements of Cash Flows Twelve Months Ended December 31, (In millions) 2020 2019 2018 Operating activities Net income (loss) $ 493.6 $ 101.1 $ ( 127.1 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 67.1 48.7 29.1 Share-based compensation 119.4 102.7 101.9 Loss on extinguishment of debt 5.9 — — Non-cash interest expense 74.0 49.6 17.9 Non-cash collaborative research and development fee through issuance of common stock — — 217.7 Unrealized gain on equity investment — — ( 36.0 ) Realized (gain) loss on equity investment — 4.2 ( 44.1 ) Deferred income taxes (including benefit from valuation allowance release) ( 277.3 ) 0.2 ( 2.2 ) Other non-cash income and expenses 13.7 1.9 6.9 Changes in operating assets and liabilities: Accounts receivable, net ( 142.3 ) ( 60.0 ) ( 93.2 ) Inventory ( 114.5 ) ( 49.1 ) ( 25.5 ) Prepaid and other assets ( 2.4 ) ( 7.2 ) ( 3.0 ) Operating lease right-of-use assets and liabilities, net ( 0.8 ) ( 2.4 ) — Accounts payable and accrued liabilities 194.5 109.0 56.2 Accrued payroll and related expenses 26.1 16.0 23.8 Deferred revenue and other liabilities 18.6 ( 0.2 ) 0.8 Net cash provided by operating activities 475.6 314.5 123.2 Investing activities Purchase of marketable securities ( 3,058.2 ) ( 2,030.4 ) ( 452.5 ) Proceeds from sale and maturity of marketable securities 2,250.5 1,196.4 392.1 Purchases of property and equipment ( 199.0 ) ( 180.0 ) ( 67.1 ) Acquisitions, net of cash acquired — — ( 11.3 ) Other investing activities ( 11.3 ) ( 1.2 ) ( 1.0 ) Net cash used in investing activities ( 1,018.0 ) ( 1,015.2 ) ( 139.8 ) Financing activities Net proceeds from issuance of common stock 15.3 11.9 10.8 Purchases of treasury stock — — ( 100.0 ) Proceeds from issuance of convertible notes, net of issuance costs 1,188.8 — 836.6 Repurchase of convertible notes ( 282.6 ) — — Proceeds from sale of warrants — — 183.8 Purchase of convertible note hedge — — ( 218.9 ) Other financing activities ( 9.4 ) ( 1.2 ) ( 1.9 ) Net cash provided by financing activities 912.1 10.7 710.4 Effect of exchange rate changes on cash, cash equivalents and restricted cash 2.1 ( 0.7 ) 1.8 Increase (decrease) in cash, cash equivalents and restricted cash 371.8 ( 690.7 ) 695.6 Cash, cash equivalents and restricted cash, beginning of period 446.4 1,137.1 441.5 Cash, cash equivalents and restricted cash, end of period $ 818.2 $ 446.4 $ 1,137.1 Reconciliation of cash, cash equivalents and restricted cash, end of period: Cash and cash equivalents $ 817.6 $ 446.2 $ 1,137.0 Restricted cash 0.6 0.2 0.1 Total cash, cash equivalents and restricted cash $ 818.2 $ 446.4 $ 1,137.1 F-9 Twelve Months Ended December 31, Supplemental disclosure of non-cash investing and financing transactions: Common stock issued for repurchase and conversions of senior convertible notes $ 1,350.9 $ — $ — Acquisition of property and equipment included in accounts payable and accrued liabilities $ 35.3 $ 14.2 $ 10.8 Supplemental cash flow information: Cash paid during the year for interest $ 10.6 $ 10.4 $ 3.6 Cash paid during the year for income taxes $ 3.6 $ 4.8 $ 2.3 See accompanying notes F-10 DexCom, Inc. Notes to Consolidated Financial Statements December 31, 2020 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 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. The functional currencies of our international subsidiaries are generally the local currencies. We translate the financial statements of our foreign subsidiaries 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 (loss) and in accumulated other comprehensive income in the equity section of our consolidated balance sheets. Gains and losses resulting from certain intercompany transactions as well as transactions with customers and vendors that are denominated in currencies other than the functional currency of each entity give rise to foreign exchange gains or losses that we record in interest and other income, net in our consolidated statements of operations . Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles, or 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 pharmacy rebates, transaction price, net accounts receivable, excess or obsolete inventories and the valuation of inventory, and accruals for litigation contingencies. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates. Fair Value Measurements The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows: Level 1—Unadjusted quoted prices that are available in active markets for identical assets or liabilities. Level 2—Inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly, through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair values are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques and significant judgment or estimation. We carry our marketable securities at fair value. We carry our other financial instruments, such as cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, at cost, which approximates the related fair values due to the short-term maturities of these instruments. For more information see Note 3, “Fair Value Measurements.” F-11 Cash and Cash Equivalents We consider highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents. Marketable Securities We have classified our marketable securities with remaining maturity at purchase of more than three months and remaining maturities of one year or less as short-term marketable securities. We have also classified marketable securities with remaining maturities of greater than one year as short-term marketable securities based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. We calculate realized gains or losses on our marketable securities using the specific identification method. We carry our marketable debt securities at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity in our consolidated balance sheets and included in comprehensive income (loss). Realized gains and losses on marketable debt securities are included in interest and other income, net in our consolidated statements of operations. We carry our marketable equity securities at fair value with realized and unrealized gains and losses reported in income on equity investments in our consolidated statements of operations. We invest in various types of debt securities, including debt securities in government-sponsored entities, corporate debt securities, U.S. Treasury securities and commercial paper. We do not generally 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. See Note 3, “Fair Value Measurements” and Note 4, “Balance Sheet Details – Short-Term Marketable Securities ” for more information on our marketable debt securities and our marketable equity securities. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are generally recorded at the invoiced amount for distributors and at net realizable value for direct customers, which is determined using estimates of claim denials and historical reimbursement experience without regard to aging category. Accounts receivable are not interest bearing. We evaluate the creditworthiness of significant customers based on historical trends, the financial condition of our customers, and external market factors. We generally do not require collateral from our customers. We maintain an allowance for doubtful accounts for potential credit losses. Uncollectable accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a customer account is uncollectable. Generally, receivable balances greater than one year past due are deemed uncollectable. 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 marketable 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. The following table sets forth the percentages of total revenue or gross accounts receivable for customers that represent 10% or more of the respective amounts for the periods shown: Revenue Gross Accounts Receivable Twelve Months Ended December 31, As of December 31, 2020 2019 2018 2020 2019 Distributor A 23 % 17 % 15 % 19 % 21 % Distributor B 11 % 12 % 12 % 10 % * Distributor C 18 % 10 % * 12 % * Distributor D 11 % * * * * * Less than 10% F-12 Inventory Inventory is valued at the lower of cost or net realizable value on a part-by-part basis that approximates first in, first out. We record adjustments to inventory for potentially excess, obsolete or scrapped goods in order to state inventory at net realizable value. Factors influencing these adjustments include inventories on hand and on order compared to estimated future usage and sales for existing and new products, as well as judgments regarding quality control testing data and assumptions about the likelihood of scrap and obsolescence. Once written down the adjustments are considered permanent and are not reversed until the related inventory is sold or disposed of. Our products require customized products and components that currently are available from a limited number of sources. We purchase certain components and materials from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. We capitalize additions and improvements and expense maintenance and repairs as incurred. We calculate depreciation using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are generally three years for computer software and hardware, four to fifteen years for machinery and equipment, and five years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the remaining lease term. Buildings are amortized over the shorter of the ownership of the building or forty years . We include the amortization of assets that are recorded under finance leases in depreciation expense. On retirement or disposition, the asset cost and related accumulated depreciation are removed from our consolidated balance sheets and any gain or loss is recognized in our consolidated statements of operations. We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate the recoverability of the asset by comparing the carrying amount to the future undiscounted cash flows that we expect the asset to generate. We estimate the fair value of the asset based on the present value of future cash flows for those assets. If the carrying value of an asset exceeds its estimated fair value, we would record an impairment loss equal to the difference. Goodwill We record goodwill when the fair value of consideration transferred in a business combination exceeds the fair value of the identifiable assets acquired and liabilities assumed. Goodwill and other intangible assets that have indefinite useful lives are not amortized, but we test them annually for impairment in the fourth quarter of our fiscal year and whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than the carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. We perform our goodwill impairment analysis at the reporting unit level, which aligns with Dexcom’s reporting structure and the availability of discrete financial information. We perform the first step of our annual impairment analysis by either comparing a reporting unit’s estimated fair value to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment. We may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and we do not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions for these projections include revenue growth, future gross margin and operating margin growth, and weighted cost of capital and terminal growth rates. The revenue and margin growth are based on increased sales of new and existing products as we maintain investments in research and development. Additional assumed value creators may include increased efficiencies from capital spending. The resulting cash flows are discounted using a weighted average cost of capital. Operating mechanisms and requirements to ensure that growth and efficiency assumptions will ultimately be realized are also considered in the evaluation, including the timing and probability of regulatory approvals for our products to be commercialized. We also consider Dexcom’s market capitalization as a part of our analysis. If the estimated fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that unit, goodwill is not impaired and no further analysis is required. If the carrying value of the net assets assigned to a reporting unit exceeds the estimated fair value of the unit, we perform the second step of the impairment test. In this step we allocate the fair value of the F-13 reporting unit calculated in step one to all of the assets and liabilities of that unit, as if we had just acquired the reporting unit in a business combination. The excess of the fair value of the reporting unit over the total amount allocated to the assets and liabilities represents the implied fair value of goodwill. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, we would record an impairment loss equal to the difference. We recorded no goodwill impairment charges for the twelve months ended December 31, 2020, 2019 or 2018. The change in goodwill for the twelve months ended December 31, 2020 and December 31, 2019 consisted of translation adjustments on our foreign currency denominated goodwill. The change in goodwill for the twelve months ended December 31, 2018 consisted of goodwill we recorded for acquisitions that were not significant, individually or in the aggregate, and translation adjustments on our foreign currency denominated goodwill. Intangible Assets and Other Long-Lived Assets Intangible assets are included in other assets in our consolidated balance sheets. We amortize intangible assets with a finite life, such as acquired technology, customer relationships, trade names and trademarks, on a straight-line basis over their estimated useful lives, which range from two to seven years . We review intangible assets that have finite lives and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate the fair value of the asset based on the present value of future cash flows for those assets. If the carrying value of an asset exceeds its estimated fair value, we would record an impairment loss equal to the difference. We recorded no intangible asset impairment charges for the twelve months ended December 31, 2020, 2019 or 2018. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Significant judgment is required to evaluate the need for a valuation allowance against deferred tax assets. We review all available positive and negative evidence, including projections of pre-tax book income, earnings history, reliability of forecasting, and reversal of temporary differences. A valuation allowance is established when it is more likely than not that some or all of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon future earnings in applicable tax jurisdictions. Prior to 2020, due to our US operating losses and earnings volatility in previous years, which did not allow sustainable profitability, we had established and maintained a full valuation allowance on our deferred tax assets. In 2020, we achieved three years cumulative income and expect to continue that profitability in future years. We analyzed both positive and negative evidence, and as a result released our valuation allowance on our deferred tax assets. We maintain the valuation allowance on our California research and development tax credits and certain foreign intangible assets, as it is more likely than not that those deferred tax assets will not be realized. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We file federal and state income tax returns in the United States and income tax returns in various other foreign jurisdictions with varying statutes of limitations. Due to net operating losses incurred, our income tax returns from inception to date are subject to examination by taxing authorities. We recognize interest expense and penalties related to income tax matters, including unrecognized tax benefits, as a component of income tax expense. Warranty Accrual Estimated warranty costs associated with a product are recorded at the time revenue is recognized. We estimate future warranty costs by analyzing historical warranty experience for the timing and amount of returned product, and expectations for future warranty activity based on changes and improvements to the product or process that are in place or will be in place in the future. We evaluate these estimates on at least a quarterly basis to determine the continued appropriateness of our assumptions. F-14 Loss Contingencies If the potential loss from a claim or legal proceeding is considered probable and the amount can be reasonably estimated, we record a liability and an expense for the estimated loss and disclose it in our financial statements if it is significant. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. Significant judgment is required in the determination of whether a potential loss is probable, reasonably possible, or remote as well as in the determination of whether a potential exposure is reasonably estimable. Comprehensive Income (Loss) Comprehensive income (loss) consists of two elements, net income (loss) and other comprehensive income. We report all components of comprehensive income (loss), including net income (loss), in our financial statements in the period in which they are recognized. Total comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. We report net income (loss) and the components of other comprehensive income, including foreign currency translation adjustments and unrealized gains and losses on marketable securities, net of their related tax effect to arrive at total comprehensive income (loss). Revenue Recognition We generate our revenue from the sale of our reusable transmitter and receiver, collectively referred to as Reusable Hardware, and disposable sensors. We refer to Reusable Hardware and disposable sensors in this section as Components. We generally recognize revenue when control is transferred to our customers in an amount that reflects the net consideration to which we expect to be entitled. In determining how revenue should be recognized, a five-step process is used which includes