Document

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 September 30, 2019



☐	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 25, 2019 was 78,812,958.

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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	31
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	46
PART II	OTHER INFORMATION	47
ITEM 1.	LEGAL PROCEEDINGS	47
ITEM 1A.	RISK FACTORS	51
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	65
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	65
ITEM 4.	MINE SAFETY DISCLOSURES	65
ITEM 5.	OTHER INFORMATION	65
ITEM 6.	EXHIBITS	66
SIGNATURES		67

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 and iRecord, 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,
	2019			2018			2019			2018
Net revenues	$	607,341		$	505,289		$	1,757,009		$	1,432,472
Cost of net revenues	169,787			133,508			485,070			367,701
Gross profit	437,554			371,781			1,271,939			1,064,771
Operating expenses:
Selling, general and administrative	277,514			213,873			792,572			625,585
Research and development	39,680			32,700			116,034			93,095
Impairments and other (gains) charges	(6,792		)	—			22,990			—
Litigation settlement gain	—			—			(51,000		)	—
Total operating expenses	310,402			246,573			880,596			718,680
Income from operations	127,152			125,208			391,343			346,091
Interest income	3,478			2,234			9,576			6,327
Other income (expense), net	(2,211		)	(837		)	5,935			(7,759		)
Net income before provision for income taxes and equity in losses of investee	128,419			126,605			406,854			344,659
Provision for income taxes	25,895			24,601			77,812			35,206
Equity in losses of investee, net of tax	—			1,132			7,528			6,610
Net income	$	102,524		$	100,872		$	321,514		$	302,843

Net income per share:
Basic	$	1.29		$	1.26		$	4.03		$	3.78
Diluted	$	1.28		$	1.24		$	4.00		$	3.71
Shares used in computing net income per share:
Basic	79,332			80,111			79,709			80,122
Diluted	79,825			81,359			80,397			81,538

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,
	2019			2018			2019		2018
Net income	$	102,524		$	100,872		$	321,514	$	302,843
Net change in foreign currency translation adjustment	(92		)	(1,756		)	530		(1,473		)
Change in unrealized gains (losses) on investments, net of tax	41			117			317		174
Other comprehensive (loss) income	(51		)	(1,639		)	847		(1,299		)
Comprehensive income	$	102,473		$	99,233		$	322,361	$	301,544

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, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	490,362		$	636,899
Marketable securities, short-term	292,011			98,460
Accounts receivable, net of allowance for doubtful accounts of $5,572 and $2,378, respectively	531,816			439,009
Inventories	94,795			55,641
Prepaid expenses and other current assets	96,595			72,470
Total current assets	1,505,579			1,302,479
Marketable securities, long-term	—			9,112
Property, plant and equipment, net	606,581			521,329
Operating lease right-of-use assets, net	53,923			—
Equity method investments	—			45,913
Goodwill and intangible assets, net	77,012			81,949
Deferred tax assets	63,150			64,689
Other assets	44,135			26,987
Total assets	$	2,350,380		$	2,052,458

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	63,300		$	64,256
Accrued liabilities	286,132			234,679
Deferred revenues	520,712			393,138
Total current liabilities	870,144			692,073
Income tax payable	101,914			78,008
Operating lease liabilities	43,365			—
Other long-term liabilities	29,408			29,486
Total liabilities	1,044,831			799,567
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; 78,809 and 79,778 issued and outstanding, respectively)	8			8
Additional paid-in capital	892,309			877,514
Accumulated other comprehensive income (loss), net	(1,927		)	(2,774		)
Retained earnings	415,159			378,143
Total stockholders’ equity	1,305,549			1,252,891
Total liabilities and stockholders’ equity	$	2,350,380		$	2,052,458

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, 2019	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
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 restricted stock units	—		—		(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		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
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 restricted stock units	—		—		(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 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, 2018	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
Balance as of June 30, 2018	80,313		$	8	$	844,599		$	911		$	373,441		$	1,218,959
Net income	—		—		—			—			100,872			100,872
Net change in unrealized gains (losses) from investments	—		—		—			117			—			117
Net change in foreign currency translation adjustment	—		—		—			(1,756		)	—			(1,756		)
Issuance of common stock relating to employee equity compensation plans	96		—		8,021			—			—			8,021
Tax withholdings related to net share settlements of restricted stock units	—		—		(2,426		)	—			—			(2,426		)
Common stock repurchased and retired	(426	)	—		(4,121		)	—			(145,881		)	(150,002		)
Stock-based compensation	—		—		19,198			—			—			19,198
Balance as of September 30, 2018	79,983		$	8	$	865,271		$	(728	)	$	328,432		$	1,192,983



