What changed in this filing

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Item 1A. Risk Factors

2020-07-31 compared with 2020-05-05 · 30 added, 27 removed, 521 unchanged (10% of the section changed)

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Protective and preventative efforts to stop or minimize its spread have and continue to center on minimizing its transmission through decreased social interactions (social distancing).

As a result of measures imposed by the governments in certain affected regions, many commercial activities, businesses and schools have been suspended as part of quarantines and other measures intended to contain this pandemic.

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.

As a result of measures imposed by the governments in certain affected regions starting in the first quarter of 2020, many commercial activities, businesses and schools were suspended as part of quarantines and other measures intended to contain this pandemic.

Because COVID-19 spreads readily through airways in nasal passages and the mouth, our principal customers, dentists and orthodontists and their patients, were an initial 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 materially limiting or preventing our customers from conducting most or all business activities and materially adversely harming our sales and sales efforts.

In response to COVID-19, we have implemented numerous measures to minimize its spread for the health and safety of our employees, customers, patients and the communities in which we live and work as well as in accordance with guidelines, orders and decrees of governmental agencies throughout the world.

These measures have included diagnostic screenings at our facilities, increased social distancing at clinical and manufacturing facilities, temporary closures of physical offices, manufacturing and treatment planning facilities, including our corporate headquarters in the U.S.

Since then, the preventative measures have been reduced such that by the end of the second quarter of 2020, dental practices across every region had largely reopened and were seeing patients, although at varying degrees of previous capacities based on differing regions and times.

In response to COVID-19, we implemented numerous measures to minimize its spread for the health and safety of our employees, customers, patients and the communities in which we live and work as well as in accordance with guidelines, orders and decrees of governmental agencies throughout the world.

These measures included diagnostic screenings at our facilities, increased social distancing at clinical and manufacturing facilities, temporary closures of physical offices, manufacturing and treatment planning facilities, including our corporate headquarters in the U.S.

and regional headquarters in Europe, the Americas and Asia, mandating that a large percentage of our global workforce work remotely, prohibiting non-essential travel, and converting our manufacturing facilities to produce personal protective equipment.

The actions we have taken and any further health and safety measures we may be required or choose to implement in response to the pandemic are and may be highly disruptive to our business, and may ultimately prove insufficient to prevent employees or their relatives from getting ill, potentially severely.

Even if these measures are completely or partially effective, if employees perceive them to be inadequate, or alternatively, overly burdensome, or they provide difficult to maintain over extended periods of time, productivity may decline or we may experience employee unrest, slowdowns or stoppages or other demands, we may be unable to timely meet customer demand or fulfill existing orders, the costs to deliver our products may increase or we may be required to store products that cannot be delivered to closed orthodontic and dental offices, and we may be subject to increased litigation, including for claims related to product liability and worker safety and working conditions.

As the economic impact of the implementation of the various protective and preventative measures continues to unfold, how and to what extent our business and financial results are or may be impacted as well as those of our customers and suppliers, and the financial health and stability of businesses and consumers overall depends on numerous evolving factors, many of which we cannot control nor accurately predict.

Even if these measures are completely or partially effective, if employees perceive them to be inadequate, or alternatively, overly burdensome, or they prove difficult to maintain over extended periods of time, productivity may decline or we may experience employee unrest, slowdowns or stoppages or other demands, we may be unable to timely meet customer demand or fulfill existing orders, the costs to deliver our products may increase or we may be required to store products that cannot be delivered to closed orthodontic and dental offices, and we may be subject to increased litigation, including for claims related to product liability and worker safety and working conditions.

As the economic impact of the implementation of the various protective and preventative measures continues to unfold, we are continually evaluating macroeconomic as well as industry-specific factors, including how and to what extent our business and financial results are or may be impacted as well as those of our customers and suppliers, and the financial health and stability of businesses and consumers overall depends on numerous evolving factors, many of which we cannot control nor accurately predict.

Examples include:

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• future governmental actions mandated, or business and societal actions taken, in response to the pandemic;

• the speed and time frames in which dental practices reopen and demand for our products increases and our ability to timely and effectively respond;

• the impact on worldwide economic activity and employment rates and actions taken by central banks and governments;

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• restrictions or limitations on the ability of our customers to effectively use digital platforms and applications when governmental mandates or societal pressures limit physical interactions with patients;

• data privacy and cybersecurity risks from new or expanded use of online service platforms, including those that facilitate remote working and teledentistry.

• data privacy and cybersecurity risks from new or expanded use of remote working and/or teledentistry by our suppliers, customers, and us, including new or expanded use of online service platforms, products and solutions such as video conferencing applications, inadequately secured computing networks or servers, overheard telephone conversations, viewable computer screens, stolen passwords or access information, increased phishing and other online cyber threats.