identifying performance obligations in the contract, determining whether the performance obligations are separate, allocating the transaction price to each separate performance obligation, estimating the amount of variable consideration to include in the transaction price and determining the timing of revenue recognition for separate performance obligations. Policy Elections and 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. We also provide free-of-charge software, mobile applications and updates for our Dexcom Share ® remote monitoring system. The standalone selling prices of our free-of-charge software, mobile applications and updates are estimated 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 the contracted rates less an estimate of claim denials and historical reimbursement experience by payor, which include current and future expectations regarding reimbursement rates and payor mix. Variable Consideration We include an estimate of variable consideration in the calculation of the transaction price at the time of sale, when control of the Components transfers to the customer. Variable consideration includes but is not limited to rebates, chargebacks, consideration payable to customers such as specialty distributor and wholesaler fees, product returns provision, prompt payment discounts, and various other promotional or incentive arrangements. We classify our provisions related to variable consideration F-15 as a reduction of accounts receivable when we are not required to make a payment or as a liability when we are required to make a payment. Rebates We are subject to rebates on pricing programs with managed care organizations, such as pharmacy benefit managers, governmental and third-party commercial payors, primarily in the U.S. We estimate provisions for rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data. Chargebacks We participate in chargeback programs, primarily with government entities in the U.S., under which pricing on products below negotiated list prices is provided to participating entities and equal to the difference between their acquisition cost and the lower negotiated price. We estimate provisions for chargebacks primarily based on historical experience on a product and program basis, current contract prices under the chargeback programs and channel inventory data. Consideration Payable to the Customer We pay administrative and service fees to certain of our distributors based on a fixed percentage of the product price. These fees are not in exchange for a distinct good or service and therefore are recognized as a reduction of the transaction price. We accrue for these fees based on actual net sales and contractual fee rates negotiated with the customer. Product Returns 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. We generally provide a “ 30 -day money back guarantee” program whereby first-time end-user customers may return Reusable Hardware. We estimate our product returns provision principally based on historical experience by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Additionally, we consider other specific factors such as estimated shelf life of inventory in the distribution channel and changes to customer terms. Prompt Payment Discounts We provide customers with prompt payment discounts which may result in adjustments to the price that is invoiced for the product transferred, in the case that payments are made within a defined period. We estimate prompt payment discount accruals based on actual net sales and contractual discount rates. Various Other Promotional or Incentive Arrangements Other promotional or incentive arrangements are periodically offered to customers, including but not limited to co-payment assistance we provide to patients with commercial insurance, promotional programs related to the launch of products or other targeted promotions. We record a provision for the incentive earned based on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. Revenue Recognition The timing of revenue recognition is based on the satisfaction of performance obligations. Substantially all of the performance obligations associated with our Components are satisfied at a point in time, which typically occurs at shipment of our products. 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 sales transactions, control transfers at delivery of the product to the customer. 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 related Reusable Hardware component. Our sales of Components include an assurance-type warranty. 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 December 31, 2020 included unbilled accounts receivable of $ 10.4 million. Unbilled accounts receivable consists 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. F-16 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 12 months of the initial contract date. The deferred revenue balances related to performance obligations that will be satisfied after 12 months was $ 8.2 million as of December 31, 2020 and $ 2.1 million as of December 31, 2019. 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. 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. Deferred cost of sales are included in prepaid and other current assets in our consolidated 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 consolidated statements of operations. Product Shipment Costs We record the amounts we charge our customers for the shipping and handling of our products in revenue and we record the related costs as cost of sales in our statements of operations. Research and Development We expense costs of research and development as we incur them. Our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology, clinical trials, regulatory expenses, quality assurance programs, materials and products for clinical trials. Research and development expenses primarily consist of employee compensation, including salary, fringe benefits, share-based compensation, and temporary employee expenses. We also incur significant expenses to operate our clinical trials that include clinical site reimbursement, clinical trial product, and associated travel expenses. Our research and development expenses also include fees for design services, contractors, and development materials. Our CGM systems include certain software that we develop. We expense software development costs as we incur them until technological feasibility has been established, at which time we capitalize development costs until the product is available for general release to customers. To date, our software has been available for general release concurrent with the establishment of technological feasibility and, accordingly, we have not capitalized any development costs. Advertising Costs We expense costs to produce advertising as we incur them whereas costs to communicate advertising are expensed when the advertising is first run. Advertising costs are included in selling, general and administrative expenses. Advertising expense was $ 76.5 million, $ 33.1 million and $ 24.0 million for the twelve months ended December 31, 2020, 2019 and 2018, respectively. Leases We determine if an arrangement is a lease at inception. Lease right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in most of our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in similar economic environments. The operating lease right-of-use asset also includes any lease payments made and excludes lease incentives. We have lease agreements with lease and non-lease components, which are generally accounted for separately. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payments that do not depend on a rate or index, payments associated with non-lease components, and costs related to leases with terms of less than 12 months are expensed as incurred. F-17 Share-Based Compensation Share-based compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized straight-line over the requisite service period of the individual grants, which typically equals the vesting period. We value time-based Restricted Stock Units or RSUs at the date of grant using the intrinsic value method. Certain RSUs granted to senior management vest based on the achievement of pre-established performance or market goals. We estimate the fair value of performance/market-based RSUs at the date of grant using the intrinsic value method and the probability that the specified performance criteria will be met. We update our assessment of the probability that the specified performance criteria will be achieved each quarter and adjust our estimate of the fair value of the performance-based RSUs if necessary. The Monte Carlo methodology that we use to estimate the fair value of market-based RSUs at the date of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of the market-based RSUs at the date of grant must be recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria. If any of the assumptions used change significantly, share-based compensation expense may differ materially from what we have recorded in the current period. We account for forfeitures as they occur by reversing any share-based compensation expense related to awards that will not vest. 