	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
Nine Months Ended September 30, 2018	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
Balance as of December 31, 2017	80,040		$	8	$	886,435		$	571		$	267,274		$	1,154,288
Net income	—		—		—			—			302,843			302,843
Net change in unrealized gains (losses) from investments	—		—		—			174			—			174
Net change in foreign currency translation adjustment	—		—		—			(1,473		)	—			(1,473		)
Issuance of common stock relating to employee equity compensation plans	765		—		16,607			—			—			16,607
Tax withholdings related to net share settlements of restricted stock units	—		—		(81,756		)	—			—			(81,756		)
Common stock repurchased and retired	(822	)	—		(7,933		)	—			(242,069		)	(250,002		)
Stock-based compensation	—		—		51,918			—			—			51,918
Other	—		—		—			—			384			384
Balance as of September 30, 2018	79,983		$	8	$	865,271		$	(728	)	$	328,432		$	1,192,983

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,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	321,514		$	302,843
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	1,470			2,047
Depreciation and amortization	57,194			38,185
Non-cash operating lease cost	13,600			—
Impairments on long-lived assets	28,498			—
Gain on lease terminations	(6,792		)	—
Impairment on equity investment	3,975			—
Gain from sale of equity method investment	(15,769		)	—
Stock-based compensation	67,687			51,918
Equity in losses of investee	7,528			6,610
Other non-cash operating activities	17,426			11,363
Changes in assets and liabilities:
Accounts receivable	(95,566		)	(89,843		)
Inventories	(40,775		)	(17,192		)
Prepaid expenses and other assets	(14,826		)	(47,775		)
Accounts payable	1,343			5,042
Accrued and other long-term liabilities	31,089			(25,436		)
Long-term income tax payable	13,425			(18,435		)
Deferred revenues	138,072			94,059
Net cash provided by operating activities	529,093			313,386
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment	(107,157		)	(169,033		)
Purchase of marketable securities	(588,805		)	(150,022		)
Proceeds from maturities of marketable securities	211,829			259,870
Proceeds from sales of marketable securities	194,677			9,560
Purchase of investments in privately held companies	—			(5,000		)
Note repayment from privately held company	13,185			—
Loan repayment from equity investee	—			30,000
Other investing activities	(14,062		)	604
Net cash used in investing activities	(290,333		)	(24,021		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	17,907			16,607
Common stock repurchases	(299,504		)	(250,002		)
Employees’ taxes paid upon the vesting of restricted stock units	(55,793		)	(81,756		)
Purchase of finance lease	(45,773		)	—
Net cash used in financing activities	(383,163		)	(315,151		)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	(2,098		)	(2,890		)
Net decrease in cash, cash equivalents, and restricted cash	(146,501		)	(28,676		)
Cash, cash equivalents, and restricted cash at beginning of the period	637,566			450,125
Cash, cash equivalents, and restricted cash at end of the period	$	491,065		$	421,449

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, 2019 and 2018, our comprehensive income for the three and nine months ended September 30, 2019 and 2018, our financial position as of September 30, 2019, our stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and our cash flows for the nine months ended September 30, 2019 and 2018. The Condensed Consolidated Balance Sheet as of December 31, 2018 was derived from the December 31, 2018 audited financial statements. It does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).

We adopted Accounting Standards Update (“ASU”) 2016-02, “Leases” (Topic 842) in the first quarter of fiscal year 2019 by electing the transition method issued in ASU 2018-11 and the package of practical expedients available in the standard. The standard had a material impact on our Condensed Consolidated Balance Sheet as we recognized assets and liabilities related to our leases. The adoption did not have an impact to prior periods.

The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 the fair values of financial instruments, valuation of investments in privately held companies, useful lives of intangible assets and property and equipment, revenue recognition, stock-based compensation, long-lived assets and goodwill, income taxes and contingent liabilities, 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. Significant changes to the Lease policy is discussed below:

Lease

We lease office and retail spaces, vehicles and office equipment with original lease periods of up to 10 years. We determine if an arrangement is a lease at inception under ASC 842. Operating lease right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. If a lease arrangement does not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease which we include in our lease term when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components which are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

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Recent Accounting Pronouncements

(i) New Accounting Updates Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases” (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, “Leases-Targeted Improvements,” which provides an additional transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted the guidance in the first quarter of fiscal year 2019 by electing the transition method issued in ASU 2018-11 and the package of practical expedients available in the standard. The standard had a material impact on our Condensed Consolidated Balance Sheet as we recognized assets and liabilities related to our leases. The adoption did not have an impact to prior periods.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify to retained earnings the tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “TCJA”) related to items in accumulated other comprehensive income. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2018 on a retrospective basis and early adoption is permitted. We adopted the standard in the first quarter of fiscal year 2019 which did not have a material impact on our consolidated financial statements and related disclosures. The TCJA did not affect our accumulated other comprehensive income (loss), net, and therefore we did not reclassify any income tax effects from accumulated other comprehensive income (loss), net to our retained earnings.

