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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)

____________________________ 

Delaware			94-3267295
(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 class			Trading Symbol			Name of each exchange on which registered
Common Stock, $0.0001 par value			ALGN			The 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 filer			☒			Accelerated filer			☐
Non-accelerated filer			☐			Smaller 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			FINANCIAL INFORMATION			3
ITEM 1.			FINANCIAL STATEMENTS (UNAUDITED):			3
			CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS			3
			CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			4
			CONDENSED CONSOLIDATED BALANCE SHEETS			5
			CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY			6
			CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS			8
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			9
ITEM 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			28
ITEM 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			41
ITEM 4.			CONTROLS AND PROCEDURES			42
PART II			OTHER INFORMATION			42
ITEM 1.			LEGAL PROCEEDINGS			43
ITEM 1A.			RISK FACTORS			43
ITEM 2.			UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			59
ITEM 3.			DEFAULTS UPON SENIOR SECURITIES			59
ITEM 4.			MINE SAFETY DISCLOSURES			59
ITEM 5.			OTHER INFORMATION			59
ITEM 6.			EXHIBITS			60
SIGNATURES						61

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,
						2020						2019						2020						2019
Net revenues						$	734,144					$	607,341					$	1,637,421					$	1,757,009
Cost of net revenues						200,056						169,787						484,649						485,070
Gross profit						534,088						437,554						1,152,772						1,271,939
Operating expenses:
Selling, general and administrative						312,492						277,514						852,365						792,572
Research and development						44,527						39,680						126,420						116,034
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 from operations						177,069						127,152						173,987						391,343
Interest income and other income (expense), net:
Interest income						329						3,478						2,788						9,576
Other income (expense), net						7,147						(2,211)						(12,368)						5,935
Total interest income and other income (expense), net						7,476						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 taxes						45,174						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,
						2020						2019						2020						2019
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 (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
Inventories						123,093						112,051
Prepaid expenses and other current assets						108,576						102,450
Total current assets						1,473,247						1,633,419
Property, plant and equipment, net						703,657						631,730
Operating lease right-of-use assets, net						83,386						56,244
Goodwill and intangible assets, net						555,946						75,692
Deferred tax assets						1,566,227						64,007
Other assets						32,628						39,610
Total assets						$	4,415,091					$	2,500,702
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable						$	119,184					$	87,250
Accrued liabilities						318,471						319,958
Deferred revenues						684,139						563,762
Total current liabilities						1,121,794						970,970
Income tax payable						108,669						102,794
Operating lease liabilities						65,518						43,463
Other long-term liabilities						85,639						37,306
Total liabilities						1,381,620						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 capital						951,740						906,937
Accumulated other comprehensive income (loss), net						24,911						(688)
Retained earnings						2,056,812						439,912
Total stockholders’ equity						3,033,471						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 Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss), Net						Retained Earnings						Total
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
Issuance of common stock relating to employee equity compensation plans						68						—						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, 2020						78,849						$	8					$	951,740					$	24,911					$	2,056,812					$	3,033,471

						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss), Net						Retained Earnings						Total
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
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 plans						416						—						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, 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.

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(in thousands)

(unaudited)

						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss), Net						Retained Earnings						Total
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
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 plans						76						—						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, 2019						78,809						$	8					$	892,309					$	(1,927)					$	415,159					$	1,305,549

						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss), Net						Retained Earnings						Total
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
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 plans						529						—						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, 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.

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

						Nine Months Ended September 30,
						2020						2019
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 amortization						68,769						57,194
Stock-based compensation						73,163						67,687
Non-cash operating lease cost						16,819						13,600
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)
Equity in losses of investee						—						7,528
Other non-cash operating activities						10,402						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 payable						21,837						1,343
Accrued and other long-term liabilities						(28,343)						31,089
Long-term income tax payable						119						13,425
Deferred revenues						128,585						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 securities						42,641						211,829
Proceeds from sales of marketable securities						278,817						194,677
Repayment on unsecured promissory note						17,828						13,185
Other investing activities						1,760						(14,062)
Net cash used in investing activities						(186,840)						(290,333)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock						20,314						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 cash						64,988						(146,501)
Cash, cash equivalents, and restricted cash at beginning of the period						551,134						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, 2019						Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
Corporate bonds						$	210,891					$	142					$	(27)					$	211,006
U.S. government treasury bonds						70,587						65						(2)						70,650
U.S. government agency bonds						22,085						17						(1)						22,101
Commercial paper						14,426						—						—						14,426
Certificates of deposit						19						—						—						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):

Description						Balance 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 funds						3,399						—						3,399						—
Current unsecured promissory note						14,505						—						—						14,505
						$	303,132					$	285,228					$	3,399					$	14,505

Description						Balance as of December 31, 2019						Level 1						Level 2						Level 3
Cash equivalents:
Money market funds						$	236,923					$	236,923					$	—					$	—
Short-term investments:
Corporate bonds						211,006						—						211,006						—
Commercial paper						14,426						—						14,426						—
U.S. government treasury bonds						70,650						70,650						—						—
U.S. government agency bonds						22,101						—						22,101						—
Certificates of deposit						19						—						19						—
Prepaid expenses and other current assets:
Israeli funds						3,226						—						3,226						—
Current unsecured promissory note						25,005						—						—						25,005
Other assets:
Long-term unsecured promissory note						7,328						—						—						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 Amount						Notional Contract Amount (USD)
Chinese Yuan			¥1,075,000						$	158,198
Euro			€127,000						148,852
Canadian Dollar			C$77,000						57,570
British Pound			£29,200						37,524
Japanese Yen			¥3,385,000						32,042
Brazilian Real			R$112,500						19,899
Israeli Shekel			ILS53,000						15,441
Mexican Peso			M$140,000						6,266
Australian Dollar			A$6,900						4,925
Swiss Franc			CHF4,000						4,343
									$	485,060

			December 31, 2019
			Local Currency Amount						Notional Contract Amount (USD)
Euro			€97,000						$	108,870
Chinese Yuan			¥431,000						60,702
Canadian Dollar			C$52,000						39,802
British Pound			£28,000						36,770
Brazilian Real			R$130,000						32,185
Japanese Yen			¥3,000,000						27,604
Israeli Shekel			ILS63,700						18,439
Mexican Peso			M$140,000						7,398
Australian Dollar			A$3,000						2,101
									$	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 process						26,167						30,974
Finished goods						26,267						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 maintenance						13,598						7,128
Others						25,264						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 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 income taxes						15,539						14,130
Others						48,320						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,
						2020						2019
Balance at beginning of period						$	11,205					$	8,551
Charged to cost of net revenues						8,047						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):