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. Potentially dilutive common shares consist of shares issuable from stock options, restricted stock units, warrants, and our senior convertible notes. Potentially dilutive common shares issuable upon vesting of stock options and restricted stock units 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. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods shown. Twelve Months Ended December 31, (In millions) 2020 2019 2018 Net income (loss) $ 493.6 $ 101.1 $ ( 127.1 ) Net income (loss) per common share Basic $ 5.23 $ 1.11 $ ( 1.44 ) Diluted $ 5.06 $ 1.10 $ ( 1.44 ) Basic weighted average shares outstanding 94.4 91.1 88.2 Dilutive potential common stock outstanding: Stock options and employee stock purchase plan — — — Restricted stock units 1.0 1.2 — Warrants 2.1 — — Senior convertible notes — — — Diluted weighted average shares outstanding 97.5 92.3 88.2 Outstanding anti-dilutive securities not included in the diluted net income (loss) per share attributable to common stockholders calculations were as follows: F-18 Twelve Months Ended December 31, (In millions) 2020 2019 2018 Stock options — — 0.1 Restricted stock units — 0.2 2.7 Warrants — 5.2 5.2 Senior convertible notes 7.2 9.2 9.2 Total 7.2 14.6 17.2 Recent Accounting Guidance Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments , which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. Our adoption of ASU 2016-13 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated financial statements. In addition, the outbreak of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”), has not had a significant impact on our expected credit losses or our consolidated financial statements during 2020. We are continuing to monitor the impact of COVID-19 on expected credit losses. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04) . 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 2017-04 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. Our adoption of ASU 2017-04 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated 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. Our adoption of ASU 2018-13 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated 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 2018-15) . 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 2018-15 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 adopted the new standard on January 1, 2020 on a prospective basis. Our adoption of ASU 2018-15 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, 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 consolidated financial statements. F-19 In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) . This new guidance is intended to reduce the complexity of accounting for convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments. Entities may adopt ASU 2020-06 using either a partial retrospective or fully retrospective method of transition. This ASU is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact that this guidance will have on our consolidated financial statements. 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 have made upfront and incentive payments and we will make potential future milestone payments upon the achievement of certain goals. In the fourth quarter of 2018, we made an initial payment of $ 250.0 million through the issuance of 1,840,943 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 amount of the charge was based on our closing stock price of $ 118.28 per share on December 28, 2018, the date on which we obtained the necessary regulatory approvals and the transaction closed. During 2020 we made no incentive payments, while in 2019 we made incentive payments 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. Additional milestone payments of up to a total of $ 275.0 million may become due and payable by us upon the achievement of future development, product regulatory approval and revenue milestones. These payments may be paid in cash or shares of our common stock, at our election. If we elect to make all $ 275.0 million of these payments in shares, we will issue a total of 2,025,036 shares of our common stock, based on the volume weighted average trading price during the 15 consecutive days ending on the date of the Restated Collaboration Agreement. Alternatively, if we elect to make all $ 275.0 million of these payments in cash, any such cash payment would be equal to the number of shares that would otherwise be issued for the given milestone payment multiplied by the value of our stock on the date the relevant milestone is achieved, adjusted for stock splits, dividends, and the like. 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 revenue 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. 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. F-20 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 December 31, 2020, classified in accordance with the fair value hierarchy: Fair Value Measurements Using (In millions) Level 1 Level 2 Level 3 Total Cash equivalents $ 491.5 $ 150.0 $ — $ 641.5 Debt securities, available for sale: U.S. government agencies — 1,570.4 — 1,570.4 Commercial paper — 258.8 — 258.8 Corporate debt — 60.9 — 60.9 Total debt securities, available for sale — 1,890.1 — 1,890.1 Other assets (1) 3.4 — — 3.4 Total assets measured at fair value on a recurring basis $ 494.9 $ 2,040.1 $ — $ 2,535.0 (1) Includes assets which are held pursuant to a deferred compensation plan for senior management, which consist mainly of mutual funds. The following table summarizes financial assets that we measured at fair value on a recurring basis as of December 31, 2019, classified in accordance with the fair value hierarchy: Fair Value Measurements Using (In millions) Level 1 Level 2 Level 3 Total Cash equivalents $ 110.1 $ 144.9 $ — $ 255.0 Debt securities, available for sale: U.S. government agencies — 676.0 — 676.0 Commercial paper — 248.2 — 248.2 Corporate debt — 162.9 — 162.9 Total debt securities, available for sale — 1,087.1 — 1,087.1 Other assets (1) 0.7 — — 0.7 Total assets measured at fair value on a recurring basis $ 110.8 $ 1,232.0 $ — $ 1,342.8 (1) Includes assets which are held pursuant to a deferred compensation plan for our executives, which consist mainly of mutual funds. There were no transfers between Level 1 and Level 2 securities during the years ended December 31, 2020 and 2019. There were no transfers into or out of Level 3 securities during the years ended December 31, 2020 and 2019. F-21 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 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 often 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. Fair Value of Senior Convertible Notes The fair value, based on trading prices (Level 1), of our senior convertible notes were as follows as of the dates indicated: Fair Value Measurements Using Level 1 (In millions) December 31, 2020 December 31, 2019 Senior Convertible Notes due 2022 * * $ 890.8 Senior Convertible Notes due 2023 $ 1,936.4 1,260.0 Senior Convertible Notes due 2025 1,219.2 * Total fair value of outstanding senior convertible notes $ 3,155.6 $ 2,150.8 *Not applicable as no notes were outstanding at this date. For more information on the carrying values of our senior convertible notes, see Note 5, “Debt.” Foreign Currency and Derivative Financial Instruments From time to time we engage in hedging transactions to reduce foreign currency risks. The fair values of these derivatives are based on quoted market prices, which are Level 1 inputs, and the derivative instruments are recorded in current assets or current liabilities in our consolidated balance sheets consistent with the nature of the instrument at period end. Derivative gains and losses are included in interest and other income, net in our consolidated statements of operations. As of December 31, 2020 and December 31, 2019, notional amounts of $ 48.0 million and $ 8.0 million, respectively, were outstanding to hedge certain foreign currency risk. The resulting impact on our consolidated financial statements from currency hedging activities was not significant for the twelve months ended December 31, 2020, 2019 and 2018. Our foreign currency exposures vary but are primarily concentrated in the British Pound, the Euro, and the Canadian Dollar. 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. 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 any impairment is recognized. We recorded no significant impairment losses during the twelve months ended December 31, 2020, 2019 and 2018. F-22 4. Balance Sheet Details Short-Term Marketable Securities Short-term marketable securities, consisting of debt securities, were as follows as of the dates indicated: December 31, 2020 (In millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Debt securities, available for sale: U.S. government agencies $ 1,570.4 $ 0.1 $ ( 0.1 ) $ 1,570.4 Commercial paper 258.7 0.1 — 258.8 Corporate debt 60.9 — — 60.9 Total debt securities, available for sale $ 1,890.0 $ 0.2 $ ( 0.1 ) $ 1,890.1 December 31, 2019 (In millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Debt securities, available for sale: U.S. government agencies $ 675.6 $ 0.4 $ — $ 676.0 Commercial paper 248.1 0.1 — 248.2 Corporate debt 163.0 — ( 0.1 ) 162.9 Total debt securities, available for sale $ 1,086.7 $ 0.5 $ ( 0.1 ) $ 1,087.1 As of December 31, 2020 and 2019, all of our debt securities had contractual maturities of less than twelve months . Gross realized gains and losses on sales of our debt securities for the twelve months ended December 31, 2020, 2019 and 2018 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 reports, and the severity of impairment. Unrealized losses on available-for-sale debt securities at December 31, 2020 were not significant and were primarily due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. Accordingly, we have not recorded an allowance for credit losses. 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. The following table reconciles the net gain recognized on marketable equity securities during the twelve months ended December 31, 2020, 2019 and 2018 to the unrealized gain recognized during those periods on equity securities still held at the reporting dates. Twelve Months Ended December 31, (In millions) 2020 2019 2018 Net gains and losses recognized during the period on equity securities $ — $ ( 4.2 ) $ 80.1 Less: Net gains and losses recognized during the period on equity securities sold during the period — 4.2 ( 44.1 ) Unrealized gains recognized during the reporting period on equity securities still held at the reporting date $ — $ — $ 36.0 F-23 Accounts Receivable December 31, (In millions) 2020 2019 Accounts receivable $ 435.7 $ 292.1 Less allowance for doubtful accounts ( 7.2 ) ( 5.8 ) Total accounts receivable, net $ 428.5 $ 286.3 Inventory December 31, (In millions) 2020 2019 Raw materials $ 69.9 $ 64.9 Work-in-process 14.2 11.1 Finished goods 150.6 43.8 Total inventory $ 234.7 $ 119.8 During the twelve months ended December 31, 2020 and 2019, we recorded excess and obsolete inventory charges of $ 24.4 million and $ 14.1 million, respectively, in cost of sales as a result of our ongoing assessment of sales demand, inventory on hand for each product and the continuous improvement and innovation of our products. During the twelve months ended December 31, 2018, we recorded excess and obsolete inventory charges of $ 7.3 million in cost of sales primarily as a result of the approval and launch of our G6 system and our ongoing assessment of sales demand and the continuous improvement and innovation of our products. Property and Equipment December 31, (In millions) 2020 2019 Land (1) $ 15.6 $ — Building (1) 49.2 15.5 Furniture and fixtures 15.3 12.8 Computer software and hardware 35.7 32.7 Machinery and equipment 198.9 130.2 Leasehold improvements 135.8 102.5 Construction in progress 219.0 132.6 Total cost 669.5 426.3 Less accumulated depreciation and amortization ( 154.2 ) ( 105.0 ) Total property and equipment, net $ 515.3 $ 321.3 (1) Represents our finance lease right-of-use assets. Depreciation expense related to property and equipment for the twelve months ended December 31, 2020, 2019 and 2018 was $ 64.0 million, $ 46.9 million, and $ 28.6 million, respectively. Loss on disposal of property and equipment during the twelve months ended December 31, 2020, 2019 and 2018 recorded in operating expenses was $ 13.6 million, $ 10.5 million and $ 5.4 million, respectively. F-24 Accounts Payable and Accrued Liabilities December 31, (In millions) 2020 2019 Accounts payable trade $ 163.3 $ 102.3 Accrued tax, audit, and legal fees 15.3 14.0 Accrued rebates 247.0 93.3 Accrued warranty 11.7 7.4 Other accrued liabilities 43.8 39.4 Total accounts payable and accrued liabilities $ 481.1 $ 256.4 Accrued Warranty Warranty costs are reflected in our statements of operations as cost of sales. Reconciliations of our accrued warranty costs for the twelve months ended December 31, 2020 and 2019 were as follows: Twelve Months Ended December 31, (In millions) 2020 2019 Beginning balance $ 7.4 $ 6.8 Charges to costs and expenses 41.3 32.7 Costs incurred ( 37.0 ) ( 32.1 ) Ending balance $ 11.7 $ 7.4 Other Long-Term Liabilities December 31, (In millions) 2020 2019 Finance lease obligations $ 54.0 $ 14.4 Contractual obligations 12.6 — Other liabilities 14.3 5.7 Total other liabilities $ 80.9 $ 20.1 F-25 5. Debt Senior Convertible Notes The carrying amounts of our senior convertible notes were as follows as of the dates indicated: December 31, (Dollars in millions) 2020 2019 Principal amount: Senior Convertible Notes due 2022 $ — $ 400.0 Senior Convertible Notes due 2023 850.0 850.0 Senior Convertible Notes due 2025 1,207.5 — Total principal amount 2,057.5 1,250.0 Unamortized debt discount ( 371.1 ) ( 177.2 ) Unamortized debt issuance costs ( 19.2 ) ( 13.1 ) Carrying amount of liability component $ 1,667.2 $ 1,059.7 Carrying value of equity component $ 461.0 $ 242.2 Remaining amortization period of debt discount on the liability component: Senior Convertible Notes due 2022 * 2.5 years Senior Convertible Notes due 2023 2.9 years 4.0 years Senior Convertible Notes due 2025 4.9 years * * Not applicable as no notes were outstanding at this date. For our senior convertible notes for which the if-converted value exceeded the principal amount, the amount in excess of principal is as follows as of the dates indicated: December 31, (In millions) 2020 2019 Senior Convertible Notes due 2022 * $ 486.2 Senior Convertible Notes due 2023 1,077.5 372.4 Total by which the notes’ if-converted value exceeds their principal amount $ 1,077.5 $ 858.6 * Not applicable as no notes were outstanding at this date. F-26 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. (Dollars in millions) Twelve Months Ended December 31, 2020 2019 2018 Cash interest expense: Contractual coupon interest (1) $ 9.3 $ 9.3 $ 3.5 Non-cash interest expense: Accretion of debt discount 68.6 45.8 16.0 Amortization of debt issuance costs 4.0 3.7 1.8 Total interest expense recognized on senior notes $ 81.9 $ 58.8 $ 21.3 Effective interest rates: Senior Convertible Notes due 2022 (2) 5.1 % 5.1 % 5.1 % Senior Convertible Notes due 2023 5.6 % 5.6 % 5.6 % Senior Convertible Notes due 2025 5.5 % * * (1) Interest on the 2022 Notes began accruing upon issuance and was payable semi-annually on May 15 and November 15 of each year. 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. (2) The effective interest rate presented represents the rate applicable for the period outstanding. The Senior Convertible Notes due 2022 were fully redeemed by July 31, 2020, as described below. * Not applicable as no notes were outstanding at this date. 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 initial conversion rate of the 2022 Notes was 10.0918 shares per $1,000 principal amount of notes, which was equivalent to a conversion price of approximately $ 99.09 per share, subject to adjustments. The 2022 Notes could be settled in cash, stock, or a combination thereof, solely at our discretion. We used 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 could 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 $ 70.6 million in additional paid-in-capital, net of debt issuance costs, during 2017. No principal payments were 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 included customary terms and covenants, including certain events of default after which the 2022 Notes could 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 2022 Notes), holders of the 2022 Notes had 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 would 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 were, 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, 2022, holders of the 2022 Notes could 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 Dexcom’s common stock for at least 20 trading days (whether or not consecutive) during F-27 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 2022 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 2022 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 called 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 could convert all or a portion of their notes regardless of the foregoing circumstances. Circumstance (1) listed above occurred during the quarters ended December 31, 2019 and March 31, 2020. As a result, the 2022 Notes became convertible at the option of the holder from January 1, 2020 through June 30, 2020. On June 29, 2020, Dexcom issued a notice of redemption to the holders of its outstanding 2022 Notes which is described below. Conversion Rights at Our Option On or after May 15, 2020, Dexcom could redeem for cash all or part of the 2022 Notes, at its option, if the last reported sale price of our common stock had 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 provided notice of redemption. The redemption price would 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. Repurchase, Conversion, and Redemption of 2022 Notes In May 2020, we used approximately $ 282.6 million of the net proceeds from the 2025 Notes offering described below and issued 1,953,067 shares of Dexcom common stock to repurchase $ 260.0 million principal amount outstanding of the 2022 Notes and the associated conversion feature of the repurchased notes (which was recorded in additional paid-in capital). In addition, holders of 2022 Notes with a principal amount of $ 140.0 million exercised their option to convert their 2022 Notes during the twelve months ended December 31, 2020. We settled these conversions by issuing 1,412,497 shares of our common stock. As a result of the repurchase and conversions of the 2022 Notes, we recorded a loss on extinguishment of debt of $ 5.9 million for the twelve months ended December 31, 2020. The loss on extinguishment of debt included the unamortized debt issuance costs for the 2022 Notes. On June 29, 2020, we issued a notice of redemption to the holders of our outstanding 2022 Notes pursuant to which we would redeem the outstanding 2022 Notes for cash at a price of 100 % of the principal amount of the 2022 Notes plus accrued and unpaid interest, if any, on July 31, 2020, unless earlier converted. The principal amount of 2022 Notes actually redeemed for cash was not significant. 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 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 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. 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. 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 $ 171.6 million in additional paid-in capital, net of debt issuance costs, during 2018. 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. F-28 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 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 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. 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. Circumstance (1) listed above occurred during the quarters ended December 31, 2019, March 1, 2020, June 30, 2020, and September 30, 2020. As a result, the 2023 Notes were convertible at the option of the holder from January 1, 2020 through December 31, 2020; actual conversions during that period were not significant. Circumstance (1) listed above also occurred during the quarter ended December 31, 2020 and as a result, the 2023 Notes will be convertible at the option of the holder from January 1, 2021 through March 31, 2021. Conversion Rights at Our Option 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. 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 F-29 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. 0.25% Senior Convertible Notes due 2025 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 1.6655 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $ 600.42 per share, subject to adjustments, with a maximum conversion rate of 2.3732. 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. 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 $ 289.4 million in additional paid-in-capital, net of debt issuance costs, during 2020. 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 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 may not 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. F-30 Revolving Credit Agreement Terms of the Revolving Credit Agreement On December 19, 2018, we entered into an amended and restated revolving credit agreement which was subsequently amended on May 11, 2020 (as amended, the Credit Agreement). The Credit Agreement provides for 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. Borrowings under the Credit Agreement are available for general corporate purposes, including working capital and capital expenditures. Information related to availability and outstanding borrowings on our Credit Agreement is as follows as of the date indicated: December 31, (In millions) 2020 Available principal amount $ 200.0 Letters of credit sub-facility 10.0 Outstanding borrowings — Outstanding letters of credit 6.3 Total available balance $ 193.7 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 will mature on the earlier to occur of (i) December 19, 2023 or (ii) 91 days prior to the maturity date of the 2022 Notes or (iii) 91 days prior to the maturity date of the 2023 Notes if both (a) the aggregate outstanding principal amount of the 2022 Notes or the 2023 Notes, as applicable, is greater than EBITDA for the period of four consecutive fiscal quarters ending prior to such date and (b) unrestricted domestic cash on hand is less than the aggregate outstanding principal amount of the 2022 Notes or the 2023 Notes, as applicable, plus $ 100.0 million. Our obligations under the 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 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 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 December 31, 2020. 6. Leases And Other Commitments Leases We lease office, manufacturing and warehouse space facilities under various domestic and international non-cancellable operating lease arrangements that expire at various times through December 2030. We also have one land lease that expires in 2080. Certain of our leases have renewal options which allow us to extend the lease term typically between three and five years per option and some of our leases have multiple options to extend. The remaining lease terms of our leases range from less than one year to approximately twenty years and represent the non-cancellable periods of the leases, including extension options that we determined are reasonably certain to be exercised. Leases are classified as operating or financing at lease commencement. We adopted ASC 842 utilizing the modified retrospective transition method through a $ 2.1 million cumulative-effect adjustment to accumulated deficit 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 and as such prior comparative periods have not been recast. 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. F-31 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 consolidated balance sheets at the beginning of the first quarter of 2019, with no material impact to our consolidated statements of operations. Operating lease right-of-use assets and lease 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. As of December 31, 2020, the maturities of our operating and finance lease liabilities were as shown in the table below: (In millions) Operating Leases Finance Leases 2020 $ 21.2 $ 10.7 2021 22.1 4.2 2022 22.4 4.3 2023 20.8 4.5 2024 20.0 4.6 Thereafter 32.0 68.7 Total future lease cost (1) 138.5 97.0 Less: Imputed interest ( 20.2 ) ( 34.2 ) Present value of future payments 118.3 62.8 Less: Current portion ( 16.5 ) ( 8.8 ) Long-term portion $ 101.8 $ 54.0 (1) Total future lease cost excludes $ 16.3 million of legally binding minimum lease payments for leases signed but not yet commenced . Certain lease agreements require us to return designated areas of leased space to its original condition upon termination of the lease agreement, for which we record an asset retirement obligation and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. In subsequent periods, the asset retirement obligation is accreted for the change in its present value and the capitalized asset is depreciated, both over the term of the associated lease agreement. Asset retirement obligations of $ 4.5 million and $ 2.6 million as of December 31, 2020 and 2019, respectively, are included under “Other long-term liabilities” in our consolidated balance sheets. F-32 The components of lease expense for the twelve months ended December 31, 2020 and 2019 were as follows: Twelve Months Ended December 31, (In millions) 2020 2019 Finance lease cost: Amortization of right-of-use assets $ 2.0 $ 1.1 Interest on lease liabilities 1.9 0.8 Operating lease cost 18.4 12.2 Short-term lease cost (1) 1.3 3.5 Variable lease cost (2) 4.2 3.9 Total lease cost $ 27.8 $ 21.5 (1) Short-term lease cost is primarily related to temporary office space associated with the transition of certain operations to the Philippines. (2) Variable lease costs are primarily related to common area maintenance charges and property taxes . Prior to January 1, 2019, we recorded operating lease rent expense under ASC 840 on a straight-line basis over the non-cancellable lease term. Rent expense for the twelve months ended December 31, 2018 was $ 12.5 million . 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. Twelve Months Ended December 31, (Dollars in millions) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 18.3 $ 14.3 Operating cash flows from finance leases 0.7 0.8 Financing cash flows from finance leases 8.5 0.5 Right-of-use assets obtained in exchange for lease liabilities: Operating leases 33.5 80.6 Finance leases $ 41.7 $ 15.5 Weighted average remaining lease term: Operating leases 6.1 years 6.2 years Finance leases 23.3 years 13.3 years Weighted average discount rate: Operating leases 5.0 % 5.0 % Finance leases 5.2 % 5.0 % Amortization of operating lease right-of-use asset included in cash flows from operating activities in our consolidated statements of cash flows was $ 12.4 million for the twelve months ended December 31, 2020 and $ 9.1 million for the twelve months ended December 31, 2019. Purchase Commitments We are party to various purchase arrangements related to our manufacturing and research and development activities. As of December 31, 2020, we had approximately $ 335.6 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year . F-33 7. 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. We do not believe we are party to any 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. 8. Income Taxes Income (loss) before income taxes subject to taxes in the following jurisdictions is as follows: Twelve Months Ended December 31, (In millions) 2020 2019 2018 United States $ 270.7 $ 119.1 $ ( 28.3 ) Outside of the United States ( 45.7 ) ( 14.9 ) ( 98.2 ) Total $ 225.0 $ 104.2 $ ( 126.5 ) Significant components of the provision for income taxes are as follows: Twelve Months Ended December 31, (In millions) 2020 2019 2018 Current: Federal $ — $ — $ — State 6.1 1.0 2.7 Foreign 2.6 1.9 0.1 Total current income taxes 8.7 2.9 2.8 Deferred: Federal ( 198.8 ) — ( 1.7 ) State ( 51.4 ) — ( 0.5 ) Foreign ( 27.1 ) 0.2 — Total deferred income taxes ( 277.3 ) 0.2 ( 2.2 ) Total $ ( 268.6 ) $ 3.1 $ 0.6 F-34 Significant loss and tax credit carryforwards and years of expiration are as follows: December 31, Year of Expiration (In millions) 2020 2019 Net Operating Loss: Federal $ 169.1 $ 438.8 2027 California 236.3 235.3 2029 Other States 36.1 88.8 2030 UK 113.2 124.1 Indefinite Tax Credits: Federal 73.1 54.4 2026 California $ 66.2 $ 52.7 Indefinite On June 29, 2020, California’s Governor Newsom signed AB 85 into law, suspending California net operating loss utilization and imposing a $5.0 million cap on the amount of business incentive tax credits companies can utilize, effective for tax years 2020 through 2022. As a result of the legislation, we are utilizing $ 2.4 million of California research and development credits for the tax year ended December 31, 2020. Utilization of net operating losses and credit carryforwards is subject to an annual limitation due to ownership change limitations provided by Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. An ownership change limitation occurred as a result of the stock offering completed in February 2009. The limitation will result in approximately $ 1.9 million of U.S. research and development tax credits that will expire unused. The related deferred tax assets have been removed from the components of our deferred tax assets as summarized in the table below. The tax benefits related to the remaining federal and state net operating losses and tax credit carryforwards may be further limited or lost if future cumulative changes in ownership exceed 50% within any three-year period. Significant components of our deferred tax assets and liabilities as of December 31, 2020 and 2019 are shown below. Significant judgment is required to evaluate the need for a valuation allowance against deferred tax assets. We review all available positive and negative evidence, including projections of pre-tax book income, earnings history, reliability of forecasting, and reversal of temporary differences. A valuation allowance is established when it is more likely than not that some or all of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon future earnings in applicable tax jurisdictions. Prior to 2020, due to our U.S. operating losses and earnings volatility in previous years, which did not allow sustainable profitability, we had established and maintained a full valuation allowance on our deferred tax assets. In 2020, we achieved three years of cumulative income. We analyzed both positive and negative evidence, and as a result, we released our valuation allowance on our deferred tax assets, with the exception of our California research and development tax credits and certain foreign intangible assets, as it is more likely than not that those deferred tax assets will not be realized. F-35 December 31, (In millions) 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 69.2 $ 127.4 Capitalized research and development expenses 53.6 57.1 Tax credits 101.1 78.6 Share-based compensation 13.0 10.9 Fixed and intangible assets 16.9 14.0 Accrued liabilities and reserves 110.3 62.0 Convertible debt — 1.7 Total gross deferred tax assets 364.1 351.7 Less: valuation allowance ( 55.5 ) ( 332.2 ) Total net deferred tax assets 308.6 19.5 Deferred tax liabilities: Fixed assets and acquired intangibles assets ( 36.3 ) ( 19.6 ) Convertible debt discount ( 55.9 ) — Total deferred tax liabilities ( 92.2 ) ( 19.6 ) Net deferred tax assets (liabilities) $ 216.4 $ ( 0.1 ) We released $ 287.2 million of valuation allowance related to our deferred tax assets, of which $ 285.5 million was recorded to income tax benefit and $ 1.7 million was recorded to additional paid-in capital. We maintain a valuation allowance of $ 55.5 million against our California research and development tax credits and certain foreign intangible assets. The reconciliation between our effective tax rate on income (loss) from continuing operations and the statutory rate is as follows: Twelve Months Ended December 31, (In millions) 2020 2019 2018 U.S. federal statutory tax rate $ 47.3 $ 21.9 $ ( 26.6 ) State income tax, net of federal benefit 3.2 ( 2.3 ) ( 5.5 ) Permanent items 13.1 1.0 1.3 Research and development credits ( 24.4 ) ( 10.8 ) ( 11.7 ) Foreign rate differential ( 0.1 ) 5.6 3.7 Stock and officers compensation ( 28.7 ) ( 14.7 ) ( 5.1 ) Change in statutory tax rates ( 4.1 ) — — Impact of adoption of ASU 2016-16 — — ( 13.3 ) Impact of Tax Cuts and Jobs Act of 2017 — — ( 0.4 ) Other 0.1 ( 1.0 ) 1.3 Change in valuation allowance ( 275.0 ) 3.4 56.9 Income taxes at effective rates $ ( 268.6 ) $ 3.1 $ 0.6 On June 22, 2020, the Supreme Court effectively resolved the Altera Corp. v. Commissioner case when it denied its petition to hear the case. Altera Corp. argued that the Treasury Department’s regulation requiring related companies to share the cost of stock-based employee compensation is arbitrary, and thus invalid. The denial to hear the case supports that related companies should share in the cost of stock-based employee compensation. Pursuant to an Altera clause in our cost-sharing agreement, we recalculated and retroactively billed stock-based compensation for years 2016-2020, resulting in an additional $ 32.0 million cost-share payment. The 2017 Tax Cuts and Jobs Act included provisions for tax on Global Intangible Low-taxed Income (“GILTI”) effective for tax years of foreign corporations beginning after December 31, 2017. We have elected to account for GILTI in the period the tax is incurred. F-36 The following table summarizes the activity related to our gross unrecognized tax benefits: (In millions) Balance at January 1, 2018 $ 22.8 Decreases related to prior year tax positions ( 0.3 ) Increases related to current year tax positions 3.4 Decrease related to Tax Cuts and Jobs Act of 2017 — Balance at December 31, 2018 25.9 Decreases related to prior year tax positions ( 0.9 ) Increases related to current year tax positions 4.5 Balance at December 31, 2019 29.5 Decreases related to prior year tax positions ( 0.9 ) Increases related to current year tax positions 8.0 Balance at December 31, 2020 $ 36.6 Of the total unrecognized tax benefits at December 31, 2020, 2019, and 2018, $ 23.5 million, $ 0 , and $ 0 , respectively, would reduce our annual effective tax rate if recognized. Interest and penalties are classified as a component of income tax expense and were not material for any period presented. We conduct business globally and consequently file income tax returns and are subject to routine compliance audits in numerous jurisdictions including those material jurisdictions listed in the following table. We are currently under a routine examination by the Federal Central Office in Germany for fiscal years 2016-2018. We do not expect any material adjustments as a result of this audit. The U.S. net operating losses generated since 1999 and utilized in recent years are open for examination. The years remaining subject to audit, by major jurisdiction, are as follows: Jurisdiction Fiscal Year United States (Federal and state) 1999 - 2020 Germany 2016 - 2020 United Kingdom 2017 - 2020 Canada 2015 - 2020 We operate under a tax holiday in the Philippines, which is effective through December 31, 2023, and may be extended for another three years if certain additional requirements are satisfied. The tax holiday is conditional upon remaining in good standing, committing no violation of PEZA Rules and Regulations, pertinent circulars and directives. The impact of this tax holiday decreased foreign taxes by $ 0.1 million in 2020. We have been granted an investment tax allowance incentive by the Malaysian Investment Development Authority (MIDA) in Malaysia, which is effective through December 31, 2025. The tax incentive had no effect on foreign taxes during 2020. We have approximately $ 1.4 million of undistributed earnings attributable to operations in our controlled foreign corporations as of December 31, 2020. We assert that any foreign earnings will be indefinitely reinvested. Accordingly, we have not recorded a liability for taxes associated with any future distributions of these undistributed earnings as any distribution would be immaterial. 