What changed in this filing

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Item 1. Financial Statements

2020-07-31 compared with 2020-05-05 · 322 added, 228 removed, 540 unchanged (50% of the section changed)

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net revenues $ 352,314 $ 600,697 $ 903,277 $ 1,149,668

5 unchanged sentences

Impairments and other charges — — — 29,782

Litigation settlement gain — ( 51,000 ) — ( 51,000 )

Total operating expenses 297,328 255,799 621,766 570,194

Income from operations 69,918 87,701

Income (loss) from operations ( 73,000 ) 176,490 ( 3,082 ) 264,191

Interest income and other income (expense), net:

2 unchanged sentences

Total interest income and other income (expense), net ( 493 ) 17,357 ( 17,056 ) 14,244

Net income before provision for (benefit from) income taxes and equity in losses of investee 53,355 84,588

Net income (loss) before provision for (benefit from) income taxes and equity in losses of investee ( 73,493 ) 193,847 ( 20,138 ) 278,435

Provision for (benefit from) income taxes ( 32,891 ) 43,121 ( 1,497,667 ) 51,917

Equity in losses of investee, net of tax — 3,584 — 7,528

Net income $ 1,518,131 $ 71,848

Net income per share:

Net income (loss) $ ( 40,602 ) $ 147,142 $ 1,477,529 $ 218,990

Net income (loss) per share:

$ ( 0.52 ) $ 1.84 $ 18.78 $ 2.74

$ ( 0.52 ) $ 1.83 $ 18.70 $ 2.71

Shares used in computing net income per share:

Shares used in computing net income (loss) per share:

78,769 79,943 78,681 79,901

5 unchanged sentences

Three Months Ended

Net income $ 1,518,131 $ 71,848

Net change in foreign currency translation adjustment 689 409

June 30, Six Months Ended

2020 2019 2020 2019

Net income (loss) $ ( 40,602 ) $ 147,142 $ 1,477,529 $ 218,990

Change in foreign currency translation adjustment, net of tax 9,294 213 9,983 622

Change in unrealized gains (losses) on investments, net of tax — 192 ( 194 ) 276

Other comprehensive income

Comprehensive income $ 1,518,626 $ 72,341

9,294 405 9,789 898

Comprehensive income (loss) $ ( 31,308 ) $ 147,547 $ 1,487,318 $ 219,888

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7 unchanged sentences

Accounts receivable, net of allowance for doubtful accounts of $ 17,099 and $ 6,756 , respectively

473,314 550,291

Inventories 131,276 112,051

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Preferred stock, $ 0.0001 par value ( 5,000 shares authorized;

none issued) — —

Common stock, $ 0.0001 par value ( 200,000 shares authorized;

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(in thousands)

Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total

Three Months Ended June 30, 2020 Shares Amount

Balance as of March 31, 2020 78,759 $ 8 $ 895,131 $ ( 193 ) $ 1,958,043 $ 2,852,989

Net loss — — — — ( 40,602 ) ( 40,602 )

Net change in foreign currency translation adjustment — — — 9,294 — 9,294

Issuance of common stock relating to employee equity compensation plans 22 — — — — —

Tax withholdings related to net share settlements of equity awards — — ( 1,643 ) — — ( 1,643 )

Stock-based compensation — — 25,007 — — 25,007

Balance as of June 30, 2020 78,781 $ 8 $ 918,495 $ 9,101 $ 1,917,441 $ 2,845,045

Common Stock Additional

2 unchanged sentences

Retained Earnings Total

Three Months Ended March 31, 2020 Shares Amount

Six Months Ended June 30, 2020 Shares Amount

Balance as of December 31, 2019 78,433 $ 8 $ 906,937 $ ( 688 ) $ 439,912 $ 1,346,169

6 unchanged sentences

Stock-based compensation — — 47,934 — — 47,934

Balance as of June 30, 2020 78,781 $ 8 $ 918,495 $ 9,101 $ 1,917,441 $ 2,845,045

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(in thousands)

Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total

Three Months Ended June 30, 2019 Shares Amount

Balance as of March 31, 2019 80,000 $ 8 $ 855,956 $ ( 2,281 ) $ 402,021 $ 1,255,704

Net income — — — — 147,142 147,142

Net change in unrealized gains (losses) from investments — — — 192 — 192

Net change in foreign currency translation adjustment — — — 213 — 213

Issuance of common stock relating to employee equity compensation plans 26 — 5 — — 5

Tax withholdings related to net share settlements of equity awards — — ( 2,537 ) — — ( 2,537 )

Common stock repurchased and retired ( 161 ) — ( 1,616 ) — ( 47,888 ) ( 49,504 )

Stock-based compensation — — 22,467 — — 22,467

Balance as of June 30, 2019 79,865 $ 8 $ 874,275 $ ( 1,876 ) $ 501,275 $ 1,373,682

Common Stock Additional

2 unchanged sentences

Retained Earnings Total

Three Months Ended March 31, 2019 Shares Amount

Six Months Ended June 30, 2019 Shares Amount

Balance as of December 31, 2018 79,778 $ 8 $ 877,514 $ ( 2,774 ) $ 378,143 $ 1,252,891

7 unchanged sentences

Stock-based compensation — — 43,511 — — 43,511

Balance as of March 31, 2019 80,000 $ 8 $ 855,956 $ ( 2,281 ) $ 402,021 $ 1,255,704

Balance as of June 30, 2019 79,865 $ 8 $ 874,275 $ ( 1,876 ) $ 501,275 $ 1,373,682

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

5 unchanged sentences

Non-cash operating lease cost 11,148 8,681

Allowance for doubtful accounts 12,578 3,240

Impairments on equity investments 3,787 3,975

Impairments on long-lived assets — 28,498

Gain from sale of equity method investment — ( 15,769 )

Equity in losses of investee — 7,528

Other non-cash operating activities 11,542 9,548

Changes in assets and liabilities:

Changes in assets and liabilities, net of effects of acquisition:

Accounts receivable 64,645 ( 89,055 )

7 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisition, net of cash acquired ( 420,788 ) —

Purchase of property, plant and equipment ( 80,502 ) ( 80,598 )

4 unchanged sentences

Other investing activities 1,760 ( 14,502 )

Net cash provided by (used in) investing activities 276,211 ( 74,418 )

Net cash used in investing activities ( 172,326 ) ( 321,020 )

CASH FLOWS FROM FINANCING ACTIVITIES:

2 unchanged sentences

Payroll taxes paid upon the vesting of equity awards ( 47,038 ) ( 52,718 )

Other financing activities — ( 2,190 )

Purchase of finance lease — ( 45,773 )

Net cash used in financing activities ( 36,376 ) ( 188,381 )

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 7,172 ) 1,467

Net increase (decrease) in cash, cash equivalents, and restricted cash 240,255 ( 48,884 )

Net decrease in cash, cash equivalents, and restricted cash ( 146,190 ) ( 213,373 )

Cash, cash equivalents, and restricted cash at beginning of the period 551,134 637,566

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The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc.

(“we”, “our”, or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and contains all adjustments, including normal recurring adjustments, necessary to state fairly our results of operations for the three months ended March 31, 2020 and 2019, our comprehensive income for the three months ended March 31, 2020 and 2019, our financial position as of March 31, 2020, our stockholders’ equity for the three months ended March 31, 2020 and 2019, and our cash flows for the three months ended March 31, 2020 and 2019.

(“we”, “our”, or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and contains all adjustments, including normal recurring adjustments, necessary to state fairly our results of operations for the three and six months ended June 30, 2020 and 2019, our comprehensive income for the three and six months ended June 30, 2020 and 2019, our financial position as of June 30, 2020, our stockholders’ equity for the three and six months ended June 30, 2020 and 2019, and our cash flows for the six months ended June 30, 2020 and 2019.

