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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________ 

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 March 31, 2021

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)

410 North Scottsdale Road, Suite 1300

Tempe, Arizona 85281

(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 April 30, 2021 was 79,136,575.

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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			7
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			8
ITEM 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			31
ITEM 4.			CONTROLS AND PROCEDURES			31
PART II			OTHER INFORMATION			32
ITEM 1.			LEGAL PROCEEDINGS			32
ITEM 1A.			RISK FACTORS			32
ITEM 2.			UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			50
ITEM 3.			DEFAULTS UPON SENIOR SECURITIES			50
ITEM 4.			MINE SAFETY DISCLOSURES			50
ITEM 5.			OTHER INFORMATION			50
ITEM 6.			EXHIBITS			51
SIGNATURES						52

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.

2

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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 March 31,
																		2021						2020
Net revenues																		$	894,771					$	550,963
Cost of net revenues																		217,673						156,607
Gross profit																		677,098						394,356
Operating expenses:
Selling, general and administrative																		397,115						282,906
Research and development																		54,537						41,532
Total operating expenses																		451,652						324,438
Income from operations																		225,446						69,918
Interest income and other income (expense), net:
Interest income																		1,643						1,986
Other income (expense), net																		34,532						(18,549)
Total interest income and other income (expense), net																		36,175						(16,563)
Net income before provision for (benefit from) income taxes																		261,621						53,355
Provision for (benefit from) income taxes																		61,245						(1,464,776)
Net income																		$	200,376					$	1,518,131
Net income per share:
Basic																		$	2.54					$	19.32
Diluted																		$	2.51					$	19.21
Shares used in computing net income per share:
Basic																		79,000						78,592
Diluted																		79,798						79,028

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

3

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

												Three Months Ended March 31,
																		2021						2020
Net income																		$	200,376					$	1,518,131
Change in foreign currency translation adjustment, net of tax																		(14,451)						689
Change in unrealized gains (losses) on investments, net of tax																		(20)						(194)
Other comprehensive income (loss)																		(14,471)						495
Comprehensive income																		$	185,905					$	1,518,626

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

4

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

						March 31, 2021						December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents						$	1,131,698					$	960,843
Accounts receivable, net of allowance for doubtful accounts of $9,882 and $10,239, respectively						718,957						657,704
Inventories						150,643						139,237
Prepaid expenses and other current assets						114,257						91,754
Total current assets						2,115,555						1,849,538
Property, plant and equipment, net						763,870						734,721
Operating lease right-of-use assets, net						82,435						82,553
Goodwill						427,561						444,817
Intangible assets, net						120,479						130,072
Deferred tax assets						1,521,922						1,552,831
Other assets						37,960						35,151
Total assets						$	5,069,782					$	4,829,683
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable						$	124,298					$	142,132
Accrued liabilities						406,672						405,582
Deferred revenues						862,872						777,887
Total current liabilities						1,393,842						1,325,601
Income tax payable						109,668						105,748
Operating lease liabilities						63,845						64,445
Other long-term liabilities						108,851						100,024
Total liabilities						1,676,206						1,595,818
Commitments and contingencies (Notes 6 and 7)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)						—						—
Common stock, $0.0001 par value (200,000 shares authorized; 79,136 and 78,860 issued and outstanding, respectively)						8						8
Additional paid-in capital						948,362						974,556
Accumulated other comprehensive income (loss), net						29,030						43,501
Retained earnings						2,416,176						2,215,800
Total stockholders’ equity						3,393,576						3,233,865
Total liabilities and stockholders’ equity						$	5,069,782					$	4,829,683

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

5

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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 March 31, 2021						Shares						Amount
Balance as of December 31, 2020						78,860						$	8					$	974,556					$	43,501					$	2,215,800					$	3,233,865
Net income						—						—						—						—						200,376						200,376
Net change in unrealized gains (losses) from investments						—						—						—						(20)						—						(20)
Net change in foreign currency translation adjustment						—						—						—						(14,451)						—						(14,451)
Issuance of common stock relating to employee equity compensation plans						276						—						13,133						—						—						13,133
Tax withholdings related to net share settlements of equity awards						—						—						(66,568)						—						—						(66,568)
Stock-based compensation						—						—						27,241						—						—						27,241
Balance as of March 31, 2021						79,136						$	8					$	948,362					$	29,030					$	2,416,176					$	3,393,576

						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss), Net						Retained Earnings						Total
Three Months Ended March 31, 2020						Shares						Amount
Balance as of December 31, 2019						78,433						$	8					$	906,937					$	(688)					$	439,912					$	1,346,169
Net income						—						—						—						—						1,518,131						1,518,131
Net change in unrealized gains (losses) from investments						—						—						—						(194)						—						(194)
Net change in foreign currency translation adjustment						—						—						—						689						—						689
Issuance of common stock relating to employee equity compensation plans						326						—						10,662						—						—						10,662
Tax withholdings related to net share settlements of equity awards						—						—						(45,395)						—						—						(45,395)
Stock-based compensation						—						—						22,927						—						—						22,927
Balance as of March 31, 2020						78,759						$	8					$	895,131					$	(193)					$	1,958,043					$	2,852,989

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)

						Three Months Ended March 31,
						2021						2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income						$	200,376					$	1,518,131
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes						28,979						(1,487,154)
Depreciation and amortization						25,635						20,738
Stock-based compensation						27,241						22,927
Non-cash operating lease cost						5,911						5,546
Allowance for doubtful accounts provisions						455						4,838
Arbitration award gain						(43,403)						—
Impairment on equity investment						—						2,900
Other non-cash operating activities						5,340						7,728
Changes in assets and liabilities:
Accounts receivable						(67,423)						13,761
Inventories						(15,582)						(10,496)
Prepaid expenses and other assets						(34,858)						(37,244)
Accounts payable						(14,936)						(12,034)
Accrued and other long-term liabilities						(475)						(69,103)
Long-term income tax payable						3,920						6,354
Deferred revenues						106,007						22,892
Net cash provided by operating activities						227,187						9,784
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment						(43,431)						(46,085)
Purchase of marketable securities						—						(5,341)
Proceeds from maturities of marketable securities						—						42,641
Proceeds from sales of marketable securities						—						278,817
Repayment on unsecured promissory note						4,594						4,419
Proceeds from arbitration award						43,403						—
Other investing activities						—						1,760
Net cash provided by investing activities						4,566						276,211
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock						13,133						10,662
Payroll taxes paid upon the vesting of equity awards						(66,568)						(45,395)
Net cash used in financing activities						(53,435)						(34,733)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash						(7,487)						(11,007)
Net increase in cash, cash equivalents, and restricted cash						170,831						240,255
Cash, cash equivalents, and restricted cash at beginning of the period						961,474						551,134
Cash, cash equivalents, and restricted cash at end of the period						$	1,132,305					$	791,389

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 months ended March 31, 2021 and 2020, our comprehensive income for the three months ended March 31, 2021 and 2020, our financial position as of March 31, 2021, our stockholders’ equity for the three months ended March 31, 2021 and 2020, and our cash flows for the three months ended March 31, 2021 and 2020. The Condensed Consolidated Balance Sheet as of December 31, 2020 was derived from the December 31, 2020 audited financial statements. It does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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, 2020.

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, 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.

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. The full extent to which the pandemic, including as a result of any new strains, business restrictions or lockdowns, and the impact of vaccinations, will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately determined.

Recent Accounting Pronouncements

New Accounting Updates Recently Adopted

In December 2019, the Financial Accounting Standards Board 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. Adoption of this standard in the first quarter of fiscal year 2021 did not have a material impact on our consolidated financial statements or related disclosures.

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Note 2. Fair Value Measurements

The following tables summarize our financial assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 (in thousands):

Description						Balance as of March 31, 2021						Level 1						Level 2
Cash equivalents:
Money market funds						$	654,211					$	654,211					$	—
Prepaid expenses and other current assets:
Israeli funds						3,752						—						3,752
						$	657,963					$	654,211					$	3,752

Description						Balance as of December 31, 2020						Level 1						Level 2						Level 3
Cash equivalents:
Money market funds						$	519,228					$	519,228					$	—					$	—
Prepaid expenses and other current assets:
Israeli funds						3,500						—						3,500						—
Current unsecured promissory note 1						5,408						—						—						5,408
						$	528,136					$	519,228					$	3,500					$	5,408

1 The unsecured promissory note was paid in full by SmileDirectClub, LLC (“SDC”) during the three months ended March 31, 2021. Besides the repayment on the note, on March 12, 2021, the Arbitrator ruled in favor of us on the SDC dispute and issued an award of $43.4 million along with interest. The gain of $43.4 million is recognized as a part of our other income (expense), net in our Condensed Consolidated Statement of Operation. Refer to Note 6 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements for more information on the arbitration award received.

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 March 31, 2021 and 2020, we recognized net gains of $12.4 million and $15.6 million, respectively. As of March 31, 2021 and December 31, 2020, the fair value of foreign exchange forward contracts outstanding was not material.

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of March 31, 2021 and December 31, 2020 (in thousands):

			March 31, 2021
			Local Currency Amount						Notional Contract Amount (USD)
Euro			€160,500						$	188,276
Chinese Yuan			¥1,107,000						168,394
Canadian Dollar			C$92,200						73,208
British Pound			£42,990						59,182
Brazilian Real			R$222,000						38,836
Japanese Yen			¥4,071,800						36,757
Polish Zloty			PLN138,395						34,906
Israeli Shekel			ILS65,220						19,533
Mexican Peso			M$295,500						14,422
Swiss Franc			CHF6,100						6,474
Australian Dollar			A$5,800						4,412
									$	644,400

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			December 31, 2020
			Local Currency Amount						Notional Contract Amount (USD)
Euro			€126,300						$	155,125
Chinese Yuan			¥936,000						143,393
Canadian Dollar			C$65,000						50,791
British Pound			£32,300						43,879
Japanese Yen			¥4,249,000						41,222
Brazilian Real			R$142,000						27,264
Israeli Shekel			ILS74,000						23,094
Mexican Peso			M$140,000						7,002
Australian Dollar			A$5,800						4,447
Swiss Franc			CHF3,700						4,191
									$	500,408

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

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Note 3. Balance Sheet Components

Inventories consist of the following (in thousands): 

						March 31, 2021						December 31, 2020
Raw materials						$	75,836					$	76,404
Work in process						40,387						31,393
Finished goods						34,420						31,440
Total inventories						$	150,643					$	139,237

Accrued liabilities consist of the following (in thousands): 

						March 31, 2021						December 31, 2020
Accrued payroll and benefits						$	153,898					$	170,106
Accrued expenses						85,854						77,024
Accrued income taxes						41,539						30,130
Accrued property, plant and equipment						36,857						27,692
Current operating lease liabilities						21,513						21,735
Other accrued liabilities						67,011						78,895
Total accrued liabilities						$	406,672					$	405,582

Accrued warranty, which is included in the "Other accrued liabilities" category of the accrued liabilities table above, consists of the following activity (in thousands):

						Three Months Ended March 31,
						2021						2020
Balance at beginning of period						$	12,615					$	11,205
Charged to cost of net revenues						4,280						3,724
Actual warranty expenditures						(3,160)						(3,140)
Balance at end of period						$	13,735					$	11,789

Deferred revenues consist of the following (in thousands):

						March 31, 2021						December 31, 2020
Deferred revenues - current						$	862,872					$	777,887
Deferred revenues - long-term 1						$	74,226					$	62,551

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

During the three months ended March 31, 2021 and 2020, we recognized $894.8 million and $551.0 million of net revenues, respectively, of which $125.8 million and $95.5 million was included in the deferred revenues balance at December 31, 2020 and 2019, respectively.

Our unfulfilled performance obligations, including deferred revenues and backlog, as of March 31, 2021 were $963.5 million. These performance obligations are expected to be recognized over the next one to five years.

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Note 4. Goodwill and Intangible Assets

Goodwill

The change in the carrying value of goodwill for the three months ended March 31, 2021, categorized by reportable segments, is as follows (in thousands):

			Clear Aligner						Systems and Services						Total
Balance as of December 31, 2020			$	112,691					$	332,126					$	444,817
Foreign currency translation adjustments			(2,374)						(14,882)						(17,256)
Balance as of March 31, 2021			$	110,317					$	317,244					$	427,561

Intangible Long-Lived Assets

Acquired intangible long-lived assets were as follows, excluding intangibles that were fully amortized (in thousands): 

			Weighted Average Amortization Period (in years)						Gross Carrying Amount as of March 31, 2021						Accumulated Amortization						Accumulated Impairment Loss						Net Carrying Value as of March 31, 2021
Existing technology			10						$	99,400					$	(15,035)					$	(4,328)					$	80,037
Customer relationships			11						55,000						(22,882)						(10,751)						21,367
Trademarks and tradenames			10						16,600						(3,318)						(4,179)						9,103
Patents and other			8						6,610						(3,989)						—						2,621
									$	177,610					$	(45,224)					$	(19,258)					113,128
Foreign currency translation																											7,351
Total intangible assets																											$	120,479

			Weighted Average Amortization Period (in years)						Gross Carrying Amount as of December 31, 2020						Accumulated Amortization						Accumulated Impairment Loss						Net Carrying Value as of December 31, 2020
Existing technology			10						$	99,400					$	(12,719)					$	(4,328)					$	82,353
Customer relationships			11						55,000						(21,879)						(10,751)						22,370
Trademarks and tradenames			10						16,600						(2,934)						(4,179)						9,487
Patents and other			8						6,610						(3,785)						—						2,825
									177,610						(41,317)						(19,258)						117,035
Foreign currency translation																											13,037
Total intangible assets																											$	130,072

The total estimated annual future amortization expense for these acquired intangible assets as of March 31, 2021 is as follows (in thousands):

Fiscal Year Ending December 31,						Amortization
Remainder of 2021						$	11,715
2022						14,366
2023						13,745
2024						12,805
2025						12,428
Thereafter						48,069
Total						$	113,128

Amortization expense for the three months ended March 31, 2021 and 2020 was $3.9 million and $1.3 million, respectively.

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Note 5. Credit Facility

On July 21, 2020 we entered into a 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. The base rate is the highest of the credit facility's publicly announced prime rate, the federal funds rate plus 0.50% and one-month LIBOR plus 1.0%. The margin ranges from 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base rate loans. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans. The outstanding principal, together with accrued and unpaid interest, is due on the maturity date. As of March 31, 2021, we had no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements.

Note 6. Legal Proceedings

2018 Securities Class Action Lawsuit

On November 5, 2018, a class action lawsuit against Align and three of our executive officers was filed in the U.S. District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock. 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. 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. On September 9, 2020, Defendants’ motion to dismiss the amended consolidated complaint was granted in part and denied in part. Trial is scheduled for October 3, 2022. Align believes the claims that remain in the case are without merit and intends to vigorously defend itself. Align is currently unable to predict the outcome of the lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

2019 Shareholder Derivative Lawsuit

In January 2019, three derivative lawsuits were filed in the U.S. 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 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. The consolidated action has been stayed pending final disposition of the 2018 Securities Class Action Lawsuit.

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

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

2020 Securities Class Action Lawsuit

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 (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. 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. On March 29, 2021, defendants’ motion to dismiss the amended complaint was granted with leave for the lead plaintiff to file a further amended complaint. On April 22, 2021, lead plaintiff filed a notice stating it would not file a further amended

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complaint. On April 23, 2021, the Court dismissed the action with prejudice and judgment was entered. Lead plaintiff filed a notice of appeal on April 28, 2021. Currently there is no schedule for the appeal. Align believes these claims are without merit and intends to vigorously defend itself. Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

2020 Shareholder Derivative Lawsuit

On May 4, 2020, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserts state law claims for breach of fiduciary duty and insider trading. The complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. This action has been stayed pending a decision on the motion to dismiss in the 2020 Securities Class Action Lawsuit. The parties are required to file a status report with the Court within 14 days of the order dismissing the 2020 Securities Class Action Lawsuit. Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

3Shape Litigation

On November 14, 2017, Align filed several patent infringement lawsuits asserting patents against 3Shape, a Danish corporation, and a related U.S. corporate entity, asserting that 3Shape’s Trios intraoral scanning system and Dental System software infringe Align patents.

These lawsuits were filed in the U.S. District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system and Dental System software. Three of the cases are active and 3Shape has filed counterclaims for breach of contract and business torts. Align’s motions to dismiss the 3Shape counterclaims was recommended to be granted by the Magistrate Judge.

In 2018, 3Shape filed two separate complaints in the U.S. District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of 3Shape patents. On August 19, 2019, the Court consolidated the two actions, and on August 30, 2019, 3Shape filed an amended complaint.

On December 11, 2018, Align filed an additional complaint 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. 3Shape filed business tort counterclaims. The Magistrate Judge recommended granting Align’s motion to dismiss 3Shape's counterclaims.

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. In response, 3Shape filed a motion to dismiss as well as business tort and patent infringement counterclaims. Align has moved to dismiss the business tort counterclaims.

Each of 3Shape and Align’s District Court patent infringement complaints and all of 3Shape’s business tort counterclaims seek monetary damages and/or injunctive relief. One of Align’s Delaware District Court cases against 3Shape is scheduled for a jury trial beginning on July 26, 2021. The case pending in the Western District of Texas has been given an estimated trial date of October 3, 2022. No trial dates have been set in the remaining cases.

On August 28, 2018, 3Shape filed a complaint against Align in the U.S. District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s alleged market activities, including Align’s assertion of its patent portfolio, in alleged clear aligner and intraoral scanner markets. After the Court dismissed 3Shape’s complaint, 3Shape filed an amended complaint on October 28, 2019. The Court denied Align’s motion to dismiss the amended complaint on November 25, 2020. No trial date has been set.

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

Antitrust Class Actions

On June 5, 2020, a dental practice named Simon and Simon, PC doing business as City Smiles brought an antitrust action in the United States District Court for the Northern District of California on behalf of itself and a putative class of similarly

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situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. 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. On April 8, 2021, the Judge denied Align’s motion to dismiss. The court has not entered a schedule or set a trial date. Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.

On May 3, 2021, an individual named Misty Snow brought an antitrust action in the United States District Court for the Northern District of California on behalf of herself and a putative class of similarly situated individuals seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. Align has not yet responded to the complaint. Align believes the plaintiffs’ 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, if any, nor estimate a range of possible loss.

SDC Dispute

In April 2018, 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. 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 in the United States, and enjoined from using the SDC Entities’ confidential information. 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. No financial damages were awarded to the SDC Entities. The Circuit Court for Cook County, Illinois confirmed the Award on April 29, 2019.

As required by the Award, Align tendered its membership interests for a purchase price that SDC claims to be Align’s “capital account” balance. Align disputed that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017. Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination. The arbitration hearing occurred in December 2020 and on March 12, 2021 the Arbitrator issued a final award in favor of Align and against SDC finding that the SDC entities owed Align an additional $43.4 million plus interest which SDC paid to Align on March 17, 2021.

In a related legal proceeding, the SDC Entities had filed a contempt petition with an Illinois court asserting that Align had no right to contest the SDC Entities; “capital account” determination in the July 3, 2019 arbitration. On September 4, 2019, the Illinois court denied in its entirety the contempt petition filed by the SDC Entities. The SDC Entities appealed and, on February 9, 2021, the Illinois Appellate Court affirmed the denial of the contempt petition. The time for SDC to seek rehearing or further appeal has passed.

On August 19, 2019, the SDC Entities filed a separate confidential arbitration proceeding alleging that Align had 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 asserted that Align’s alleged dealings with a third-party constituted contempt of the Award. On February 5, 2021, pursuant to an agreement reached by the parties, the arbitrator dismissed the arbitration with prejudice.

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. On January 19, 2021, SDC filed a counterclaim alleging that Align breached the Supply Agreement. Align denies the SDC Entities’ allegations in the counterclaim and will vigorously defend itself against them. This arbitration hearing is scheduled for September 27, 2021.

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

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investigations, labor and employment claims, breach of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs, diversion of management resources, and other factors. Although the results of complex legal proceedings are difficult to predict and Align’s view of these matters may change in the future as litigation and events related thereto unfold; Align currently does not believe that these matters, individually or in the aggregate, will materially affect Align’s financial position, results of operations or cash flows.

Note 7. Commitments and Contingencies

Off-Balance Sheet Arrangements

As of March 31, 2021, 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 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

Indemnification Provisions

In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim.

It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period. As of March 31, 2021, we did not have any material indemnification claims that were probable or reasonably possible.

Note 8. Stockholders’ Equity

As of March 31, 2021, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares of which 4,210,089 shares are available for issuance.

Common Stock Repurchase Program

As of March 31, 2021, we have $100.0 million available for repurchase under the May 2018 Repurchase Program. Subsequent to the first quarter, on April 30, 2021, we entered into an accelerated stock repurchase agreement (“2021 ASR”) to repurchase $100.0 million of our common stock. We paid $100.0 million on May 3, 2021 and received an initial delivery of approximately 0.1 million shares based on current market prices. The final number of shares to be repurchased will be based on our volume-weighted average stock price under the terms of the 2021 ASR, less an agreed upon discount.

Summary of Stock-Based Compensation Expense

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 months ended March 31, 2021 and 2020 is as follows (in thousands): 

												Three Months Ended March 31,
																		2021						2020
Cost of net revenues																		$	1,306					$	1,347
Selling, general and administrative																		21,844						18,130
Research and development																		4,091						3,450
Total stock-based compensation																		$	27,241					$	22,927

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Restricted Stock Units (“RSUs”)

The fair value of RSUs is based on our closing stock price on the date of grant. RSUs granted generally vest over a period of four years. A summary for the three months ended March 31, 2021 is as follows:

			Number of Shares Underlying RSUs (in thousands)						Weighted Average Grant Date Fair Value						Weighted Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value (in thousands)
Unvested as of December 31, 2020			632						$	243.55
Granted			149						598.37
Vested and released			(214)						214.65
Forfeited			(7)						298.24
Unvested as of March 31, 2021			560						$	348.77					1.7						$	303,402

As of March 31, 2021, we expect to recognize $163.6 million of total unamortized compensation cost, net of estimated forfeitures, related to RSUs over a weighted average period of 2.7 years.

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

We grant MSUs to our executive officers. Each MSU represents the right to one share of Align’s common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period, and certain MSU grants are also based on Align’s stock price at the end of the performance period. The maximum number of MSUs which will be eligible to vest range from 250% to 300% of the MSUs initially granted and the vesting period is three years.

A summary for the three months ended March 31, 2021 is as follows: 

			Number of Shares Underlying MSUs (in thousands)						Weighted Average Grant Date Fair Value						Weighted Average Remaining Contractual Term (in years)						Aggregate Intrinsic  Value (in thousands)
Unvested as of December 31, 2020			227						$	430.50
Granted			91						675.44
Vested and released			(101)						351.75
Unvested as of March 31, 2021			217						$	569.07					1.4						$	117,620

As of March 31, 2021, we expect to recognize $60.8 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”)

In May 2010, our stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which will continue until terminated by either the Board of Directors or its administrator. The maximum number of shares available for purchase under the 2010 Purchase Plan is 2,400,000 shares. As of March 31, 2021, we have 253,444 shares available for future issuance.

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

												Three Months Ended March 31,
																		2021						2020
Expected term (in years)																		1.0						1.0
Expected volatility																		58.8		%				41.7		%
Risk-free interest rate																		0.1		%				1.5		%
Expected dividends																		—						—
Weighted average fair value at grant date																		$	202.74					$	80.54

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As of March 31, 2021, there was $3.9 million of total unamortized compensation costs related to employee stock purchases which we expect to be recognized over a weighted average period of 0.4 year.

Note 9. Accounting for Income Taxes

Our provision for income taxes was $61.2 million for the three months ended March 31, 2021 and our benefit from income taxes was $1,464.8 million for the three months ended March 31, 2020 representing effective tax rates of 23.4% and (2,745.3)%, respectively. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended March 31, 2021 primarily due to the recognition of additional tax expense resulting from state income taxes, non-deductible expenses in the U.S. and foreign income taxed at different rates, partially offset by the recognition of excess tax benefits related to stock-based compensation. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended March 31, 2020 mainly as a result of the recognition of a deferred tax asset and related one-time tax benefit in accordance with the completion of the intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss entity and excess tax benefits related to stock-based compensation, partially offset by state income taxes and foreign income taxed at different rates.

During the three months ended March 31, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss entity. The transfer of intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the three months ended March 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.

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. We continue to assess the realizability of the deferred tax assets as we take into account new information.

We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and Switzerland. We are no longer subject to U.S. federal tax examination for years before 2017 and U.S. state tax examination for years before 2016. Our subsidiary in Israel is under audit by the local tax authorities for years 2015 through 2018. 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 $50.0 million and $46.3 million as of March 31, 2021 and December 31, 2020, respectively, a material amount of which would impact our effective tax rate if recognized. Total interest and penalties accrued as of March 31, 2021 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 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 $32.9 million and $35.7 million as of March 31, 2021 and December 31, 2020, respectively, which primarily related to the intangible assets from our exocad acquisition.

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Note 10. Net Income per Share

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 March 31,
																		2021						2020
Numerator:
Net income																		$	200,376					$	1,518,131
Denominator:
Weighted average common shares outstanding, basic																		79,000						78,592
Dilutive effect of potential common stock																		798						436
Total shares, diluted																		79,798						79,028
Net income per share, basic																		$	2.54					$	19.32
Net income per share, diluted																		$	2.51					$	19.21
Anti-dilutive potential common shares 1																		76						148

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

Note 11. Supplemental Cash Flow Information

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

						Three Months Ended March 31,
						2021						2020
Non-cash investing and financing activities:
Fixed assets acquired with accounts payable or accrued liabilities						$	45,354					$	24,121
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases						$	6,923					$	6,236
Right-of-use assets obtained in exchange for lease obligations:
Operating leases						$	7,369					$	21,602

Note 12. Segments and Geographical Information

Segment Information

We report segment information based on the management approach. The management approach designates the internal reporting used by our Chief Operating Decision Maker for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues, gross profit and income from operations. Income from operations for each segment includes all geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. Certain operating expenses are attributable to operating segments and each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Costs not specifically allocated to segment income from operations include various corporate expenses such as stock-based compensation and costs related to IT, facilities, human resources, accounting and finance, legal and regulatory, and other separately managed general and administrative costs outside the operating segments. We group our operations into two reportable segments: Clear Aligner segment and Imaging Systems and CAD/CAM services (“Systems and Services”) segment.

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Summarized financial information by segment is as follows (in thousands):

												Three Months Ended March 31,
																		2021						2020
Net revenues
Clear Aligner																		$	753,269					$	481,611
Systems and Services																		141,502						69,352
Total net revenues																		$	894,771					$	550,963
Gross profit
Clear Aligner																		$	584,534					$	351,492
Systems and Services																		92,564						42,864
Total gross profit																		$	677,098					$	394,356
Income from operations
Clear Aligner																		$	327,465					$	166,388
Systems and Services																		47,228						14,389
Unallocated corporate expenses																		(149,247)						(110,859)
Total income from operations																		$	225,446					$	69,918
Stock-based compensation
Clear Aligner																		$	2,294					$	2,529
Systems and Services																		171						78
Unallocated corporate expenses																		24,776						20,320
Total stock-based compensation																		$	27,241					$	22,927
Depreciation and amortization
Clear Aligner																		$	11,120					$	10,121
Systems and Services																		4,545						1,785
Unallocated corporate expenses																		9,970						8,832
Total depreciation and amortization																		$	25,635					$	20,738

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

												Three Months Ended March 31,
																		2021						2020
Total segment income from operations																		$	374,693					$