9. Employee Benefit Plans and Stockholders’ Equity 401(k) Plan We have a defined contribution 401(k) retirement plan (the 401(k) Plan) covering substantially all employees in the United States that meet certain age requirements. Employees who participate in the 401(k) Plan may contribute up to 75 % of their compensation each year, subject to Internal Revenue Service limitations and the terms and conditions of the plan. Under the terms of the 401(k) Plan, we may elect to match a discretionary percentage of contributions. We match 50 % of contributions up to 5 % of annual compensation. Total matching contributions were $ 6.7 million and $ 4.8 million for the twelve months ended December 31, 2020, and 2019, respectively. Employee Stock Purchase Plan, or ESPP Under the 2015 Employee Stock Purchase Plan (the 2015 ESPP), amended in December 2019, eligible employees can purchase shares of our common stock at semi-annual intervals through periodic payroll deductions during defined Offering F-37 Periods. A total of up to 1.5 million shares may be issued under the 2015 ESPP and it expires upon the earliest to occur of (a) termination of the 2015 ESPP by our board of directors, (b) issuance of all of the shares of common stock reserved for issuance under the plan, or (c) May 28, 2025. Payroll deductions may not exceed 10 % of the participant’s cash compensation subject to certain limitations, and the purchase price will not be less than 85 % of the lower of the fair market value of the common stock at either the beginning of the applicable Offering Period or the Purchase Date. We issued 89,194 and 150,408 and 189,904 shares of common stock under the 2015 ESPP during the twelve months ended December 31, 2020, 2019 and 2018, respectively. Equity Incentive Plans In May 2015, we adopted the Amended and Restated 2015 Equity Incentive Plan (the 2015 Plan), which replaced our 2005 Equity Incentive Plan and provides for the grant of incentive and nonstatutory stock options, restricted stock, stock bonuses, stock appreciation rights, and restricted stock units to employees, directors or consultants of the Company. On May 30, 2019 our stockholders approved an increase to the maximum number of shares that may be issued under the 2015 Plan. We are permitted to issue up to 9.8 million shares under the 2015 Plan. Treasury Stock Repurchased shares of our common stock are held as treasury shares until they are reissued or retired. When we reissue treasury stock, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount. We issue new shares of common stock to satisfy RSU vesting under our employee equity incentive plans. We have not yet determined the ultimate disposition of the 0.8 million shares that we repurchased in 2018, and consequently we continue to hold them as treasury shares rather than retiring them. No shares of our common stock were repurchased during 2019 or 2020. Stock Options We have not granted any stock options since 2010. As of December 31, 2020, we have no stock options outstanding. The total intrinsic value of stock options exercised as of the date of exercise was as follows: Twelve Months Ended December 31, (In millions) 2020 2019 2018 Intrinsic value of options exercised $ 7.9 $ 7.4 $ 30.0 F-38 Restricted Stock Units (RSUs) RSU awards typically vest annually over three or four years and vesting is subject to continued services. A summary of our RSU activity for the twelve months ended December 31, 2020, 2019 and 2018 is as follows: (In millions except weighted average grant date fair value) Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Nonvested at December 31, 2017 2.7 $ 70.68 Granted 1.7 66.07 Vested ( 1.4 ) 68.44 Forfeited ( 0.3 ) 68.56 Nonvested at December 31, 2018 2.7 69.19 $ 319.0 Granted 0.7 144.37 Vested ( 1.4 ) 69.45 Forfeited ( 0.2 ) 83.45 Nonvested at December 31, 2019 1.8 96.63 392.0 Granted 0.5 300.36 Vested ( 1.0 ) 92.07 Forfeited ( 0.1 ) 137.44 Nonvested at December 31, 2020 1.2 $ 183.51 $ 430.6 The total vest-date fair value of RSUs vested was $ 331.8 million, $ 207.2 million and $ 120.9 million for the twelve months ended December 31, 2020, 2019 and 2018, respectively. Common Stock Reserved for Future Issuance Shares of common stock reserved for future issuance were as follows as of the dated indicated: December 31, (In millions) 2020 2019 Stock awards under our plans: Unvested restricted stock units 1.2 1.8 Reserved for future grant 4.5 4.9 Employee Stock Purchase Plan 0.8 0.9 Total 6.5 7.6 Share-based Compensation The following table summarizes share-based compensation expense related to restricted stock units and employee stock purchases under the ESPP for the twelve months ended December 31, 2020, 2019 and 2018: Twelve Months Ended December 31, (In millions) 2020 2019 2018 Cost of sales $ 14.6 $ 9.0 $ 9.2 Research and development 37.8 33.5 33.0 Selling, general and administrative 67.0 60.2 59.7 Total share-based compensation expense $ 119.4 $ 102.7 $ 101.9 We estimate the fair value of ESPP purchase rights on the date of grant using the Black-Scholes option pricing model and the assumptions below for the specified reporting periods. F-39 Twelve Months Ended December 31, 2020 2019 2018 Risk free interest rate 0.13 - 0.95 1.72 - 2.55 1.55 - 2.25 Dividend yield — % — % — % Expected volatility of Dexcom common stock 0.51 - 0.63 0.40 - 0.51 0.50 - 0.67 Expected life (in years) 0.5 1 1 At December 31, 2020, unrecognized estimated compensation costs related to unvested restricted stock units and ESPP shares totaled $ 147.6 million and are expected to be recognized through 2024. 10. 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. Dexcom is domiciled in the United States. We sell our CGM systems through a direct sales force in the United States, Canada and some countries in Europe, and through distribution arrangements in the United States, and certain countries in Africa, Asia, Europe, Latin America, and the Middle East, as well as Australia, Canada, and New Zealand. We disaggregate our revenue from contracts by geography and by major sales channel as we believe they best depict how the nature, amount and timing of revenues and cash flows are affected by economic factors. Revenues by geographic region During the twelve months ended December 31, 2020, 2019 and 2018, no individual country outside the United States generated revenue that represented more than 10% of our total revenue. The table below sets forth revenues by our two primary geographical markets, the United States and outside of the United States, based on the geographic location to which we deliver the product. The majority of our long-lived assets are located in the United States. Twelve Months Ended December 31, 2020 2019 2018 (Dollars in millions) Amount % of Total Amount % of Total Amount % of Total United States $ 1,509.5 78 % $ 1,161.5 79 % $ 818.4 79 % Outside of the United States 417.2 22 % 314.5 21 % 213.2 21 % Total $ 1,926.7 100 % $ 1,476.0 100 % $ 1,031.6 100 % F-40 Revenues by customer sales channel The following table sets forth revenues by major sales channel for the twelve months ended December 31, 2020, 2019 and 2018: Twelve Months Ended December 31, 2020 2019 2018 (Dollars in millions) Amount % of Total Amount % of Total Amount % of Total Distributor $ 1,437.6 75 % $ 1,011.6 69 % $ 652.9 63 % Direct 489.1 25 % 464.4 31 % 378.7 37 % Total $ 1,926.7 100 % $ 1,476.0 100 % $ 1,031.6 100 % F-41 DexCom, Inc. SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS (In millions) Allowance for doubtful accounts Balance at December 31, 2017 $ 11.4 Provision for doubtful accounts 3.6 Write-offs and adjustments ( 8.3 ) Recoveries 0.5 Balance at December 31, 2018 $ 7.2 Allowance for doubtful accounts Balance at December 31, 2018 $ 7.2 Provision for doubtful accounts 0.9 Write-offs and adjustments ( 3.0 ) Recoveries 0.7 Balance at December 31, 2019 $ 5.8 Allowance for doubtful accounts Balance at December 31, 2019 $ 5.8 Provision for doubtful accounts 3.2 Write-offs and adjustments ( 2.1 ) Recoveries 0.3 Balance at December 31, 2020 $ 7.2 F-42