The Condensed Consolidated Balance Sheet as of December 31, 2019 was derived from the December 31, 2019 audited financial statements.

It does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future period, and we make no representations related thereto.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future period, and we make no representations related thereto.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.

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We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Significant Accounting Policies

Our significant accounting policies are described in Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

As a result of our exocad Global Holdings GmbH (“exocad”) acquisition, we have added or amended relevant significant accounting policies as described below .

Refer to Note 4 "Business Combination" of the Notes to Condensed Consolidated Financial Statements for additional details on the exocad acquisition which is included in our Imaging Systems and CAD/CAM Services ( “ Systems and Services ” ) reportable segment.

Business Combinations

We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.

When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to intangible assets.

The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle.

These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made.

Revenue Recognition - Systems and Services

We sell intraoral scanners and computer-aided design/computer-aided manufacturing ( “ CAD/CAM”) services through both our direct sales force and distribution partners.

The intraoral scanner sales price includes one year of warranty and unlimited scanning services.

The customer may also select, for additional fees, extended warranty and unlimited scanning services for periods beyond the initial year.

When intraoral scanners are sold with an unlimited scanning service agreement and/or extended warranty, we allocate revenues based on the respective standalone selling price ( “ SSP”) of the scanner and the subscription service.

We estimate the SSP of each element, taking into consideration historical prices as well as our discounting

Revenues are then recognized over time as the monthly services are rendered and upon shipment of the scanner, as that is when we deem the customer to have obtained control.

CAD/CAM services, where sold separately, include the initial software license and maintenance and support.

We allocate revenues based upon the respective SSPs of the software license and the maintenance and support.

We estimate the SSP of each element using historical prices.

Revenues related to the software license are recognized upfront and revenues related to the maintenance and support are recognized over time.

For both scanner and service sales, most consideration is collected upfront and in cases where there are payment plans, consideration is collected within one year and, therefore, there are no significant financing components.

Certain Risks and Uncertainties

Due to the COVID-19 pandemic, we are subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies.

As COVID-19 continues to develop, we may make changes to these estimates and judgments, which could result in meaningful impacts to our financial statements in future periods.

The extent and duration of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as the response to the pandemic is in its incipient stages and information is rapidly evolving.

Because COVID-19 spreads readily through airways in nasal passages and the mouth, our principal customers, dentists and orthodontists and their patients, have been a primary focus of the protective and preventative efforts.

For instance, in many countries, governments and dental regulatory associations acted quickly to prohibit non-essential dental procedures;

thereby preventing our customers from conducting most or all business activities and materially adversely harming our sales and sales efforts.

Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession.

As the COVID-19 pandemic continues to be a global issue, we may make changes to these estimates and judgments, which could result in meaningful impacts to our financial statements in future periods.

The extent and duration of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict and the response to the pandemic is rapidly evolving.

The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers, all of which are uncertain and cannot be predicted.

Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers.

Additionally, the uncertainty of future results and cash flows may impact our significant assumptions and estimates including the collectability of accounts and other receivables and realization of our deferred tax assets.

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Under the amendments in this update, the entity is required to follow the guidance in Subtopic 350-40, Internal-Use Software , to determine which implementation costs under the service contract to be capitalized as an asset and which costs to expense.

The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 either on a retrospective or prospective basis.

The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15,

2019 either on a retrospective or prospective basis.

We adopted this standard in the first quarter of fiscal year 2020 on a prospective basis which did not have any impact on our condensed consolidated financial statements and related disclosures.

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Marketable Securities

We have no short-term or long-term marketable securities as of March 31, 2020.

We have no short-term or long-term marketable securities as of June 30, 2020.

As of December 31, 2019, the estimated fair value of our short-term marketable securities, classified as available for sale, are as follows (in thousands):

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We had no long-term marketable securities as of December 31, 2019.

Cash equivalents are not included in the tables above as the gross unrealized gains and losses are not material.

We have no short-term marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2019.

Amounts reclassified to earnings from accumulated other comprehensive income (loss), net related to unrealized gains or losses were not material for the three months ended March 31, 2020 and 2019.

For the three months ended March 31, 2020 and 2019, realized gains or losses were not material.

Our fixed-income securities investment portfolio consists of investments that can have a maximum effective maturity of up to 40 months on any individual security.

Cash equivalents are not included in the table above as the gross unrealized gains and losses are not material.

We had no short-term marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2019.

Amounts reclassified to earnings from accumulated other comprehensive income (loss), net related to unrealized gains or losses were not material for the three and six months ended June 30, 2020 and 2019.

For the three and six months ended June 30, 2020 and 2019, realized gains or losses were not material.

Our fixed-income securities investment portfolio allows for investments with a maximum effective maturity of up to 40 months on any individual security.

The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies.

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Fair Value Measurements

The following tables summarize our financial assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):

The following tables summarize our financial assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):

Description Balance as of

March 31, 2020 Level 1

June 30, 2020 Level 1

Cash equivalents:

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Investments in Privately Held Companies

Our investments in equity securities of privately held companies without readily determinable fair values were $ 3.0 million and $ 5.9 million as of March 31, 2020 and December 31, 2019, respectively, and are reported as nonrecurring investments within other assets in our Condensed Consolidated Balance Sheet.

Our investments in equity securities are considered Level 3 in the fair value hierarchy since the investments are in private companies without quoted market prices and we adjust the carrying value based on observable price changes.

During the three months ended March 31, 2020 and March 31, 2019, we recorded impairment losses of $ 2.9 million and $ 4.0 million, respectively, resulting from observable price changes.

Our investments in equity securities of privately held companies without readily determinable fair values were $ 2.1 million and $ 5.9 million as of June 30, 2020 and December 31, 2019, respectively, and are reported as nonrecurring investments within other assets in our Condensed Consolidated Balance Sheet.

During the six months ended June 30, 2020 and June 30, 2019, we recorded impairment losses of $ 3.8 million and $ 4.0 million, respectively, resulting from observable price changes.

Derivatives Not Designated as Hedging Instruments

Recurring foreign currency forward contracts

We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade and intercompany receivables and payables.

We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain t rade and intercompany receivables and payables.

These forward contracts are classified within Level 2 of the fair value hierarchy.

The net gain from the settlement of foreign currency forward contracts during the three months ended March 31, 2020 was $ 15.6 million and the net gain from the settlement of foreign currency forward contracts during the three months ended March 31, 2019 was not material.

As of March 31, 2020 and December 31, 2019, the fair value of foreign exchange forward contracts outstanding was not material.

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020

The net loss from the settlement of foreign currency forward contracts during the three months ended June 30, 2020 was $ 3.0 million and the net gain from the settlement of foreign currency forward contracts during the six months ended June 30, 2020 was $ 12.7 million.

The net gain (loss) from the settlement of foreign currency forward contracts during the three and six months ended June 30, 2019 was not material.

As of June 30, 2020 and December 31, 2019, the fair value of foreign exchange forward contracts outstanding was not material.

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020

Local Currency Amount Notional Contract Amount (USD)

Euro € 67,500 $ 74,274

Chinese Yuan ¥ 997,000 $ 140,618

Euro € 81,000 90,879

Canadian Dollar C$ 46,000 33,623

British Pound £ 23,200 28,894

Brazilian Real R$ 153,000 27,859

British Pound £ 20,000 24,584

Japanese Yen ¥ 2,385,000 22,154

1 unchanged sentence

Mexican Peso M$ 140,000 6,038

Swiss Franc CHF 3,000 3,161

Australian Dollar A$ 2,800 1,924

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Other foreign currency forward contract

During the three months ended March 31, 2020, in anticipation for the closing of the exocad Global Holdings GmbH ("exocad") acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of € 376.0 million.

During the three months ended March 31, 2020, we recognized an unrealized loss of $ 9.2 million within other income (expense), net in our Condensed Consolidated Statement of Operation as a result of the forward contract's fair value as of March 31, 2020.

Prior to the closing of the exocad Global Holdings GmbH ("exocad") acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of € 376.0 million.

During the three and six months ended June 30, 2020, we recognized losses of $ 1.0 million and $ 10.2 million, respectively, within other income (expense), net in our Condensed Consolidated Statement of Operations.

Balance Sheet Components

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21,314 25,005

Other prepaid expenses and current assets 19,624 24,637

Other current receivables 4,262 4,428

Others 24,957 29,065

Total prepaid expenses and other current assets $ 140,295 $ 102,450

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Current operating lease liabilities 20,860 15,737

Accrued fixed assets 18,781 9,167

Accrued income taxes 15,324 14,130

Accrued professional fees 19,506 10,410

Accrued sales tax and value added tax 11,733 9,089

Accrued warranty 11,629 11,205

Others 42,946 55,502

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however, future actual warranty costs could differ from the estimated amounts.

We also warrant our CAD/CAM software for a one year period to perform in accordance with agreed product specifications.

As we have not historically incurred any material warranty costs, we do not accrue for these software warranties.

Warranty accrual consists of the following activity (in thousands):

Three Months Ended

Six Months Ended

Balance at beginning of period $ 11,205 $ 8,551

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1 Included in Other long-term liabilities within our Condensed Consolidated Balance Sheet

During the three months ended March 31, 2020 and 2019, we recognized $ 551.0 million and $ 549.0 million of revenue, respectively, of which $ 95.5 million a nd $ 68.4 million was included in the deferred revenues balance at December 31, 2019 and 2018, respectively.

Our unfilled performance obligations, including deferred revenues and backlog, as of March 31, 2020 were $ 619.7 million.

During the three months ended June 30, 2020 and 2019, we recognized $ 352.3 million and $ 600.7 million of revenue, respectively, of which $ 72.4 million and $ 68.6 million was included in the deferred revenues balance at December 31, 2019 and 2018, respectively.

During the six months ended June 30, 2020 and 2019, we recognized $ 903.3 million and $ 1.1 billion of revenue, respectively, of which $ 167.9 million and $ 137.0 million was included in the deferred revenues balance at December 31, 2019 and 2018, respectively.

Our unfilled performance obligations, including deferred revenues and backlog, as of June 30, 2020 were $ 651.9 million.

These performance obligations are expected to be recognized over the next one to five years .

Equity Method Investments

On July 25, 2016, we acquired a 17 % equity interest, on a fully diluted basis, in SmileDirectClub, LLC (“SDC”) for $ 46.7 million.

Concurrently with the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019.

The sale of aligners to SDC and the income from the supply agreement are reported in our Clear Aligner business segment.

On July 24, 2017, we purchased an additional 2 % equity interest in SDC for $ 12.8 million.

The investment was accounted for as an equity method investment and recorded in our Condensed Consolidated Balance Sheet.

We recorded our proportional share of SDC’s losses within equity in losses of investee, net of tax, in our Condensed Consolidated Statement of Operations.

As a result of the arbitrator’s decision regarding SDC announced on March 5, 2019, we were ordered to tender our SDC equity interest by April 3, 2019 for a purchase price equal to the “capital account” balance as of October 31, 2017 under the terms of the investment.

In April 2019, based on the “capital account” value provided by SDC, we entered into an unsecured promissory note with SDC to receive $ 54.2 million through February 1, 2021 in exchange for the tender of our membership interests.

As a result, we derecognized the equity method investment balance of $ 38.4 million in exchange for an unsecured promissory note of $ 54.2 million and we recorded the difference of $ 15.8 million as a gain in the second quarter of 2019 in other income in our Condensed Consolidated Statement of Operations.

Although we tendered our membership interests pursuant to the arbitrator’s decision, the parties did not agree on the amount of the “capital account” balance as of October 31, 2017 or the appropriate repurchase price for the membership units.

On July 3, 2019, we filed a demand for arbitration regarding SDC’s calculation of the “capital account” balance.

The arbitration proceeding remains pending (Refer to Note 8 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements for SDC legal proceedings discussion).

Business Combination

On April 1, 2020 (the “acquisition date”), we completed the acquisition of privately-held exocad for a total purchase consideration of $ 430.0 million and exocad became a wholly-owned subsidiary.

exocad is a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and dental practices.

We believe the synergies from the acquisition will strengthen our digital platform by adding exocad’s expertise in restorative dentistry, implantology, guided surgery, and smile design to extend our digital solutions and pave the way for new, seamless cross-discipline dentistry in lab and at chairside.

The total purchase consideration consisted of the following (in thousands):

Cash paid to exocad stockholders $ 412,287

Cash paid to settle exocad's bank debt 17,691

Total purchase consideration paid $ 429,978

The following table summarizes the allocation of purchase price to assets acquired and liabilities assumed as of April 1, 2020 which are considered preliminary and therefore subject to change (in thousands):

Goodwill $ 344,238

Identified intangible assets 118,700

Cash and cash equivalents 9,190

Deferred tax liabilities ( 35,419 )

Other assets (liabilities), net ( 6,731 )

Total $ 429,978

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets, and represents the expected synergies of the transaction and the knowledge and experience of the workforce in place.

None of this goodwill is deductible for tax purposes.

Under the applicable accounting guidance, goodwill will not be amortized but will be tested for impairment on an annual basis or more frequently if certain indicators are present.

We allocated approximately $ 300.7 million of goodwill to our Systems and Services reporting unit (formerly the "Scanner and Services" reporting unit prior to its renaming during the second quarter of 2020) and approximately $ 43.5 million of the goodwill to our Clear Aligner reporting unit (Refer to Note 5 "Goodwill and Intangible Assets" of the Notes to Condensed Consolidated Financial Statements for additional details) .

Our reporting units are the same as our operating segments.

Acquisition related costs are recognized separately from the business combination and expensed as incurred.

The following table presents details of the identified intangible assets acquired (in thousands, except years):

Weighted Average Amortization Period (in years) Fair Value

Intangible assets subject to amortization:

Existing technology

Customer relationships

Intangible assets not subject to amortization:

In-process Research and Development ("IPR&D")

Total intangible assets $ 118,700

We believe the amount of purchased intangible assets recorded above represent the fair values and approximate the amount a market participant would pay for these intangible assets as of the acquisition date.

Existing technology represents the estimated fair value of exocad’s core technology that has reached technological feasibility.

We valued the existing technology using the multi-period excess earnings method under the income approach.

The economic useful life of existing technology was determined by considering the life cycle of the technology and related cash flows.

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers.

Customer relationships were valued using the with-and-without method under the income approach.

The economic useful life for customer relationships was based on historical customer attrition rates.

Tradenames relates to the exocad tradenames that are recognized within the industry.

The fair value was determined using the relief-from-royalty method under the income approach.

The economic useful life of tradenames was determined by benchmarking against similar transactions entered into by peer companies.

IPR&D refers to the fair value of projects that are not yet completed but have potential value to the company.

Deferred tax liabilities were recorded for significant basis differences primarily to reflect the tax effect of fair value adjustments made to the beginning balance of the intangible assets and deferred revenue as of the acquisition date (Refer to Note 13 "Accounting for Income Taxes" of the Notes to Condensed Consolidated Financial Statements for additional details).

Our condensed consolidated financial statements include the operating results of exocad from the acquisition date.

Separate post-acquisition operating results and pro forma results of operations for this acquisition have not been presented as the effect is not material to our financial results.