(ii) Recent Accounting Updates Not Yet Effective

In June 2016, the 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. Early adoption of the update is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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.

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 and early adoption is permitted. 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.

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 and early adoption is permitted. 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.

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to clarify the guidance on the costs of implementing a cloud computing hosting arrangement that is a service contract. Under the amendments in this update, the entity is required to follow the guidance in Subtopic 350-40, Internal-Use Software, to determine which implementation costs under the service contract to be capitalized as an asset and which costs to expense. The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 either on a

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retrospective or prospective basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

Note 2. Investments and Fair Value Measurements

Marketable Securities

As of September 30, 2019 and December 31, 2018, the estimated fair value of our short-term and long-term marketable securities, classified as available for sale, are as follows (in thousands):

Short-term



September 30, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	33,259	$	—	$	—		$	33,259
Corporate bonds	152,452		169		(10		)	152,611
U.S. government agency bonds	10,233		6		—			10,239
U.S. government treasury bonds	91,832		48		(5		)	91,875
Foreign bonds	4,004		4		—			4,008
Certificates of deposit	19		—		—			19
Total marketable securities, short-term	$	291,799	$	227	$	(15	)	$	292,011

As of September 30, 2019, we had no long-term marketable securities.

Short-term



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	17,793	$	—	$	—		$	17,793
Corporate bonds	45,100		—		(48		)	45,052
U.S. government agency bonds	19,981		—		(77		)	19,904
U.S. government treasury bonds	15,292		—		(1		)	15,291
Certificates of deposit	420		1		(1		)	420
Total marketable securities, short-term	$	98,586	$	1	$	(127	)	$	98,460

Long-term



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate bonds	$	4,957	$	5	$	(2	)	$	4,960
U.S. government agency bonds	1,399		8		—			1,407
U.S. government treasury bonds	2,235		9		—			2,244
Certificates of deposit	500		1		—			501
Total marketable securities, long-term	$	9,091	$	23	$	(2	)	$	9,112

Cash equivalents are not included in the tables above as the gross unrealized gains and losses are not material. We have no short-term or long-term investments that have been in a continuous material unrealized loss position for greater than twelve months as of September 30, 2019 and December 31, 2018. 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, 2019 and 2018. For the three and nine months ended September 30, 2019 and 2018, realized gains or losses were not material.

Our fixed-income securities investment portfolio consists of investments that can have 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

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unrealized loss. The unrealized losses 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 and four months as of September 30, 2019 and December 31, 2018, respectively.

As the carrying value approximates the fair value for our short-term and long-term marketable securities shown in the tables above, the following table summarizes the fair value of our short-term and long-term marketable securities classified by contractual maturity as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019		December 31, 2018
One year or less	$	292,011	$	98,460
Due in greater than one year	—		9,112
Total available for sale short-term and long-term marketable securities	$	292,011	$	107,572

Investments in Privately Held Companies

Our investments in privately held companies as of September 30, 2019 and December 31, 2018 are as follows (in thousands):



	September 30, 2019		December 31, 2018
Equity securities under the equity method investment ¹	$	—	$	45,913
Equity securities without readily determinable fair values ²	$	5,887	$	9,862


¹	Refer to Note 5 “Equity Method Investments” of the Notes to Condensed Consolidated Financial Statements for more information.


²	The equity securities are reported as a nonrecurring investment within other assets in our Condensed Consolidated Balance Sheet. During the nine months ended September 30, 2019, there was approximately $4.0 million of impairment resulting from an observable price change.

Fair Value Measurements

We measure the fair value of financial assets as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset managers independently use professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

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The following tables summarize our financial assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):



Description	Balance as of September 30, 2019		Level 1		Level 2
Cash equivalents:
Money market funds	$	181,401	$	181,401	$	—
Commercial paper	22,403		—		22,403
Corporate bonds	4,528		—		4,528
U.S. government treasury bonds	5,298		5,298		—
Short-term investments:
Commercial paper	33,259		—		33,259
Corporate bonds	152,611		—		152,611
U.S. government agency bonds	10,239		—		10,239
U.S. government treasury bonds	91,875		91,875		—
Foreign bonds	4,008		—		4,008
Certificates of deposit	19		—		19
Prepaid expenses and other current assets:
Israeli funds	3,103		—		3,103
	$	508,744	$	278,574	$	230,170



Description	Balance as of December 31, 2018		Level 1		Level 2
Cash equivalents:
Money market funds	$	431,081	$	431,081	$	—
Commercial paper	4,681		—		4,681
Corporate bonds	3,880		—		3,880
U.S. government treasury bonds	2,195		2,195		—
Short-term investments:
Commercial paper	17,793		—		17,793
Corporate bonds	45,052		—		45,052
U.S. government agency bonds	19,904		—		19,904
U.S. government treasury bonds	15,291		15,291		—
Certificates of deposit	420		—		420
Long-term investments: