What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-10-30 compared with 2020-07-31 · 191 added, 170 removed, 692 unchanged (34% of the section changed)

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

5 unchanged sentences

Research and development 44,527 39,680 126,420 116,034

Impairments and other charges — — — 29,782

Impairments and other (gains) charges — ( 6,792 ) — 22,990

Litigation settlement gain — — — ( 51,000 )

Total operating expenses 357,019 310,402 978,785 880,596

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

Income from operations 177,069 127,152 173,987 391,343

Interest income and other income (expense), net:

2 unchanged sentences

Total interest income and other income (expense), net 7,476 1,267 ( 9,580 ) 15,511

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

Net income before provision for (benefit from) income taxes and equity in losses of investee 184,545 128,419 164,407 406,854

Provision for (benefit from) income taxes 45,174 25,895 ( 1,452,493 ) 77,812

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

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

Net income (loss) per share:

Net income $ 139,371 $ 102,524 $ 1,616,900 $ 321,514

Net income per share:

$ 1.77 $ 1.29 $ 20.54 $ 4.03

$ 1.76 $ 1.28 $ 20.45 $ 4.00

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

Shares used in computing net income per share:

78,824 79,332 78,729 79,709

5 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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

Net income $ 139,371 $ 102,524 $ 1,616,900 $ 321,514

Change in foreign currency translation adjustment, net of tax 15,810 ( 92 ) 25,793 530

Change in unrealized gains (losses) on investments, net of tax — 41 ( 194 ) 317

Other comprehensive income

Other comprehensive income (loss)

15,810 ( 51 ) 25,599 847

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

Comprehensive income $ 155,181 $ 102,473 $ 1,642,499 $ 322,361

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

2 unchanged sentences

(in thousands, except per share data)

September 30,

2020 December 31,

38 unchanged sentences

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 )

Three Months Ended September 30, 2020 Shares Amount

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

Net income — — — — 139,371 139,371

Net change in foreign currency translation adjustment — — — 15,810 — 15,810

2 unchanged sentences

Stock-based compensation — — 25,229 — — 25,229

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

Balance as of September 30, 2020 78,849 $ 8 $ 951,740 $ 24,911 $ 2,056,812 $ 3,033,471

Common Stock Additional

2 unchanged sentences

Retained Earnings Total

Six Months Ended June 30, 2020 Shares Amount

Nine Months Ended September 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 — — 73,163 — — 73,163

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

Balance as of September 30, 2020 78,849 $ 8 $ 951,740 $ 24,911 $ 2,056,812 $ 3,033,471

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

3 unchanged sentences

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

Three Months Ended September 30, 2019 Shares Amount

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

Net income — — — — 102,524 102,524

5 unchanged sentences

Stock-based compensation — — 24,176 — — 24,176

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

Balance as of September 30, 2019 78,809 $ 8 $ 892,309 $ ( 1,927 ) $ 415,159 $ 1,305,549

Common Stock Additional

2 unchanged sentences

Retained Earnings Total

Six Months Ended June 30, 2019 Shares Amount

Nine Months Ended September 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 — — 67,687 — — 67,687

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

Balance as of September 30, 2019 78,809 $ 8 $ 892,309 $ ( 1,927 ) $ 415,159 $ 1,305,549

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

2 unchanged sentences

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

5 unchanged sentences

Non-cash operating lease cost 16,819 13,600

Allowance for doubtful accounts 12,578 3,240

Allowance for doubtful accounts provisions 13,090 4,084

Impairments on equity investments 3,787 3,975

Impairments on long-lived assets — 28,498

Gain on lease terminations — ( 6,792 )

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

10 unchanged sentences

Net cash provided by operating activities

280,756 529,093

CASH FLOWS FROM INVESTING ACTIVITIES:

14 unchanged sentences

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 568 ) ( 2,098 )

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

Net increase (decrease) in cash, cash equivalents, and restricted cash 64,988 ( 146,501 )

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

6 unchanged sentences

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 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.

(“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 nine months ended September 30, 2020 and 2019, our comprehensive income for the three and nine months ended September 30, 2020 and 2019, our financial position as of September 30, 2020, our stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and our cash flows for the nine months ended September 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 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 results of operations for the three and nine months ended September 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.

13 unchanged sentences

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.

Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.

Revenue Recognition - Systems and Services

2 unchanged sentences

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

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 strategies.

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.

9 unchanged sentences

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 us or our customers.

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 or limitations, changes in manufacturing efficiency and capacity constraints caused by uneven or rapid changes in demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by us or 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.

As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain.

The extent to which the COVID-19 pandemic may continue to materially impact our financial condition, liquidity, or results of operations is uncertain for all of the foregoing reasons stated above and many others directly and indirectly related to the virus and efforts to contain its spread.

Recent Accounting Pronouncements

15 unchanged sentences

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to clarify the guidance on the costs of implementing a cloud computing hosting arrangement that is a service contract.

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.

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.

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.

7 unchanged sentences

Marketable Securities

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

We have no short-term or long-term marketable securities as of September 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):

10 unchanged sentences

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.

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

For the three and nine months ended September 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.

6 unchanged sentences

Fair Value Measurements

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):

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

Description Balance as of

June 30, 2020 Level 1

September 30, 2020 Level 1

Cash equivalents:

19 unchanged sentences

$ 590,684 $ 307,573 $ 250,778 $ 32,333

The unsecured promissory note that was entered into in 2019 is classified as Level 3 in our fair value hierarchy as financial information of third parties may not be timely available and consequently we estimate the fair value based on the best available information at the measurement date.

The unsecured promissory note that was entered into in 2019 with SmileDirectClub, LLC (“SDC”) is classified as Level 3 in our fair value hierarchy as financial information of third parties may not be timely available and consequently we estimate the fair value based on the best available information at the measurement date.

The original amount of the note was $ 54.2 million which has decreased due to payments received.

1 unchanged sentence

Investments in Privately Held Companies

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.

Our investments in equity securities of privately held companies without readily determinable fair values were $ 2.1 million and $ 5.9 million as of September 30, 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 change s.

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.

During the nine months ended September 30, 2020 and September 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 t rade 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 trade and intercompany receivables and payables.

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

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

As a result of the settlement of foreign currency forward contracts, during the three months ended September 30, 2020 and 2019, we recognized net losses of $ 12.1 million and net gains of $ 10.1 million, respectively, and during the nine months ended September 30, 2020 and 2019, we recognized net gains of $ 0.6 million and $ 10.5 million,

respectively.

As of September 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 September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020

Local Currency Amount Notional Contract Amount (USD)

2 unchanged sentences

Canadian Dollar C$ 77,000 57,570

Brazilian Real R$ 153,000 27,859

British Pound £ 29,200 37,524

Japanese Yen ¥ 3,385,000 32,042

Brazilian Real R$ 112,500 19,899

Israeli Shekel ILS 53,000 15,441

Mexican Peso M$ 140,000 6,266

Swiss Franc CHF 3,000 3,161

Australian Dollar A$ 6,900 4,925

Swiss Franc CHF 4,000 4,343

December 31, 2019

10 unchanged sentences

Other foreign currency forward contract

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.

Prior to the closing of the 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 nine months ended September 30, 2020, we recognized a $ 10.2 million loss within other income (expense), net in our Condensed Consolidated Statement of Operations.

Balance Sheet Components

Inventories consist of the following (in thousands):

September 30,

2020 December 31,

4 unchanged sentences

Prepaid expenses and other current assets consist of the following (in thousands):

September 30,

2020 December 31,

Tax related receivables $ 55,162 $ 41,252

Prepaid software and maintenance 21,543 7,128

Current promissory note 1

Current promissory note and related interest receivable 1

14,552 25,005

Prepaid software and maintenance 13,598 7,128

Others 25,264 29,065

2 unchanged sentences

Accrued liabilities consist of the following (in thousands):

September 30,

2020 December 31,

1 unchanged sentence

Accrued expenses 63,117 55,529

Accrued property, plant and equipment 25,597 9,167

Current operating lease liabilities 20,674 15,737

Accrued professional fees 19,112 10,410

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

Accrued warranty 11,629 11,205

Accrued income taxes 15,539 14,130

Others 48,320 52,499

6 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

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

3 unchanged sentences

Deferred revenues consist of the following (in thousands):

September 30,

2020 December 31,

3 unchanged sentences

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

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.

During the three months ended September 30, 2020 and 2019, we recognized $ 734.1 million and $ 607.3 million of revenue, respectively, of which $ 99.6 million and $ 70.1 million was included in the deferred revenues balance at December 31, 2019 and 2018, respectively.

During the nine months ended September 30, 2020 and 2019, we recognized $ 1.6 billion and $ 1.8 billion of revenue, respectively, of which $ 263.3 million and $ 207.0 million was included in the deferred revenues balance at December 31, 2019 and 2018, respectively.

Our unfulfilled performance obligations, including deferred revenues and backlog, as of September 30, 2020 were $ 744.7 million.

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

2 unchanged sentences

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):

2 unchanged sentences

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):

The preliminary allocation of purchase price to assets acquired and liabilities assumed which is subject to change within the measurement period is as follows (in thousands):

Goodwill $ 340,181

33 unchanged sentences

Goodwill and Intangible Assets

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):

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

Clear Aligner Systems and Services Total

4 unchanged sentences

2,695 20,542 23,237

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

Balance as of September 30, 2020 $ 110,119 $ 317,223 $ 427,342

1 Includes goodwill adjustments within the measurement period (up to one year from acquisition date).

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

2 Adjustments related to foreign currency translation within the measurement period

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.

2 unchanged sentences

Weighted Average Amortization Period

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

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

Impairment Loss

June 30, 2020

September 30, 2020

Trademarks and tradenames 10 $ 16,900 $ ( 2,849 ) $ ( 4,179 ) $ 9,872

2 unchanged sentences

5 14,913 ( 11,885 ) — 3,028

Total intangible assets 2

$ 186,413 $ ( 46,213 ) $ ( 19,258 ) 120,942

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

Foreign currency translation 7,662

Total intangible assets 2

1 Includes reacquired rights, patents 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.

11 unchanged sentences

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 June 30, 2020 is as follows (in thousands):

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

Fiscal Year Ending December 31,

2 unchanged sentences

Total $ 120,942

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.

Amortization expense for the three months ended September 30, 2020 and 2019 was $ 4.1 million and $ 1.5 million, respectively, and amortization expense for the nine months ended September 30, 2020 and 2019 was $ 9.5 million and $ 4.5 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.

On July 25, 2016, we acquired a 17 % equity interest, on a fully diluted basis, in 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.

9 unchanged sentences

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).

As of September 30, 2020, the unsecured promissory note had a remaining current balance of $ 14.5 million.

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 ("2018 Credit Facility").

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

The loans 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 1.25 % to 1.75 % for LIBOR loans and 0.25 % to 0.75 % for base rate 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 June 30, 2020, we had no outstanding borrowings under the 2018 Credit Facility and were in compliance with the conditions and performance requirements.

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

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”), replacing our previous credit facility which provided for a $ 200.0 million revolving line of credit with a $ 50.0 million letter of credit.

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.

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 %.

2 unchanged sentences

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

Impairments and Other Charges

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

Impairments and Other (Gains) Charges

On March 5, 2019, we announced the outcome of the arbitration regarding SDC (Refer to Note 9 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements for SDC legal proceedings discussion) which required Align to close its Invisalign stores and tender Align’s equity interest in SDC by April 3, 2019.

4 unchanged sentences

In addition, we also recorded $ 1.3 million of employee severance costs and other charges.

During the third quarter of 2019, we negotiated early termination of our Invisalign store leases and recorded lease termination gains of $ 6.8 million.

Legal Proceedings

2 unchanged sentences

District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock between July 25, 2018 and October 24, 2018.

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.

The complaint generally alleged claims under the federal securities laws and sought 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.

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.

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.

On September 9, 2020, Defendants’ motion to dismiss the amended consolidated complaint was granted in part and denied in part.

On September 24, 2020, the Court stayed the case until otherwise ordered to allow the parties time to pursue private mediation.

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

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.

2 unchanged sentences

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 allegations in the complaints are similar to those asserted 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.

1 unchanged sentence

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.

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

The allegations in the 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.

2 unchanged sentences

On March 2, 2020, a class action lawsuit against Align and two of our executive officers was filed in the U.S.

District Court for the Southern District of New York on behalf of a purported class of purchasers of our common stock between April 24, 2019 and July 24, 2019.

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.

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.

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

District Court for the Southern District of New York (later transferred to the U.S.

District Court for the Northern District of California) on behalf of a purported class of purchasers of our common stock between April 24, 2019 and July 24, 2019.

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

The lead plaintiff filed an amended complaint on August 4, 2020 against Align and three of our executive officers alleging similar claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019.

A motion to dismiss the amended complaint was filed on September 18, 2020.

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

12 unchanged sentences

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

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.

Three of the cases are active, and one was voluntarily dismissed by Align.

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

2 unchanged sentences

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:

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

On December 10, 2018, Align filed one Section 337 complaint with the ITC alleging that 3Shape violates U.S.

3 unchanged sentences

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

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.

The current deadline for completing the investigation is November 2, 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.

Trial is scheduled to begin on February 7, 2022.

On October 19, 2020, Align filed a complaint in the U.S.

District Court for the Western District of Texas alleging patent infringement by 3Shape ’s intraoral scanners and associated software products.

3Shape has not yet responded to the complaint.

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

Align disputes 3Shape’s positions and intends to vigorously defend the validity of its patent rights.

Each of the District Court patent infringement complaints seek monetary damages and injunctive relief against further infringement.

Each of the District Court patent infringement complaints seek monetary damages and/or injunctive relief against further infringement.

Trial dates in the District Court cases are uncertain given the ongoing pandemic.

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

8 unchanged sentences

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.

Plaintiff filed an amended complaint and added VIP Dental Spas as a plaintiff on August 14, 2020.

On September 9, 2020, Align moved to dismiss Plaintiffs’ amended 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 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.

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

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

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.

In an award dated March 4, 2019, (“Award”) an arbitrator found that Align breached a restrictive covenant 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 extended the expiration date of specified aspects of the restrictive covenant 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.

4 unchanged sentences

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.

That arbitration proceeding remains pending and a hearing is currently expected to occur in December 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.

1 unchanged sentence

The SDC Entities have appealed the denial of the contempt petition, and that appeal remains pending.

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 August 19, 2019, the SDC Entities filed a separate confidential arbitration proceeding alleging that Align has violated a restrictive covenant 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 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.

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

Align denies and intends to vigorously defend itself against all asserted allegations.

On September 30, 2020, SDC announced that it was withdrawing its claim for damages in this arbitration proceeding, and that it would instead seek injunctive and equitable relief.

That arbitration proceeding remains pending and a hearing is currently expected to occur in March 2021.

On August 27, 2020, Align initiated a confidential arbitration proceeding against the SDC entities before the American Arbitration Association in San Jose, California.

This arbitration relates to the Strategic Supply Agreement (“Supply Agreement”) entered into between the parties in 2016.

The complaint states that the SDC Entities breached the Supply Agreement ’ s terms, causing damages to Align in an amount to be determined.

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

In addition to the above, in the course of Align’s operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters.

4 unchanged sentences

Other Commitments

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.

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

As of September 30, 2020, we had a remaining commitment of $ 32.5 million which is expected to be paid through 2023.

Off-Balance Sheet Arrangements

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.

As of September 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

6 unchanged sentences

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

As of September 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 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.

As of September 30, 2020, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares of which 4,617,148 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 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):

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

5 unchanged sentences

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

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

A summary for the nine months ended September 30, 2020 is as follows:

Number of Shares

7 unchanged sentences

Forfeited ( 34 ) 233.59

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.

Unvested as of September 30, 2020 652 $ 241.90 1.4 $ 213,410

As of September 30, 2020, we expect to recognize $ 113.4 million of total unamortized compensation cost, net of estimated forfeitures, related to RSUs over a weighted average period of 2.4 years.

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

3 unchanged sentences

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 six months ended June 30, 2020 is as follows:

A summary for the nine months ended September 30, 2020 is as follows:

Number of Shares

7 unchanged sentences

Vested and released ( 173 ) 120.39

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.

Unvested as of September 30, 2020 227 $ 430.50 1.4 $ 74,391

As of September 30, 2020, we expect to recognize $ 39.0 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.4 years.

Employee Stock Purchase Plan (“ESPP”)

1 unchanged sentence

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

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

As of September 30, 2020, we have 325,665 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:

Six Months Ended

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Expected term (in years) 1.0 1.5 1.0 1.4

3 unchanged sentences

Weighted average fair value at grant date $ 117.32 $ 80.42 $ 96.94 $ 86.02

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.

As of September 30, 2020, there was $ 4.9 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

6 unchanged sentences

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

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

As of September 30, 2020, we have $ 100.0 million available for repurchase under the May 2018 Repurchase Program.

Accounting for Income Taxes

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.

During the nine months ended September 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 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.

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 nine months ended September 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 provision for income t axes was $ 45.2 million and $ 25.9 million for the three months ended September 30, 2020 and 2019, representing effective tax rates of 24.5 % and 20.2 %, respectively.

O ur benefit from income taxes was $ 1,452.5 million for the nine months ended September 30, 2020 and our provision for income taxes was $ 77.8 million for the nine months ended September 30, 2019, representing effective tax rates of ( 883.5 )% and 19.1 %, respectively.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended September 30, 2020 primarily due to the recognition of additional tax expense resulting from state tax and non-deductible expenses in the U.S., partially offset by the recognition of a tax benefit for the release of certain unrecognized tax benefits following the settlement of an Internal Revenue Service ( “ IRS ” ) income tax audit for years 2015 and 2016.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the nine months ended September 30, 2020 mainly as a result of the recognition of tax benefits related to the intra-entity transfer of certain intellectual property rights and fixed assets mentioned above.

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

The increase in our effective tax rate for the three months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to reduced tax benefit of certain foreign earnings being taxed at lower tax rates and tax benefits recorded last year related to certain statute of limitations expirations and adjustments for prior years that did not recur in 2020, offset in part by a tax benefit recorded this quarter for the release of certain unrecognized tax benefits following the settlement of an IRS income tax audit for years 2015 and 2016.

The decrease in our effective tax rate for the nine months ended

September 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 nine months ended September 30, 2020.

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.

5 unchanged sentences

federal, the State of California and Switzerland.

federal and state tax returns, we are no longer subject to tax examinations for years before 2015.

We are currently under examination by the IRS for tax years 2015 and 2016.

We are no longer subject to U.S.

federal tax examination for years before 2017 and U.S.

state tax examination for years before 2015.

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, 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.

Our total gross unrecognized tax benefits, excluding interest and penalties, were $ 47.0 million and $ 46.7 million as of September 30, 2020 and December 31, 2019, respectively, a material amount of which would impact our effective tax rate if recognized.

Total interest and penalties accrued as of September 30, 2020 was not material.

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

The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

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.

During the three months ended September 30, 2020, we recognized $ 8.7 million of previously unrecognized tax benefits through our effective tax rate due to the settlement of the IRS audit for tax years 2015 and 2016.

We do not anticipate the total unrecognized tax benefits will change significantly within the next 12 months due to settlement of audits nor expiration of statutes of limitations.

Our total deferred tax liabilities were $ 36.8 million as of September 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.

3 unchanged sentences

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

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.

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.

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.

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):

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):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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

Net income $ 139,371 $ 102,524 $ 1,616,900 $ 321,514

Weighted average common shares outstanding, basic 78,824 79,332 78,729 79,709

1 unchanged sentence

Total shares, diluted 79,163 79,825 79,078 80,397

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

Net income per share, basic $ 1.77 $ 1.29 $ 20.54 $ 4.03

Net income per share, diluted $ 1.76 $ 1.28 $ 20.45 $ 4.00

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.

1 unchanged sentence

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

Six Months Ended

Nine Months Ended

September 30,

Non-cash investing and financing activities:

27 unchanged sentences

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

• 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.

• 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 CAD/CAM 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.

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

5 unchanged sentences

Total gross profit $ 534,088 $ 437,554 $ 1,152,772 $ 1,271,939

Income (loss) from operations

Income from operations

Clear Aligner $ 261,774 $ 211,952 $ 467,078 $ 614,622

1 unchanged sentence

Unallocated corporate expenses ( 119,617 ) ( 117,560 ) ( 345,285 ) ( 323,565 )

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

Total income from operations $ 177,069 $ 127,152 $ 173,987 $ 391,343

Depreciation and amortization

6 unchanged sentences

Total depreciation and amortization $ 24,486 $ 19,706 $ 68,769 $ 57,194

Impairments and other charges

Impairments and other (gains) charges

Clear Aligner

$ — $ ( 6,792 ) $ — $ 22,990

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

Total impairments and other (gains) charges $ — $ ( 6,792 ) $ — $ 22,990

Litigation settlement gain

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

1 unchanged sentence

Unallocated corporate expenses ( 119,617 ) ( 117,560 ) ( 345,285 ) ( 323,565 )

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

Total income from operations 177,069 127,152 173,987 391,343

Interest income 329 3,478 2,788 9,576

Other income (expense), net 7,147 ( 2,211 ) ( 12,368 ) 5,935

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

Net income before provision for (benefit from) income taxes and equity in losses of investee $ 184,545 $ 128,419 $ 164,407 $ 406,854

Geographical Information

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

12 unchanged sentences

Tangible long-lived assets, which includes Property, plant and equipment, net, and Operating lease right-of-use assets, net, are presented below by geographic area (in thousands):

September 30,

2020 December 31, 2019

11 unchanged sentences

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