Goodwill and Intangible Assets

The change in the carrying value of goodwill for the three months ended March 31, 2020, all attributable to our Clear Aligner reporting unit, is as follows (in thousands):

The change in the carrying value of goodwill for the six months ended June 30, 2020, categorized by reportable segments, is as follows (in thousands):

Clear Aligner Systems and Services Total

Balance as of December 31, 2019 $ 63,924 $ — $ 63,924

Additions from exocad acquisition 1

43,500 300,738 344,238

Adjustments 2

Balance as of March 31, 2020 $ 63,284

574 6,800 7,374

Balance as of June 30, 2020 $ 107,998 $ 307,538 $ 415,536

1 Refer to Note 4 "Business Combination" of the Notes to Condensed Consolidated Financial Statements for additional details

2 Adjustments were related to foreign currency translation within the measurement period

During the fourth quarter of fiscal 2019, we performed the annual goodwill impairment testing and found no impairment as the fair value of our Clear Aligner reporting unit was significantly in excess of the carrying value.

During the fourth quarter of fiscal 2019, we performed our annual goodwill impairment testing and found no impairment as the fair value of our Clear Aligner reporting unit was significantly in excess of the carrying value.

Intangible Long-Lived Assets

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Weighted Average Amortization Period

(in years) Gross Carrying Amount as of March 31, 2020 Accumulated

(in years) Gross Carrying Amount as of June 30, 2020 Accumulated

Impairment Loss

March 31, 2020

Trademarks 15 $ 7,100 $ ( 2,080 ) $ ( 4,179 ) $ 841

June 30, 2020

Trademarks and tradenames 10 $ 16,900 $ ( 2,514 ) $ ( 4,179 ) $ 10,207

Existing technology 10 99,600 ( 5,936 ) ( 4,328 ) 89,336

Customer relationships 11 55,000 ( 19,348 ) ( 10,751 ) 24,901

Reacquired rights 3 7,500 ( 7,500 ) — —

Patents 8 6,796 ( 3,377 ) — 3,419

Other 2 618 ( 590 ) — 28

5 15,314 ( 12,083 ) — 3,231

Total intangible assets 2

$ 186,814 $ ( 39,881 ) $ ( 19,258 ) $ 127,675

1 Includes reacquired rights, patents, IPR&D and other intangible assets

2 Refer to Note 4 "Business Combination" of the Notes to Condensed Consolidated Financial Statements for additional details on intangible assets from our exocad acquisition.

Weighted Average Amortization Period

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Total intangible assets $ 68,114 $ ( 37,088 ) $ ( 19,258 ) $ 11,768

The total estimated annual future amortization expense for these acquired intangible assets as of March 31, 2020 is as follows (in thousands):

The total estimated annual future amortization expense for these acquired intangible assets as of June 30, 2020 is as follows (in thousands):

Fiscal Year Ending December 31,

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Total $ 127,675

Amortization expense for the three months ended March 31, 2020 and 2019 was $ 1.3 million and $ 1.5 million, respectively.

Amortization expense for the three months ended June 30, 2020 and 2019 was $ 4.1 million and $ 1.5 million, respectively, and amortization expense for the six months ended June 30, 2020 and 2019 was $ 5.4 million and $ 3.0 million, respectively.

Equity Method Investments

On July 25, 2016, we acquired a 17 % equity interest, on a fully diluted basis, in SmileDirectClub, LLC (“SDC”) for $ 46.7 million.

Concurrently with the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019.

The sale of aligners to SDC and the income from the supply agreement are reported in our Clear Aligner business segment.

On July 24, 2017, we purchased an additional 2 % equity interest in SDC for $ 12.8 million.

The investment was accounted for as an equity method investment and recorded in our Condensed Consolidated Balance Sheet.

We recorded our proportional share of SDC’s losses within equity in losses of investee, net of tax, in our Condensed Consolidated Statement of Operations.

On July 3, 2019, we filed a demand for arbitration regarding SDC’s calculation of the “capital account” balance.

The arbitration proceeding remains pending (Refer to Note 9 “Legal Proceedings” of the Notes to Condensed Consolida ted Financial Statements for SDC legal proceedings discussion).

Credit Facility

On February 27, 2018, we entered into a credit facility for a $ 200.0 million revolving line of credit, with a $ 50.0 million letter of credit sublimit, and a maturity date of February 27, 2021.

On February 27, 2018, we entered into a credit facility for a $ 200.0 million revolving line of credit, with a $ 50.0 million letter of credit sublimit, and a maturity date of February 27, 2021 ("2018 Credit Facility").

The 2018 Credit Facility requires us to comply with specific financial conditions and performance requirements.

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The margin ranges from 1.25 % to 1.75 % for LIBOR loans and 0.25 % to 0.75 % for base rate loans.

Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans.

on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans.

Principal, together with accrued and unpaid interest, is due on the maturity date.

As of March 31, 2020, we had no outstanding borrowings under this credit facility and were in compliance with the conditions and performance requirements.

As of June 30, 2020, we had no outstanding borrowings under the 2018 Credit Facility and were in compliance with the conditions and performance requirements.

On July 21, 2020 we entered into a new credit facility for a $ 300.0 million unsecured revolving line of credit, with a $ 50.0 million letter of credit sublimit, and a maturity date of July 21, 2023 ("2020 Credit Facility").

Upon entry into the 2020 Credit Facility, the 2018 Credit Facility was terminated.

The 2020 Credit Facility requires us to comply with specific financial conditions and performance requirements.

Loans under the 2020 Credit Facility bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a base rate, in each case plus a margin.

The base rate is the highest of the credit facility's publicly announced prime rate, the federal funds rate plus 0.50 % and one-month LIBOR plus 1.0 %.

The margin ranges from 1.50 % to 2.25 % for LIBOR loans and 0.50 % to 1.25 % for base rate loans.

The outstanding principal, together with accrued and unpaid interest, is due on the maturity date.

Impairments and Other Charges

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The complaint generally alleges claims under the federal securities laws and seeks monetary damages in an unspecified amount and costs and expenses incurred in the litigation.

On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018 (together with the first lawsuit, the “Securities Actions”).

On May 10, 2019, the lead plaintiff filed a consolidated complaint against Align and four of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018.

On June 24, 2019, defendants filed a motion to dismiss the consolidated complaint.

On October 29, 2019, that motion to dismiss was granted with leave to amend.

On November 29, 2019, the lead plaintiff filed an amended consolidated complaint against Align and two of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of purchasers of

our common stock from May 23, 2018 and October 24, 2018.

Defendants’ motion to dismiss the amended consolidated complaint was filed on January 17, 2020.

A hearing on the motion to dismiss is scheduled for June 4, 2020.

On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018.

A motion to dismiss the amended consolidated complaint was filed on January 17, 2020 and a ruling on the motion is pending.

Align believes these claims are without merit and intends to vigorously defend itself.

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In January 2019, three derivative lawsuits were filed in the U.S.

District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in the complaints are similar to those presented in the Securities Actions, but the complaints assert various state law causes of action including for breaches of fiduciary duty, insider trading, and unjust enrichment, among others.

District Court for the Northern District of California which were later consolidated, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in the complaints are similar to those presented in the 2018 Securities Class Action Lawsuit, but the complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment.

The complaints seek unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees.

On February 26, 2019, the three lawsuits were consolidated.

On April 10, 2019, the court stayed the consolidated action pending final disposition of the Securities Actions.

The consolidated action has been stayed pending final disposition of the 2018 Securities Class Action Lawsuit.

On April 12, 2019, a derivative lawsuit was also filed in California Superior Court for Santa Clara County, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in this complaint are similar to those in the derivative suits described above.

On May 16, 2019, the court stayed this action pending final disposition of the Securities Actions.

On February 22, 2019, a purported stockholder sent a letter to Align pursuant to 8 Del.

§ 220 demanding certain books and records for the stated purpose of investigating potential breaches of duty, corporate mismanagement, and alleged wrongdoing by fiduciaries of the Company.

On April 16, 2019, Align responded and refused the demand on several legal grounds.

On June 10, 2019, the purported stockholder petitioned the Superior Court of the State of California, County of Santa Clara, to issue a writ of mandate commanding Align to provide the books and records requested.

On August 23, 2019, Align filed a demurrer seeking to dismiss the petition, and on October 28, 2019, the Court issued an order sustaining Align’s demurrer and dismissing the petition without an opportunity to amend.

On December 19, 2019, the same purported stockholder filed a complaint in the Superior Court of California, County of Santa Clara, seeking an order from the Court compelling Align to permit the inspection of the same books and records that were previously requested, as well as requesting attorneys’ fees.

Align filed a demurrer seeking to dismiss this new complaint on March 12, 2020.

Plaintiff has indicated it will file an amended complaint by May 18, 2020.

Align is currently unable to predict the outcome of this demand or of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss .

allegations in this complaint are similar to those in the derivative suits described above.

The matter has been similarly stayed pending final disposition of the 2018 Securities Class Action Lawsuit.

Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss .

2020 Securities Class Action Lawsuit

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The complaint filed in the Southern District of New York alleges claims under the federal securities laws and seeks monetary damages in an unspecified amount and costs and expenses incurred in the litigation.

The court entered an order approving a stipulation of the parties that defendants will have no obligation to respond to the complaint, until after the appointment of a lead plaintiff.

On April 16, 2020, the Court approved the parties’ stipulation to transfer the case to the U.S.

District Court for the Northern District of California.

No lead plaintiff has been appointed to date.

The lead plaintiff in this matter is expected to file an amended complaint by August 4, 2020.

Align believes these claims are without merit and intends to vigorously defend itself.

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The allegations in the complaint are similar to those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserts state law claims for breach of fiduciary duty and insider trading.

The complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees.

The complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a no minal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees.

This action has been stayed pending final disposition of the 2020 Securities Class Action Lawsuit.

Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

3Shape Litigation

On November 14, 2017, Align filed six patent infringement lawsuits asserting 26 patents against 3Shape, a Danish corporation, and a related U.S.

On November 14, 2017, Align filed several patent infringement lawsuits asserting patents against 3Shape, a Danish corporation, and a related U.S.

corporate entity, asserting that 3Shape’s Trios intraoral scanning system and Dental System software infringe Align patents.

Align filed two Section 337 complaints with the U.S.

International Trade Commission (“ITC”) alleging that 3Shape violates U.S.

trade laws by selling for importation and importing its infringing Trios intraoral scanning system and Dental System software.

Align’s ITC complaints sought cease and desist orders and exclusion orders prohibiting the importation of 3Shape’s Trios scanning system and Dental System software products into the U.S.

The ITC conducted hearings in the Section 337 investigations in September and November 2018.

On March 1, 2019, the Administrative Law Judge issued an Initial Determination in one of the Section 337 investigations, finding no violation of Section 337 by 3Shape.

On April 26, 2019, the Administrative Law Judge issued an Initial Determination in the second Section 337 investigation, finding no violation of Section 337 by 3Shape.

On August 20, 2019, the Commission vacated one Initial Determination and terminated the investigation.

On November 22, 2019, the Commission affirmed a finding of no violation on modified grounds in the other investigation.

In addition to the two ITC Section 337 complaints, in November 2017, Align also filed four separate complaints in the U.S.

These lawsuits included four separate complaints in the U.S.

District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system and Dental System software.

Two of those cases were stayed pending the ITC determinations, while the other two cases proceeded.

Trials in the latter two cases have been scheduled to begin on August 5, 2020 in one case and November 30, 2020 in the other.

In a Delaware case corresponding to one of the terminated ITC investigations, the District Court lifted the stay and scheduled trial to begin on November 8, 2021.

Three of the cases are active, and one is stayed.

Trials have been scheduled to begin on November 30, 2020, and November 8, 2021, in two of the three active cases, with an additional trial to be scheduled in the third.

Certain of Align’s asserted patents in the Delaware actions were found invalid by the District Court judge.

On May 9, 2018, 3Shape filed a complaint in the U.S.

District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of a single 3Shape patent.

On June 14, 2018, 3Shape filed another complaint in the U.S.

District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of another 3Shape patent.

On August 19, 2019, the Court consolidated the two actions, and on August 30, 2019, 3Shape filed an amended complaint alleging infringement of an additional patent.

In that same case, Align asserted counterclaims against 3Shape for infringement of three additional Align patents, which have been severed and added to another patent infringement action brought by Align (described below).

The case is active and in the early discovery phase, with trial scheduled to begin on April 12, 2021.

On May 9, 2018, and June 14, 2018, 3Shape filed separate complaints in the U.S.

District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of two 3Shape patents.

On August 19, 2019, the Court consolidated the two actions, and on August 30, 2019, 3Shape filed an amended complaint alleging infringement of a third patent.

Trial is scheduled to begin on April 12, 2021.

In December 2018, Align filed three additional patent infringement lawsuits asserting 10 additional patents against 3Shape as follows:

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trade laws by selling for importation and importing the infringing TRIOS intraoral scanning system, Trios Lab Scanners and TRIOS software, TRIOS Module software, Dental System software, and Ortho System Software.

The ITC instituted the investigation, and an evidentiary hearing was held at the end of October 2019 before an Administrative Law Judge (“ALJ”).

On April 30, 2020, the ALJ issued an initial determination.

The ALJ determined that 3Shape has infringed on 7 of the 9 patent claims asserted by Align, found valid 6 of the 9 claims asserted by Align, and found a violation of Section 337 stemming from 3Shape’s infringement of 4 claims in 2 of Align's asserted patents.

On April 30, 2020, an Administrative Law Judge (“ALJ”) issued an initial determination that 3Shape infringed on 7 of the 9 patent claims asserted by Align, found valid 6 of the 9 claims asserted by Align, and found a violation of Section 337 stemming from 3Shape’s infringement of 4 claims in 2 of Align's asserted patents.

The ALJ recommended an exclusion order and cease and desist order be entered against 3Shape’s unlawful importation.

The Initial Determination is now subject to review by the Commissioners at the ITC.

Align may file a contingent petition for review of any findings it believes are incorrect.

3Shape may also petition for review of the Initial Determination.

The Commission will then decide whether to review portions of or the entire Initial Determination.

Align filed a petition for review of findings it believes are incorrect, and 3Shape also petitioned for review of the Initial Determination.

On July 28, 2020, the Commission determined to review the Initial Determination in part.

The current deadline for completing the investigation is September 28, 2020.

In addition to the December 10, 2018 ITC Complaint, on December 11, 2018, Align filed two separate complaints in the U.S.

District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system, Lab Scanners and Dental and Ortho System Software.

One of the District Court cases was stayed pending the parallel ITC investigation.

One of the District Court cases was stayed pending the parallel ITC

investigation.

The remaining District Court case is in the early stages of discovery and pretrial proceedings.

Align has dismissed without prejudice three previously-asserted patents from this case, and added the three patents previously asserted as counterclaims in the case filed by 3Shape in 2018 referenced above.

Trial is scheduled for February 7, 2022.

On November 5, 2019, Align filed a complaint for patent infringement asserting an additional patent against 3Shape.

On January 7, 2020, Align voluntarily dismissed the suit without prejudice, and Align currently asserts the patent in another existing litigation against 3Shape.

Trial is scheduled to begin on February 7, 2022.

3Shape has sought to invalidate certain of Align’s patents through petitions for inter partes review proceedings.

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On August 28, 2018, 3Shape filed a complaint against Align in the U.S.