A sustained downturn may also result in the carrying value of our goodwill or other intangible assets, including those as a result of the exocad acquisition that closed in April 2020, exceeding their fair value, which may require us to recognize an impairment to those assets.

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however, the pandemic or the perception of its effects could continue to have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price in the future .

For instance, while general economic activity in certain countries such as China has begun to slowly return, it is uncertain when and to what extent dental and orthodontic care may resume, whether patients will feel safe visiting their physicians, and whether or not other countries can begin to return to normal economic activity in similar timeframes.

Moreover, the pandemic could worsen in countries that are already afflicted, could continue to spread to additional countries, or could return to countries where the pandemic was thought to have been partially contained, each of which could further adversely impact our operations, the businesses of our orthodontist and dentist customers, and economic activity generally.

Our net revenues are dependent primarily on our Invisalign System and iTero Scanners and any decline in sales or average selling price of these products for any reason, would adversely affect net revenues, gross margin and net income.

Our net revenues are largely dependent on the sales of our Invisalign System of clear aligners and iTero intraoral scanners.

Our net revenues are largely dependent on the sales of our Invisalign System of clear aligners an d iTero intraoral scanners.

Of the two, we expect net revenues from the sale of the Invisalign System, primarily our comprehensive products, will continue to account for the vast majority of our net revenues for the foreseeable future.

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Although the number and type of competitors varies by segment, geography and customer, we encounter a wide variety of competitors, including new and well-established regional competitors in certain foreign markets, as well as larger companies or divisions of larger companies with substantial sales, marketing, research and financial capabilities.

Due in part to the expiration of certain of our key patents beginning in 2017, competition in the clear aligner market has increased.

Due in part to the expiration of certain of our key patents beginning in 2017, competition in the clear aligner market has

Competitors include existing larger companies able to leverage existing dental market channels to compete directly with us, direct-to-consumer (“DTC”) companies that provide clear aligners using a remote teledentistry model requiring little or no in-office care from trained and licensed physicians, and doctors themselves who can manufacture custom aligners in their offices using modern 3D printing technology.

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We have generally received positive feedback from orthodontists, GPs and consumers regarding Invisalign treatment as both an alternative to braces and as a clinical method for the treatment of malocclusion, but a number of dental professionals believe the Invisalign treatment is appropriate for only a limited percentage of patients.

Increased market acceptance of all of our products will depend in part upon the recommendations of dental professionals, as well as other factors including effectiveness, safety, ease of use, reliability, aesthetics, and price compared to competing products and treatment methods.

Increased market acceptance of all of our products will depend in part

upon the recommendations of dental professionals, as well as other factors including effectiveness, safety, ease of use, reliability, aesthetics, and price compared to competing products and treatment methods.

Our success may depend on our ability to develop, successfully introduce and achieve market acceptance of new products or product offerings.

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or if our geographic, channel, or product mix shifts to lower priced products or to products that have a higher percentage of deferred revenue, our average selling prices would be adversely affected.

Moreover, we may find that some programs are unsuccessful

or, if successful, may drive demand in unexpected ways.

Moreover, we may find that some programs are unsuccessful or, if successful, may drive demand in unexpected ways.

Were any of the foregoing to occur, our net revenues, gross profit, gross margin and net income may decline.

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We believe exocad’s tools and features for diagnostic, restorative, implant, and orthodontic workflows will strengthen and extend our digital solutions;

helping pave the way for new, seamless cross-discipline dentistry in labs and at chairside and extending our Invisalign and iTero solutions while broadening our reach in digital dentistry to exocad’s existing and future customer base.

helping pave the way for new, seamless cross-discipline dentistry in labs and in practices;

extending our Invisalign and iTero solutions while broadening our reach in digital dentistry to exocad’s existing and future customer base.

However, for a variety of reasons, many of which are outside our control or ability to predict, there can be no guarantee that the acquisition will achieve the desired benefits and synergies or will result in additional sales of either Invisalign or iTero solutions or that the exocad software will continue to succeed in the marketplace.

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For instance, as a result of the COVID-19 pandemic sales in the final weeks of the first quarter of 2020 declined substantially and operations at our manufacturing facilities declined shortly thereafter.

If product demand decreases, remains lower or we fail to forecast demand accurately, we could be required to write off inventory or record excess capacity charges, which would lower our gross margin.

If product demand decreases, remains lower or we fail to forecast demand accurately or if we are required to implement additional protective measures to safeguard employees in manufacturing facilities and offices, we could be required to write off inventory or record excess capacity charges, productivity could decline, or we may be required to purchase or lease additional or larger facilities and additional equipment, any of which may take time to accomplish and may lower our gross margin.

Production of our intraoral scanners may also be limited by capacity constraints due to a variety of factors, including our dependency on third party vendors for key components in addition to limited production yields.

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If we fail to meet our customer and patients’ expectations regarding the security of their information, we could be liable for damages and our reputation and competitive position could be impaired.

Affected parties could initiate legal or regulatory action against us, which could cause us to incur significant expense and liability or result in orders forcing us to modify our business practices.

Affected parties could initiate legal or

regulatory action against us, which could cause us to incur significant expense and liability or result in orders forcing us to modify our business practices.

Concerns over our privacy practices could adversely affect others’ perception of us and deter customers, advertisers and partners from using our products.

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Our success depends in part on our proprietary technology, and if we are unable to successfully enforce our intellectual property rights, our competitive position may be harmed.

Litigating claims of this type is costly and could distract our management and cause a decline in our results of operations and stock price.

Litigating claims of this type are costly and could distract our management and cause a decline in our results of operations and stock price.

Our success depends in part on our ability to maintain existing intellectual property ("IP") rights and to obtain and maintain further IP protection for our products, both in the U.S.

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Our inability to maintain the proprietary nature of our technology through patents, copyrights or trade secrets would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects.

In particular, a failure to protect our proprietary rights might allow competitors to copy our technology, which could adversely affect our pricing and market share.

In particular, a failure to protect our proprietary rights might allow competitors to copy

our technology, which could adversely affect our pricing and market share.

In addition, in an effort to protect our IP we are currently, have in the past been, and may in the future be involved in litigation.

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We periodically receive letters from third parties drawing our attention to their patent rights.

While we do not believe we infringe

upon any valid and enforceable rights that have been brought to our attention, there may be other more pertinent rights of which we are presently unaware.

While we do not believe we infringe upon any valid and enforceable rights that have been brought to our attention, there may be other more pertinent rights of which we are presently unaware.

The defense and prosecution of IP suits, interference proceedings and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel.

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The healthcare market itself is highly regulated and subject to changing political, economic and regulatory influences.

Regulations implemented pursuant to the Health Insurance Portability and Accountability Act (“HIPAA”), including regulations affecting the security and privacy of patient healthcare information held by healthcare providers and their business associates may require us to make significant and unplanned enhancements of software applications or services, result in delays or cancellations of orders, or result in the revocation of endorsement of our products and services by healthcare participants.

products and services by healthcare participants.

The effect of HIPAA and newly enforced regulations on our business is difficult to predict, and there can be no assurance that we will adequately address the business risks created by HIPAA and its implementation or that we will be able to take advantage of any resulting business opportunities.

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If there is a major earthquake or any other natural disaster in a region where one of these facilities is located, our ability to create ClinCheck treatment plans, respond to customer inquiries or manufacture and ship our aligners could be compromised which could result in our customers experiencing significant delays receiving their aligners and a decrease in service levels for a period of time.

Moreover, our corporate headquarters and a portion of our research and development activities are located in California, which

suffers from earthquakes, periodic droughts, and wildfires affecting the health and safety of our employees.

Moreover, our corporate headquarters and a portion of our research and development activities are located in California, which suffers from earthquakes, periodic droughts, and wildfires affecting the health and safety of our employees.

Any such business interruptions could materially and adversely affect our business, financial condition and results of operations.

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Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate.

These factors include, but are not limited to, changes in legal entity structure and/or activities performed within our entities, changes in tax laws, regulations and/or rates, new or changes to accounting pronouncements, changing interpretations of existing tax

laws or regulations, changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates, changes in overall levels of pretax earnings, the future levels of tax benefits of stock-based compensation, settlement of income tax audits and non-deductible goodwill impairments.

These factors include, but are not limited to, changes in global economic environment, changes in legal entity structure and/or activities performed within our entities, changes in tax laws, regulations and/or rates, new or changes to accounting pronouncements, changing interpretations of existing tax laws or regulations, changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates, changes in overall levels of pretax earnings, the future levels of tax benefits of stock-based compensation, settlement of income tax audits and non-deductible goodwill impairments.

For example, our effective tax rate varied significantly in our first quarter of fiscal 2020 due to the relocation of our EMEA regional headquarters from the Netherlands to Switzerland effective January 1, 2020.

Also, we may continue to experience significant variation in our effective tax rate related to excess tax benefits on stock-based compensation, particularly in the first quarter of each year when the majority of our equity awards vest.

Our effective tax rate is also dependent in part on forecasts of full year results and could vary materially with the impact of the COVID-19 outbreak to the global economic environment.

Furthermore, we may continue to experience significant variation in our effective tax rate related to excess tax benefits on stock-based compensation, particularly in the first quarter of each year when the majority of our equity awards vest.

Changes in tax laws or tax rulings could negatively impact our income tax provision and net income.

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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 1A. Risk Factors