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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
____________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to
Commission file number: 000-32259
____________________________
ALIGN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
____________________________ 
Delaware94-3267295
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2820 Orchard Parkway
San Jose, California 95134
(Address of principal executive offices)
(408) 470-1000
(Registrant’s telephone number, including area code)
 ____________________________
Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par valueALGNThe NASDAQ Stock Market LLC
(NASDAQ Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 
The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of October 23, 2020 was 78,850,392.


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ALIGN TECHNOLOGY, INC.
INDEX
 
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

Invisalign, Align, the Invisalign logo, ClinCheck, Made to Move, Invisalign Assist, Invisalign Teen, Invisalign Go, Vivera, SmartForce, SmartTrack, SmartStage, SmileView, iTero, iTero Element, Orthocad, iCast, iRecord and exocad, among others, are trademarks and/or service marks of Align Technology, Inc. or one of its subsidiaries or affiliated companies and may be registered in the United States and/or other countries.
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PART I—FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net revenues$734,144 $607,341 $1,637,421 $1,757,009 
Cost of net revenues200,056 169,787 484,649 485,070 
Gross profit534,088 437,554 1,152,772 1,271,939 
Operating expenses:
Selling, general and administrative312,492 277,514 852,365 792,572 
Research and development44,527 39,680 126,420 116,034 
Impairments and other (gains) charges (6,792) 22,990 
Litigation settlement gain   (51,000)
Total operating expenses357,019 310,402 978,785 880,596 
Income from operations177,069 127,152 173,987 391,343 
Interest income and other income (expense), net:
Interest income329 3,478 2,788 9,576 
Other income (expense), net7,147 (2,211)(12,368)5,935 
      Total interest income and other income (expense), net7,476 1,267 (9,580)15,511 
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 taxes45,174 25,895 (1,452,493)77,812 
Equity in losses of investee, net of tax   7,528 
Net income $139,371 $102,524 $1,616,900 $321,514 
Net income per share:
Basic
$1.77 $1.29 $20.54 $4.03 
Diluted
$1.76 $1.28 $20.45 $4.00 
Shares used in computing net income per share:
Basic
78,824 79,332 78,729 79,709 
Diluted
79,163 79,825 79,078 80,397 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net income $139,371 $102,524 $1,616,900 $321,514 
Change in foreign currency translation adjustment, net of tax15,810 (92)25,793 530 
Change in unrealized gains (losses) on investments, net of tax 41 (194)317 
Other comprehensive income (loss)
15,810 (51)25,599 847 
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.
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ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)

September 30,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$615,532 $550,425 
Marketable securities, short-term 318,202 
Accounts receivable, net of allowance for doubtful accounts of $13,716 and $6,756, respectively
626,046 550,291 
Inventories123,093 112,051 
Prepaid expenses and other current assets108,576 102,450 
Total current assets1,473,247 1,633,419 
Property, plant and equipment, net703,657 631,730 
Operating lease right-of-use assets, net83,386 56,244 
Goodwill and intangible assets, net555,946 75,692 
Deferred tax assets1,566,227 64,007 
Other assets32,628 39,610 
Total assets$4,415,091 $2,500,702 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$119,184 $87,250 
Accrued liabilities318,471 319,958 
Deferred revenues684,139 563,762 
Total current liabilities1,121,794 970,970 
Income tax payable108,669 102,794 
Operating lease liabilities65,518 43,463 
Other long-term liabilities85,639 37,306 
Total liabilities1,381,620 1,154,533 
Commitments and contingencies (Notes 9 and 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)
  
Common stock, $0.0001 par value (200,000 shares authorized; 78,849 and 78,433 issued and outstanding, respectively)
8 8 
Additional paid-in capital951,740 906,937 
Accumulated other comprehensive income (loss), net24,911 (688)
Retained earnings2,056,812 439,912 
Total stockholders’ equity3,033,471 1,346,169 
Total liabilities and stockholders’ equity$4,415,091 $2,500,702 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)


Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss), NetRetained EarningsTotal
Three Months Ended September 30, 2020SharesAmount
Balance as of June 30, 202078,781 $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 
Issuance of common stock relating to employee equity compensation plans68 — 9,652 — — 9,652 
Tax withholdings related to net share settlements of equity awards— — (1,636)— — (1,636)
Stock-based compensation— — 25,229 — — 25,229 
Balance as of September 30, 202078,849 $8 $951,740 $24,911 $2,056,812 $3,033,471 



Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss), Net
Retained EarningsTotal
Nine Months Ended September 30, 2020SharesAmount
Balance as of December 31, 201978,433 $8 $906,937 $(688)$439,912 $1,346,169 
Net income— — — — 1,616,900 1,616,900 
Net change in unrealized gains (losses) from investments— — — (194)— (194)
Net change in foreign currency translation adjustment
— — — 25,793 — 25,793 
Issuance of common stock relating to employee equity compensation plans416 — 20,314 — — 20,314 
Tax withholdings related to net share settlements of equity awards— — (48,674)— — (48,674)
Stock-based compensation— — 73,163 — — 73,163 
Balance as of September 30, 202078,849 $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.

















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ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(in thousands)
(unaudited)

Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss), NetRetained EarningsTotal
Three Months Ended September 30, 2019SharesAmount
Balance as of June 30, 201979,865 $8 $874,275 $(1,876)$501,275 $1,373,682 
Net income— — — — 102,524 102,524 
Net change in unrealized gains (losses) from investments— — — 41 — 41 
Net change in foreign currency translation adjustment— — — (92)— (92)
Issuance of common stock relating to employee equity compensation plans76 — 8,293 — — 8,293 
Tax withholdings related to net share settlements of equity awards— — (3,075)— — (3,075)
Common stock repurchased and retired(1,132)— (11,360)— (188,640)(200,000)
Stock-based compensation— — 24,176 — — 24,176 
Balance as of September 30, 201978,809 $8 $892,309 $(1,927)$415,159 $1,305,549 



Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss), Net
Retained EarningsTotal
Nine Months Ended September 30, 2019SharesAmount
Balance as of December 31, 201879,778 $8 $877,514 $(2,774)$378,143 $1,252,891 
Net income— — — — 321,514 321,514 
Net change in unrealized gains (losses) from investments— — — 317 — 317 
Net change in foreign currency translation adjustment
 
— — — 530 — 530 
Issuance of common stock relating to employee equity compensation plans529 — 17,907 — — 17,907 
Tax withholdings related to net share settlements of equity awards— — (55,793)— — (55,793)
Common stock repurchased and retired(1,498)— (15,006)— (284,498)(299,504)
Stock-based compensation— — 67,687 — — 67,687 
Balance as of September 30, 201978,809 $8 $892,309 $(1,927)$415,159 $1,305,549 

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







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ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months Ended
September 30,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,616,900 $321,514 
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes(1,502,459)1,470 
Depreciation and amortization68,769 57,194 
Stock-based compensation73,163 67,687 
Non-cash operating lease cost16,819 13,600 
Allowance for doubtful accounts provisions13,090 4,084 
Impairments on equity investments3,787 3,975 
Impairments on long-lived assets 28,498 
Gain on lease terminations (6,792)
Gain from sale of equity method investment (15,769)
Equity in losses of investee 7,528 
Other non-cash operating activities10,402 13,342 
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable(101,888)(95,566)
Inventories(11,774)(40,775)
Prepaid expenses and other assets(28,251)(14,826)
Accounts payable21,837 1,343 
Accrued and other long-term liabilities(28,343)31,089 
Long-term income tax payable119 13,425 
Deferred revenues128,585 138,072 
Net cash provided by operating activities
280,756 529,093 
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired(420,788) 
Purchase of property, plant and equipment(101,757)(107,157)
Purchase of marketable securities(5,341)(588,805)
Proceeds from maturities of marketable securities42,641 211,829 
Proceeds from sales of marketable securities278,817 194,677 
Repayment on unsecured promissory note17,828 13,185 
Other investing activities1,760 (14,062)
Net cash used in investing activities(186,840)(290,333)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock20,314 17,907 
Common stock repurchases (299,504)
Payroll taxes paid upon the vesting of equity awards(48,674)(55,793)
Purchase of finance lease (45,773)
Net cash used in financing activities(28,360)(383,163)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash(568)(2,098)
Net increase (decrease) in cash, cash equivalents, and restricted cash64,988 (146,501)
Cash, cash equivalents, and restricted cash at beginning of the period551,134 637,566 
Cash, cash equivalents, and restricted cash at end of the period$616,122 $491,065 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ALIGN TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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 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 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.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the U.S. requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, useful lives of intangible assets and property and equipment, long-lived assets and goodwill, income taxes and contingent liabilities, the fair values of financial instruments, stock-based compensation, unsecured promissory note receivable, and valuation of investments in privately held companies among others. 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. 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

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/
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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. 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 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 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. 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

(i) New Accounting Updates Recently Adopted

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments - Credit Losses” (Topic 326) to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses which clarifies the scope of guidance in the ASU 2016-13. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this standard in the first quarter of fiscal year 2020 which did not have a material impact on our condensed consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the amendments in this update, an entity will recognize an impairment charge for the amount by which the carrying value exceeds the fair value. The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis. We adopted this standard in the first quarter of fiscal year 2020 which did not have any impact on our condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis. We adopted this standard in the first quarter of fiscal year 2020 which did not have any impact on our condensed consolidated financial statements and related disclosures.

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
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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.

(ii) Recent Accounting Updates Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, to enhance and simplify various aspects of the income tax accounting guidance. The amendment removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The amendments are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures; however, we anticipate the adoption of the guidance will not have a material impact to our consolidated financial statements and related disclosures.