District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s alleged market activities, including Align’s assertion of its patent portfolio, in alleged clear aligner and intraoral scanning markets, and the Court scheduled trial to begin on May 10, 2021.

Align filed a motion to dismiss 3Shape’s complaint on October 17, 2018.

Align also moved to stay the litigation pending the outcome of its motion to dismiss.

The court granted Align’s motion to stay.

On August 15, 2019, the Magistrate Judge recommended that Align’s motion to dismiss be granted, and, on September 26, 2019, the District Court Judge adopted the Magistrate Judge’s Report and Recommendation, granted Align’s motion to dismiss, and dismissed 3Shape’s complaint with leave to amend.

On October 28, 2019, 3Shape filed an amended complaint, and Align again moved to dismiss the complaint.

A hearing on Align’s motion to dismiss was held on February 13, 2020 before the Magistrate Judge, who will issue a written Report and Recommendation to the District Court judge.

After the Court dismissed 3Shape’s complaint with leave, 3Shape filed an amended complaint on October 28, 2019.

On May 20, 2020, the Magistrate Judge recommended that Align’s motion to dismiss the amended complaint be denied.

Align’s objection to the Magistrate Judge’s Report and Recommendation has been fully briefed to the District Court, and the parties are waiting for a ruling.

Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

Simon & Simon

On March 14, 2019, a dental practice named Simon and Simon, PC d/b/a City Smiles brought an antitrust action in the United States District Court for the District of Delaware on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanning markets.

Align filed a motion to dismiss the complaint on April 5, 2019.

On October 15, 2019, the Magistrate Judge issued a Report and Recommendation recommending that Align’s motion be granted and that the plaintiffs’ complaint be dismissed without prejudice.

On October 29, 2019, Simon and Simon filed objections to the Magistrate Judge’s Report and Recommendation, and Align responded on November 12, 2019.

The Court ordered supplemental briefing, which was completed by April 10, 2020.

On April 24, 2020, the Magistrate Judge issued a revised Report and Recommendation again recommending that Align’s motion be granted and that the plaintiffs’ complaint be dismissed without prejudice.

On May 4, 2020, the plaintiff filed a notice of voluntary dismissal and stated an intent to file an amended complaint in a different jurisdiction.

Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.

On June 5, 2020, a dental practice named Simon and Simon, PC d/b/a City Smiles brought an antitrust action in the United States District Court for the Northern District of California on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanning markets.

Prior to filing in the Northern District of California, on May 4, 2020, Plaintiff voluntarily dismissed a similar action in the U.S.

District Court for the District of Delaware after the Magistrate Judge recommended that its complaint be dismissed.

On July 28, 2020, Align filed a motion to dismiss the complaint.

A lign believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.

Align is currently unable to predi ct the outcome of this lawsuit and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

In February 2018, Align received a communication on behalf of SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC Entities”) alleging that the launch and operation of the Invisalign store pilot program constituted a breach of non-compete provisions applicable to the members of SDC Financial LLC, including Align.

As a result of this alleged breach, SDC Financial LLC notified us that its members (other than Align) sought to exercise a right to repurchase all of Align's SDC Financial LLC membership interests for a purchase price equal to the current “capital account” balance of Align.

The SDC Entities’ communication also alleged that Align breached confidentiality provisions applicable to the SDC Financial LLC members and demanded that Align cease all activities related to the Invisalign store pilot project, close existing Invisalign stores and cease using SDC’s confidential information.

In April 2018, the SDC Entities instigated confidential arbitration proceedings and filed a complaint in the Chancery Court of Davidson County, State of Tennessee that sought, among other forms of relief, to preliminarily and permanently enjoin all activities related to the Invisalign store pilot project, require Align to close existing Invisalign stores, prohibit Align from opening any additional stores, and allow the SDC Entities to exercise a right to repurchase all of Align’s SDC Financial LLC membership interests for a purchase price equal to Align’s current “capital account” balance.

On June 29, 2018, the Chancery Court of Davidson County, State of Tennessee denied the SDC Entities’ request for a temporary injunction to prevent Align from opening additional Invisalign stores.

In April 2018, the SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC Entities”) instigated confidential arbitration proceedings against Align.

During December 2018, the parties participated in binding arbitration proceedings and presented closing arguments on January 23, 2019.

The arbitrator issued his decision on March 4, 2019.

The arbitrator found that Align breached the non-compete provision applicable to the members of SDC Financial LLC and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC.

The arbitrator ordered Align to close its Invisalign stores by April 3, 2019, and enjoined Align from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the marketing and sale of clear aligners, and enjoined Align from using the SDC Entities’ confidential information.

In an award dated March 4, 2019, (“Award”) an arbitrator found that Align breached the non-compete provision applicable to the SDC Entities and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC.

As part of the Award, Align was enjoined from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the marketing and sale of clear aligners, and enjoined from using the SDC Entities’ confidential information.

The arbitrator extended the expiration date of specified aspects of the non-compete provision to August 18, 2022.

The arbitrator also ordered Align to tender its SDC Financial LLC membership interests to the SDC Entities for a purchase price equal to the “capital account” balance as of October 31, 2017, to be determined in accordance with the applicable provisions of the SDC Operating Agreements.

financial damages were awarded to the SDC Entities.

The SDC Entities filed a motion to confirm the Award, which Align did not oppose, in the Circuit Court for Cook County, Illinois.

The motion to confirm the Award was granted on April 29, 2019.

As required by the Award, on April 3, 2019, Align had closed its Invisalign stores, returned SDC’s alleged confidential information, and tendered its membership interests for a purchase price that SDC claims to be Align’s “capital account” balance as of October 31, 2017.

No financial damages were awarded to the SDC Entities.

The Circuit Court for Cook County, Illinois confirmed the Award on April 29, 2019.

As required by the Award, Align tendered its membership interests for a purchase price that SDC claims to be Align’s “capital account” balance.

Align disputes that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017 as required by the SDC Operating Agreements and the Award.

Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination of Align’s “capital account” balance as of October 31, 2017.

That arbitration proceeding remains pending and a hearing date is expected to be set once the sheltering restrictions associated with the COVID-19 pandemic are lifted.

Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination.

That arbitration proceeding remains pending and a hearing is currently expected to occur before the end of 2020.

Relatedly, the SDC Entities filed a contempt petition with the Illinois court which confirmed the Award, asserting that Align had no right to contest the “capital account” determination as made by the SDC Entities.

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On August 19, 2019, the SDC Entities filed a separate confidential arbitration proceeding alleging that Align has violated the non-compete provisions applicable to the members of the SDC Entities by virtue of Align’s alleged dealings with a third-party claimed to be a competitor of the SDC Entities.

On March 20, 2020, the SDC Entities requested leave to amend their arbitration demand in order to assert new claims.

Align has opposed the pending request to amend and has denied and intends to vigorously defend itself against all asserted allegations.

On April 27, 2020, the SDC Entities filed an amended arbitration demand, which additionally asserts that Align’s alleged dealings with a third-party constitute contempt of the Award.

Align denies and

intends to vigorously defend itself against all asserted allegations.

The SDC Entities have yet to identify the range of damages they may seek to recover in the course of this arbitration and no hearing date has yet been set.

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Other Commitments

On January 15, 2019, we entered into a Purchase Agreement to purchase five floors of a building under construction in Petach Tivka, Israel for a purchase price of approximately $ 27.0 million with an option to purchase additional three floors with progress payments due through 2020.

During the fourth quarter of 2019, we exercised the option to purchase three additional floors and purchased one additional floor in the building for a purchase price of approximately $ 24.4 million.

As of March 31, 2020, we have a remaining commitment of $ 21.4 million which is expected to be paid in 2020.

On October 3, 2019, we entered into a Promotional Rights Agreement (the “Agreement”) for $ 36.0 million with a third-party which includes certain advertising and media coverage.

The expense related to the Agreement will be incurred over the period of April 1, 2020 through March 31, 2023.

On October 3, 2019, we entered into a Promotional Rights Agreement (the “Agreement”) for $ 36.0 million with a third-party which includes certain advertising and m edia coverage.

As of June 30, 2020, the entire Agreement amount was an outstanding commitment which is expected to be paid through 2023.

Off-Balance Sheet Arrangements

As of March 31, 2020, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Note 10 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

As of June 30, 2020, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Note 10 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

Indemnification Provisions

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However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.

As of March 31, 2020, we did not have any material indemnification claims that were probable or reasonably possible.

As of June 30, 2020, we did not have any material indemnification claims that were probable or reasonably possible.

Stockholders’ Equity

Summary of Stock-Based Compensation Expense

As of March 31, 2020, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares of which 4,662,468 shares are available for issuance.

As of June 30, 2020, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares of which 4,611,280 shares are available for issuance.

Stock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period.

Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The stock-based compensation related to all of our stock-based awards and employee stock purchases for the three months ended March 31, 2020 and 2019 is as follows (in thousands):

The stock-based compensation related to our stock-based awards and employee stock purchase plans for the three and six months ended June 30, 2020 and 2019 is as follows (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Cost of net revenues $ 891 $ 1,278 $ 2,238 $ 2,390

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The fair value of RSUs is based on our closing stock price on the date of grant.

A summary for the three months ended March 31, 2020 is as follows:

A summary for the six months ended June 30, 2020 is as follows:

Number of Shares

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(in thousands)

Weighted Average Grant Date Fair Value Weighted

Average Remaining

Contractual Term (in years)

Weighted Average Grant Date Fair Value Weighted Average Remaining

Contractual Term (in years) Aggregate

(in thousands)

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Forfeited ( 22 ) 231.28

Unvested as of March 31, 2020 677 $ 237.27 1.8 $ 117,738

As of March 31, 2020, we expect to recognize $ 133.4 million of total unamortized compensation cost, net of estimated forfeitures, related to RSUs over a weighted average period of 2.7 years.

Unvested as of June 30, 2020 675 $ 238.47 1.6 $ 185,207

As of June 30, 2020, we expect to recognize $ 126.0 million of total unamortized compensation cost, net of estimated forfeitures, related to RSUs over a weighted average period of 2.6 years.

Market-performance Based Restricted Stock Units (“MSUs”)

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Each MSU represents the right to one share of Align’s common stock.

The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the

performance of a stock market index over the vesting period, and certain MSU grants are also based on Align’s stock price at the end of the performance period.

The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period, and certain MSU grants are also based on Align’s stock price at the end of the performance period.

The maximum number of MSUs which will be eligible to vest range fr om 250 % to 300 % of the MSUs initially granted and the vesting period is three years .

A summary for the three months ended March 31, 2020 is as follows:

A summary for the six months ended June 30, 2020 is as follows:

Number of Shares

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Vested and released ( 173 ) 120.39

Unvested as of March 31, 2020 227 $ 430.50 1.9 $ 39,529

As of March 31, 2020, we expect to recognize $ 52.9 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.9 years.

Unvested as of June 30, 2020 227 $ 430.50 1.6 $ 62,365

As of June 30, 2020, we expect to recognize $ 46.1 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.6 years.

Employee Stock Purchase Plan (“ESPP”)

In May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which will continue until terminated by either the Board of Directors or its administrator.

In May 2010, our stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which will continue until terminated by either the Board of Directors or its administrator.

The maximum number of shares available for purchase under the 2010 Purchase Plan is 2,400,000 shares.

As of March 31, 2020, we have 379,304 shares available for future issuance.

As of June 30, 2020, we have 379,304 shares available for future issuance.

The fair value of the option component of the 2010 Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:

Three Months Ended

Six Months Ended

Expected term (in years) 1.0 1.4

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Weighted average fair value at grant date $ 80.54 $ 90.36

As of March 31, 2020, there was $ 8.4 million of total unamortized compensation costs related to employee stock purchases which we expect to be recognized over a weighted average period of 0.7 year.

As of June 30, 2020, there was $ 5.7 million of total unamortized compensation costs related to employee stock purchases which we expect to be recognized over a weighted average period of 0.5 year.

Common Stock Repurchase Program

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We received a total of 1.1 million shares for an average share price of $ 176.61 .

As of March 31, 2020, we hav e $ 100.0 million available for repurchase under the May 2018 Repurchase Program.

As of June 30, 2020, we hav e $ 100.0 million available for repurchase under the May 2018 Repurchase Program.

Accounting for Income Taxes

During the three months ended March 31, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020.

During the six months ended June 30, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our Europe, Middle East and Africa (" EMEA") regional headquarters is located beginning January 1, 2020.

The transfer of intellectual property rights did not result in a taxable gain;

however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights.

Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $ 1,493.5 million during the three months ended March 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.

Our benefit from income taxes was $ 1,464.8 million for the three months ended March 31, 2020 and our provision for income taxes was $ 8.8 million for the three months ended March 31, 2019, representing effective tax rates of ( 2,745.3 )% and 10.4 %, respectively.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended March 31, 2020 mainly as a result of the aforementioned intra-entity transfer and the recognition of excess tax benefits related to stock-based compensation, partially offset by state income taxes and unrecognized tax benefits associated with certain foreign payments.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended March 31, 2019 mainly as a result of the recognition of excess tax benefits related to stock-based compensation and certain foreign earnings, primarily from the Netherlands and Costa Rica, being taxed at lower tax rates.

The decrease in our effective tax rate for the three months ended March 31, 2020 compared to the same period in 2019 is primarily attributable to the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights during the three months ended March 31, 2020.

Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $ 1,493.5 million during the six months ended June 30, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.

Our benefit from income taxes was $ 32.9 million for the three months ended June 30, 2020 and our provision for income taxes was $ 43.1 million for the three months ended June 30, 2019, representing effective tax rates of 44.8 % and 22.2 %, respectively.

O ur benefit from income taxes was $ 1,497.7 million for the six months ended June 30, 2020 and our provision for income taxes was $ 51.9 million for the six months ended June 30, 2019, representing effective tax rates of 7,437.0 % and 18.6 %, respectively.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended June 30, 2020 primarily due to the recognition of additional tax benefits re sulting from changes in annual effective tax rate caused by a shift in jurisdictional mix of forecasted annual income.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the six months ended June 30, 2020 mainly as a result of the aforementioned intra-entity transfer and the recognition of excess tax benefits related to stock-based compensation, partially offset by unrecognized tax benefits associated with certain foreign payments.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and six months ended June 30, 2019 mainly as a result of the recognition of excess tax benefits related to stock-based compensation and certain foreign earnings, primarily from the Netherlands and Costa Rica, being taxed at lower tax rates.

The increase in our effective tax rate for the three months ended June 30, 2020 compared to the same period in 2019 is primarily attributable to the tax impact of a higher annual forecasted effective tax rate driven by changes in the jurisdictional mix of forecasted income.

The increase in our effective tax rate for the six months ended June 30, 2020 compared to the same period in 2019 is primarily attributable to the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights during the six months ended June 30, 2020.

While the recognition of a deferred tax asset would

normally cause a reduction in tax rate, due to our net loss before tax for the six months ended June 30, 2020, it has the effect of increasing the effective tax rate.

We exercise significant judgment in regards to estimates of future market growth, forecasted earnings and projected taxable income in determining the provision for income taxes and for purposes of assessing our ability to utilize any future benefit from deferred tax assets.

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With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2013.

Our total gross unrecognized tax benefits, excluding interest and penalties, was $ 51.1 million and $ 46.7 million as of March 31, 2020 and December 31, 2019, respectively, a material amount of which would impact our effective tax rate if recognized.