Note 2. Investments and Fair Value Measurements

Marketable Securities

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):
December 31, 2019Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Corporate bonds$210,891 $142 $(27)$211,006 
U.S. government treasury bonds70,587 65 (2)70,650 
U.S. government agency bonds22,085 17 (1)22,101 
Commercial paper14,426   14,426 
Certificates of deposit19   19 
Total marketable securities, short-term$318,008 $224 $(30)$318,202 

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

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 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. The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss which are primarily due to changes in interest rates and credit spreads. We expect to realize the full value of all these investments upon maturity or sale. The weighted average remaining duration of these securities was approximately seven months as of December 31, 2019.

As the carrying value approximates the fair value for our short-term marketable securities shown in the table above, the fair value of our short-term marketable securities as of December 31, 2019 had a contractual maturity one year or less.
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Fair Value Measurements

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):
DescriptionBalance as of
September 30, 2020
Level 1

Level 2
Level 3
Cash equivalents:
Money market funds$285,228 $285,228 $ $ 
Prepaid expenses and other current assets:
Israeli funds3,399  3,399  
Current unsecured promissory note14,505   14,505 
$303,132 $285,228 $3,399 $14,505 

DescriptionBalance as of December 31, 2019Level 1Level 2Level 3
Cash equivalents:
Money market funds$236,923 $236,923 $ $ 
Short-term investments:
Corporate bonds211,006  211,006  
Commercial paper14,426  14,426  
U.S. government treasury bonds70,650 70,650   
U.S. government agency bonds22,101  22,101  
Certificates of deposit19  19  
Prepaid expenses and other current assets:
Israeli funds3,226  3,226  
Current unsecured promissory note25,005   25,005 
Other assets:
Long-term unsecured promissory note7,328   7,328 
$590,684 $307,573 $250,778 $32,333 

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. Refer to Note 6 “Equity Method Investments” of the Notes to Condensed Consolidated Financial Statements for more information.

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 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 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 trade and intercompany receivables and payables. These forward contracts are classified within Level 2 of the fair value hierarchy. 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,
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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 AmountNotional Contract Amount (USD)
Chinese Yuan¥1,075,000$158,198 
Euro127,000148,852 
Canadian DollarC$77,00057,570 
British Pound£29,20037,524 
Japanese Yen¥3,385,00032,042 
Brazilian RealR$112,50019,899 
Israeli ShekelILS53,00015,441 
Mexican PesoM$140,0006,266 
Australian DollarA$6,9004,925 
Swiss FrancCHF4,0004,343 
$485,060 

December 31, 2019
Local Currency AmountNotional Contract Amount (USD)
Euro97,000$108,870 
Chinese Yuan¥431,00060,702 
Canadian DollarC$52,00039,802 
British Pound£28,00036,770 
Brazilian RealR$130,00032,185 
Japanese Yen¥3,000,00027,604 
Israeli ShekelILS63,70018,439 
Mexican PesoM$140,0007,398 
Australian DollarA$3,0002,101 
$333,871 

Other foreign currency forward contract

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.

Note 3. Balance Sheet Components

Inventories consist of the following (in thousands): 
September 30,
2020
December 31,
2019
Raw materials$70,659 $54,947 
Work in process26,167 30,974 
Finished goods26,267 26,130 
Total inventories$123,093 $112,051 

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Prepaid expenses and other current assets consist of the following (in thousands): 
September 30,
2020
December 31,
2019
Tax related receivables$55,162 $41,252 
Current promissory note and related interest receivable 1
14,552 25,005 
Prepaid software and maintenance13,598 7,128 
Others25,264 29,065 
Total prepaid expenses and other current assets$108,576 $102,450 

1Refer to Note 6“Equity Method Investments” of the Notes to Condensed Consolidated Financial Statements for more information.

Accrued liabilities consist of the following (in thousands): 
September 30,
2020
December 31,
2019
Accrued payroll and benefits$126,112 $162,486 
Accrued expenses63,117 55,529 
Accrued property, plant and equipment25,597 9,167 
Current operating lease liabilities20,674 15,737 
Accrued professional fees19,112 10,410 
Accrued income taxes15,539 14,130 
Others48,320 52,499 
Total accrued liabilities$318,471 $319,958 

We regularly review the balance for accrued warranty and update based on historical warranty trends. Actual warranty costs incurred have not materially differed from those accrued; 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):
Nine Months Ended
September 30,
 20202019
Balance at beginning of period$11,205 $8,551 
Charged to cost of net revenues8,047 9,429 
Actual warranty expenditures(8,229)(7,178)
Balance at end of period$11,023 $10,802 

Deferred revenues consist of the following (in thousands):
September 30,
2020
December 31,
2019
Deferred revenues - current$684,139 $563,762 
Deferred revenues - long-term 1
$46,986 $35,503 

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

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.
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Note 4. 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 the 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 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 
Identified intangible assets118,700 
Cash and cash equivalents9,190 
Deferred tax liabilities(35,419)
Other assets (liabilities), net(2,674)
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 $296.7 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
10$87,000 
  Customer relationships
1021,500 
  Tradenames
79,800 
Intangible assets not subject to amortization:
  In-process Research and Development (“IPR&D”)
N/A400 
Total intangible assets$118,700