Our total interest and penalties accrued as of March 31, 2020 was not material.

Our total gross unrecognized tax benefits, excluding interest and penalties, were $ 57.0 million and $ 46.7 million as of June 30, 2020 and December 31, 2019, respectively, a material amount of which would impact our effective tax rate if recognized.

Our total interest and penalties accrued as of June 30, 2020 was not material.

We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes.

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Although it is possible that our balance of gross unrecognized tax benefits could materially change in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.

Our total deferred tax liabilities were $ 35.4 million as of June 30, 2020, which were primarily related to the intangible assets from our exocad acquisition.

Our deferred tax liabilities as of December 31, 2019 were not material.

As of December 31, 2019, undistributed earnings of our foreign subsidiaries totaled $ 452.6 million and substantially all of the earnings previously determined to be not indefinitely reinvested have been repatriated.

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therefore, the tax impact upon distribution is limited to mainly state income and withholding taxes and is not significant.

Net Income per Share

Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period.

Net Income (Loss) per Share

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period.

Diluted net income per share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common stock.

Potential common stock, computed using the treasury stock method, includes RSUs, MSUs and our ESPP.

The following table sets forth the computation of basic and diluted net income per share attributable to common stock (in thousands, except per share amounts):

Due to our net loss for the three months ended June 30, 2020 , the potential common stock instruments such as RSUs, MSUs and ESPP were not included in the computation of diluted net loss per share as the effect of including these shares would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stock (in thousands, except per share amounts):

Three Months Ended

Net income $ 1,518,131 $ 71,848

June 30, Six Months Ended

2020 2019 2020 2019

Net income (loss) $ ( 40,602 ) $ 147,142 $ 1,477,529 $ 218,990

Weighted average common shares outstanding, basic 78,769 79,943 78,681 79,901

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Total shares, diluted 78,769 80,590 79,016 80,665

Net income per share, basic $ 19.32 $ 0.90

Net income per share, diluted $ 19.21 $ 0.89

For the three months ended March 31, 2020 and 2019, potentially anti-dilutive shares excluded from diluted net income per share related to RSUs, MSUs and ESPP were not material.

Net income (loss) per share, basic $ ( 0.52 ) $ 1.84 $ 18.78 $ 2.74

Net income (loss) per share, diluted $ ( 0.52 ) $ 1.83 $ 18.70 $ 2.71

Anti-dilutive potential common shares 1

733 139 231 111

1 Represents RSUs and MSUs not included in the calculation of diluted net income per share as the effect would have been anti-dilutive.

Supplemental Cash Flow Information

The supplemental cash flow information consists of the following (in thousands):

Three Months Ended

Six Months Ended

Non-cash investing and financing activities:

Fixed assets acquired with accounts payable or accrued liabilities $ 13,199 $ 12,202

Issuance of promissory note in exchange for sale of equity method investment $ — $ 54,154

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 12,817 $ 9,020

Investing cash flows from finance leases 1

Financing cash flows from finance leases $ — $ 45,773

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Finance leases $ — $ 51,064

1 A portion of finance lease purchase payment relates to leasing a part of the building to a third party as a lessor.

This amount is included in Other Investing Activities in our Condensed Consolidated Statements of Cash Flows.

Segments and Geographical Information

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We group our operations into two reportable segments:

Clear Aligner segment and Scanner segment.

Clear Aligner segment and Imaging Systems and CAD/CAM services ("Systems and Services") segment.

The Systems and Services segment was formerly known as the Scanner and Services segment prior to our acquisition of exocad on April 1, 2020 (Refer to Note 4 "Business Combination" of the Notes to Condensed Consolidated Financial Statements for additional details on the exocad acquisition).

• Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:

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▪ Non-Case includes, but not limited to, Vivera retainers along with our training and ancillary products for treating malocclusion.

• Our Scanner segment consists of intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, additional services and ancillary products.

This segment includes our iTero scanner and OrthoCAD services.

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, OrthoCAD services and ancillary products, as well as exocad's software solution that integrates workflows to dental labs and dental practices.

These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Clear Aligner $ 298,341 $ 496,702 $ 779,952 $ 965,907

Scanner 69,352 79,766

Systems and Services 53,973 103,995 123,325 183,761

Total net revenues $ 352,314 $ 600,697 $ 903,277 $ 1,149,668

Clear Aligner $ 192,366 $ 366,142 $ 543,858 $ 717,500

Scanner 42,864 50,738

Systems and Services 31,962 66,147 74,826 116,885

Total gross profit $ 224,328 $ 432,289 $ 618,684 $ 834,385

Income from operations

Income (loss) from operations

Clear Aligner $ 38,916 $ 244,029 $ 205,304 $ 402,670

Scanner 14,389 28,259

Systems and Services 2,893 39,267 17,282 67,526

Unallocated corporate expenses ( 114,809 ) ( 106,806 ) ( 225,668 ) ( 206,005 )

Total income from operations $ 69,918 $ 87,701

Total income (loss) from operations $ ( 73,000 ) $ 176,490 $ ( 3,082 ) $ 264,191

Depreciation and amortization

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$ 9,697 $ 9,455 $ 19,818 $ 18,545

Unallocated corporate depreciation and amortization

Systems and Services

5,005 1,854 6,790 3,362

Unallocated corporate expenses

8,843 7,863 17,675 15,581

Total depreciation and amortization $ 23,545 $ 19,172 $ 44,283 $ 37,488

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Clear Aligner

$ — $ — $ — $ 29,782

Total impairments and other charges $ — $ — $ — $ 29,782

Litigation settlement gain

Clear Aligner

$ — $ ( 51,000 ) $ — $ ( 51,000 )

Total litigation settlement gain $ — $ ( 51,000 ) $ — $ ( 51,000 )

The following table reconciles total segment income from operations in the table above to net income before provision for (benefit from) income taxes and equity losses of investee (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Total segment income from operations $ 41,809 $ 283,296 $ 222,586 $ 470,196

Unallocated corporate expenses ( 114,809 ) ( 106,806 ) ( 225,668 ) ( 206,005 )

Total income from operations 69,918 87,701

Total income (loss) from operations ( 73,000 ) 176,490 ( 3,082 ) 264,191

Interest income 473 3,465 2,459 6,098

Other income (expense), net ( 966 ) 13,892 ( 19,515 ) 8,146

Net income before provision for (benefit from) income taxes and equity in losses of investee $ 53,355 $ 84,588

Net income (loss) before provision for (benefit from) income taxes and equity in losses of investee $ ( 73,493 ) $ 193,847 $ ( 20,138 ) $ 278,435

Geographical Information

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net revenues 1 :

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Switzerland 2

105,495 — 292,771 —

The Netherlands 2

— 192,188 — 366,932

China 46,377 44,823 66,102 87,439

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United States 180,815 164,451

Costa Rica 85,573 82,083

China 96,565 73,174

Costa Rica 84,348 82,083

The Netherlands 2

1,504 226,286

Other International 159,113 134,225

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2 As a result of the new international corporate structure changes, most of the long-lived assets were transferred from our Netherlands entity to our Switzerland entity during the first quarter of 2020 .

Subsequent Event

On March 3, 2020, we entered into a Sale and Purchase Agreement with CETP III Ivory S.a.r.1., Luxembourg to purchase all of the issued and outstanding shares of capital stock of exocad, a German dental computer-aided design/computer-aided manufacturing software company that offers fully integrated workflows to dental labs and dental practices.

On April 1, 2020, we completed the acquisition for a purchase price of approximately $ 430.0 million in cash, subject to certain adjustments, and exocad became a wholly owned subsidiary.

We are in the process of determining the preliminary allocation of the purchase price to exocad's tangible assets and liabilities assumed.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements