algn-20211231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________
FORM 10-K
________________________________________________________________________
(Mark One)
For the fiscal year ended December 31, 2021
OR
For the transition period from to
Commission file number: 000-32259
________________________________________________________________________
ALIGN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________
410 North Scottsdale Road, Suite 1300
Tempe, Arizona85281
(Address of principal executive offices)
(602)742-2000
(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)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐No☒
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 ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $34.7 billion as of June 30, 2021 based on the closing sale price of the registrant’s common stock on the NASDAQ Global Market on such date. Shares held by persons who may be deemed affiliates have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On February 21, 2022, 78,795,494 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to its 2022 Annual Stockholders’ Meeting to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year end of December 31, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K.
ALIGN TECHNOLOGY, INC.
FORM 10-K
For the Year Ended December 31, 2021
TABLE OF CONTENTS
Page
PART I 3
Item 1. Business 3
Information about our Executive Officers 16
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 38
Item 2. Properties 39
Item 3. Legal Proceedings 39
Item 4. Mine Safety Disclosures 39
Item 6. [Reserved] 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52
Item 8. Financial Statements and Supplementary Data 54
Item 9A. Controls and Procedures 92
Item 9B. Other Information 93
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 93
PART III 93
Item 10. Directors, Executive Officers and Corporate Governance 93
Item 11. Executive Compensation 93
Item 14. Principal Accountant Fees and Services 94
Item 15. Exhibits and Financial Statement Schedules 95
Signatures 98
Invisalign, Align, the Invisalign logo, ClinCheck, Made to Move, Invisalign Assist, Invisalign Teen, Invisalign Go, Vivera, SmartForce, SmartTrack, SmartStage, SmileView, iTero, iTero Element, Orthocad, iCast, iRecord and exocad, among others, are trademarks and/or service marks of Align Technology, Inc. or one of its subsidiaries or affiliated companies and may be registered in the United States and/or other countries.
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In addition to historical information, this annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our estimates regarding the size and opportunities of the markets we are targeting along with our expectations for growth in those markets, our beliefs regarding the impact of technological innovation in general, and in our solutions and products in particular, on target markets and patient care, our beliefs regarding digital dentistry and its potential to impact our business, our intentions regarding expanding our business, including its impact on our operational flexibility and responsiveness to customer demand, our beliefs regarding the potential for clinical solutions and their utilization to increase sales of our Invisalign system as well as the complementary products and solutions themselves, our beliefs regarding doctor training and its impact on Invisalign system utilization, our beliefs regarding the importance of our manufacturing operations on our success, our beliefs regarding the need for and benefits of our technological development on Invisalign treatment, the areas of development in which we focus our efforts, and the advantages of our intellectual property portfolio, our beliefs regarding our business strategy and growth drivers, our expectations regarding product mix and product adoption, our expectations regarding the utilization rates for our products, including the impact of marketing on those rates and causes for periodic fluctuations of the rates, our expectations regarding the existence and impact of seasonality and the COVID-19 disruptions to seasonality, our expectations regarding the sales growth of our intraoral scanner sales in international markets, our expectations regarding the productivity impact additional sales representatives will have on our sales and the impact of specialization of those representatives in sales channels, our expectations regarding the continued expansion of our international markets and their growth, our expectation regarding customer and consumer purchasing behavior, including expectations related to the consumer demand environment in China especially for U.S. based products and services, our expectations regarding competition and our ability to compete in our target markets, our beliefs concerning our compliance with applicable laws and regulations, our beliefs regarding our culture and commitment and its impact on our financial and operational performance and its importance to our future success, our expectations for future investments in and benefits from consumer demand sales and marketing activities, our expectations regarding the implications of the COVID-19 pandemic and the health, safety and economic impact from it, on the global economy, the businesses of our customers, and us, including our preparedness to react to changing circumstances and overall on our revenues, results of operations and financial condition, our expectations for our expenses and capital obligations and expenditures in particular, the actions we will take to control spending and for investments, our intentions regarding the investment of our international earnings from operations, our belief regarding the sufficiency of our cash balances and borrowing capacity, our judgments regarding the estimates used in our revenue recognition, and assessment of goodwill and intangible assets, our expectations regarding our tax positions and the assumptions we make related to our tax obligations, our expectations regarding potential additional litigation with SDC Financial LLC and certain affiliates, the level of our operating expenses and gross margin and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. These or any forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in particular, the risks discussed below in Part I, Item 1A “Risk Factors.” We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I
Item 1.Business.
Our Company
Align Technology, Inc. (“We”, “Our”, “Align”) is a global medical device company primarily engaged in the design, manufacture and marketing of Invisalign® clear aligners, iTero® intraoral scanners and services for dentistry, and exocad® computer-aided design and computer-aided manufacturing (“CAD/CAM”) software for dental laboratories and dental practitioners. We also market and sell consumer products that are complementary to our doctor-prescribed principal products under the Invisalign and other brands, including retainers, aligner cases (clamshells), teeth whitening products and cleaning solutions (crystals, foam and other material) (collectively “Consumer Products”). Our primary goals are to establish clear aligners as the principal solution for the treatment of malocclusions, or the misalignment of teeth, and our Invisalign system as the treatment solution of choice by orthodontists, general dental practitioners and patients globally, our intraoral scanners as the
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preferred scanning technology for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs.
Align’s corporate headquarters are located at 410 North Scottsdale Road, Suite 1300, Tempe, Arizona 85281. Our telephone number is 602-742-2000. Our internet address is www.aligntech.com. Our Americas regional headquarters is located in Raleigh, North Carolina, U.S.A.; our European, Middle East and Africa (“EMEA”) regional headquarters is located in Rotkreuz, Switzerland; and our Asia Pacific (“APAC”) regional headquarters is located in Singapore.
We have two operating segments: (1) Clear Aligner and (2) Imaging Systems and CAD/CAM Services (“Systems and Services”). For the year ended December 31, 2021, Clear Aligner net revenues represented approximately 82% of worldwide net revenues, while Systems and Services net revenues represented the remaining 18%. We sell the majority of our products directly through a dedicated and specialized sales force to our customers: orthodontists, general practitioner dentists (“GPs”), restorative and aesthetic dentists, including prosthodontists, periodontists, and oral surgeons, and dental laboratories. We also sell through sales agents and distributors in certain countries. In addition, we sell directly to Dental Support Organizations (“DSOs”) who contract with dental practices to provide critical business management and support including non-clinical operations, and we sell products used by dental laboratories who manufacture or customize a variety of products used by licensed dentists to provide oral health care. We sell our Consumer Products online through our corporate website and large e-commerce websites.
Our clear aligners are sold under the Invisalign® brand name. Our Invisalign system is intended mainly for the treatment of malocclusions and is designed to help dental professionals achieve the clinical outcomes that they expect and the results patients desire. To date, over 12 million people worldwide have been treated with our Invisalign system. We received 510(k) clearance from the United States (“U.S.”) Food and Drug Administration (“FDA”) to market the Invisalign system in 1998. In order to provide Invisalign treatment to their patients, orthodontists and GPs must initially complete an Invisalign training course.
Our iTero intraoral scanner is used by dental professionals and/or labs and service providers for restorative and orthodontic digital procedures as well as Invisalign case submissions. To date, over 68,000 iTero scanners have been sold. We received 510(k) clearance in the U.S. for the caries detection feature of the iTero Element 5D in 2020. Our Systems and Services products, which includes our iTero intraoral scanners, are primarily sold through our direct sales force and through sales agents and distributors in certain countries and directly to DSOs.
Our exocad CAD/CAM software products provide restorative dentistry, implantology, guided surgery, and smile design to dental labs and dental practices through fully integrated workflows, paving the way for new, cross-disciplinary dentistry in labs and at chairside. There are over 200 exocad strategic distribution partners and over 47,000 software licenses installed worldwide.
Clear Aligner Segment
Malocclusion and Traditional Orthodontic Treatment
Malocclusion is one of the most prevalent clinical dental conditions, affecting approximately 60% to 75% of the global population. Annually, approximately 21 million people globally elect treatment by orthodontists. Today, most orthodontic patients continue to have their malocclusions treated with the use of traditional methods such as metal arch wires and brackets, referred to as braces, augmented with elastics, metal expanders, headgear or functional appliances, and other ancillary devices as needed. Upon completion of the treatment, the dental professional may recommend the patient use a retainer appliance. Of the 21 million cases started, we estimate that approximately 90% or 19 million could be treated using our Invisalign system. In addition, globally approximately 500 million people with malocclusion could benefit from straightening their teeth. This represents a significant opportunity for us as we expand the market for orthodontics by training more doctors, including GPs as well as orthodontists, educating more consumers about the benefits of straighter teeth using the Invisalign system and connecting consumers with an Invisalign-trained doctor of their choice.
The Invisalign system
The Invisalign system is a proprietary method for treating malocclusion based on a proprietary computer-simulated virtual treatment plan and a series of doctor-prescribed, custom manufactured, clear polymer removable aligners. The Invisalign system offers a range of treatment options, specialized services, and access to proprietary software for treatment visualization and is comprised of the following phases:
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Diagnosis and transmission of treatment data. An Invisalign trained dental professional prepares an online prescription form on our Invisalign Doctor Site and submits the patient's records, which include a digital intraoral scan or a polyvinyl-siloxane (“PVS”) impression of the relevant dental arches, photographs of the patient and, at the dental professional’s election, x-rays of the patient’s dentition. Intraoral digital scans may be submitted through Align’s iTero scanner or certain third-party scanners capable of accurately interfacing with our systems and processes. Globally, more than 85% of Invisalign system case submissions are now submitted via digital scan, increasing the accuracy of treatments, reducing the time from prescription submission to patient receipt, and decreasing the carbon footprint resulting from the shipment of the materials used to form PVS impressions to the doctors and shipping those PVS impressions back to us. Additionally, it is during this stage that exocad’s CAD/CAM software platform can be used to identify, assess and assist doctors and dental labs to collaborate on any needed ortho-restorative treatment options through comprehensive interdisciplinary workflows.
Computer-simulated treatment plan. Using the digital scans or PVS impressions, certain doctor preferences and digital data provided, we generate a proposed custom, three-dimensional treatment plan, called a ClinCheck® treatment plan using proprietary software we have developed through significant, ongoing investments over more than 20 years. A patient’s ClinCheck treatment plan simulates desired tooth movement in stages and details the timing and placement of any features or attachments to be used during treatment. Attachments are tooth-colored “buttons” that are sometimes used to increase the biomechanical force on a specific tooth or teeth in order to affect the desired movement(s).
Review and approval of the treatment plan by an Invisalign trained doctor. The patient’s ClinCheck treatment plan is then made available to the prescribing dental professional via Align’s Invisalign Doctor Site, enabling the dental professional to evaluate projected tooth movement from initial position to final position and compare multiple treatment plan options. By reviewing, modifying as needed and approving the treatment plan, the dental professional retains control of the patient’s treatment.
Manufacture of custom aligners. Following the dental professional’s approval of a ClinCheck treatment plan, we use the data underlying the simulation as input for the next stage in which we use stereolithography technology (a form of 3D printing technology) to construct a series of molds depicting the future position of the patient’s teeth. Each mold is a replica of the patient’s teeth at each stage of the simulated course of treatment. From these molds, aligners are fabricated by pressure-forming polymeric sheets over each mold. Aligners are thin, clear polymer, removable dental appliances that are custom manufactured in a series designed to correspond to each stage of the patient's ClinCheck treatment plan.
Shipment to the dental professional and patient aligner wear. Once manufactured, all the aligners for a patient's doctor-approved treatment plan are typically shipped directly to the dental professional, who then dispenses them to the patient at regular check-up intervals. Aligners are generally worn for a short period of time corresponding to the stages of the patient’s approved ClinCheck treatment plan and their doctor’s discretion. The patient replaces the aligners with the next pair in the series when prescribed, advancing tooth movement through each stage. At various points in each patient’s treatment, their doctor may place attachments or use other auxiliaries to achieve desired tooth movements, per the doctor’s original prescription and the approved ClinCheck treatment plan. Additionally, for patients treated using many of our Invisalign system treatments, doctors have the option to adjust treatment plans to achieve desired results by ordering additional clear aligners in accordance with pre-defined terms.
Clear Aligner Products
We offer our Invisalign system in a variety of treatment packages designed to correspond with the case-by-case treatment needs of our doctors and their patients. The table below provides a general description of the categories of treatment products we offer in various regions as they typically correspond to the severity of malocclusion and length of anticipated treatment.
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Malocclusion Very Mild Moderate Severe
Treatment Stages* 7 14 20 20-26 As many as required
* The number of stages can vary by product and region.
Most of our Invisalign system treatment plans described above provide dental professionals with the option to order additional aligners if the patient's treatment deviates from the original treatment plan. The number and timing of additional aligner orders are subject to certain requirements noted in our terms and conditions.
Comprehensive Products - Invisalign Treatment Options:
Invisalign Comprehensive Packages. The Invisalign Comprehensive Package is used to treat adults and teens over a wide spectrum of mild to severe malocclusion and contains a broad variety of Invisalign features to address the desired treatment goals. It also addresses the frequently complex orthodontic needs of teenage or younger patients with advanced features such as mandibular advancement, compliance indicators and compensation for tooth eruption. These packages include Invisalign Comprehensive, Invisalign First Phase 1 and Invisalign First Comprehensive Phase 2.
Invisalign First Phase 1 and Invisalign First Comprehensive Phase 2 Packages. Invisalign First Phase 1 Package is designed specifically for younger patients generally between the ages of seven and ten years, who frequently have a mixture of primary/baby and permanent teeth. Invisalign First Phase 1 treatment provides early interceptive orthodontic treatment, traditionally done through arch expansion, or partial metal braces, before all permanent teeth have erupted. Invisalign First Phase 1 clear aligners are designed specifically to address a wide range of younger patients' malocclusions, including shorter clinical crowns, management of erupting dentition and predictable dental arch expansion. Our Invisalign First Comprehensive Phase 2 Package is complementary to Invisalign First Phase 1 and is generally consistent with our Invisalign Comprehensive Package. After a patient completes Invisalign First Phase 1, doctors have the option to purchase a Comprehensive Phase 2 Package for that same patient.
Non-Comprehensive Products - Invisalign Treatment Options:
Invisalign Non-comprehensive Packages. We offer a variety of lower priced treatment packages for less complex orthodontic cases, non-comprehensive relapse cases, or straightening prior to restorative or cosmetic treatments, such as veneers. These treatment packages include Invisalign Express, Lite, Go, Go Plus and Moderate. These packages may be offered in select countries and/or may differ from region to region.
Invisalign Go Packages. We also offer in various markets Invisalign Go and Invisalign Go Plus, streamlined Non-Comprehensive packages designed for GPs to more easily identify and treat patients with mild malocclusion. The Invisalign Go and Invisalign Go Plus packages include case assessment support, simplified ClinCheck treatment plans and a progress assessment feature for case monitoring.
Feature Enhancement / New Products
Invisalign G8 with SmartForce® Activation. Broadly released in early 2021, Invisalign G8 with SmartForce Aligner Activation is a clear aligner biomechanical innovation designed to optimize tooth movements and further improve predictability for frequently treated crowding, crossbite, and deep bite cases through the targeted application of force to teeth through surface contours on the aligners that help control the location, direction and intensity of tooth movement.
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New Invisalign Innovations in Treatment Planning for Align Digital Platform. Released in early 2022, the new Invisalign system innovations as a part of the Align digital platform is a combination of software, systems and services designed to provide a seamless experience and workflow that integrates and connects all users – doctors, labs, patients and consumers. These new innovations include ClinCheck Live Update for 3D controls, the Invisalign Practice App, Invisalign Personalized Plan and Invisalign Smile Architect.
Non-Case Products:
Clear Aligner non-case products include retention products, Invisalign training, adjusting tools used by dental professionals during the course of treatment and ancillary Consumer Products and other oral health products available in certain e-commerce channels in the U.S.
Retention. We offer up to four sets of custom clear aligners called Vivera retainers made with proprietary material strong enough to maintain tooth position and correct minor relapse, if necessary, as well as Invisalign retainers. Retainers are generally available for doctors to offer to any of their patients, whether they use the Invisalign system or other products, including wires and brackets. In select markets, we also offer single set retainers. Further, in the third quarter of 2021, we announced a multi-year supply and distribution agreement with Ultradent Products to allow Invisalign trained doctors to exclusively offer a professional whitening system using Ultradent’s Opalescence PF whitening system with Vivera retainers.
We also offer in the U.S., a Doctor Subscription Program which is a monthly subscription program based on the doctor’s monthly need for retention or limited treatment. The program allows doctors the flexibility to order both “touch-up” or retention aligners within their subscribed tier and is designed for a segment of experienced Invisalign doctors who are currently not regularly using our retainers or low-stage aligners.
SmartTrack Aligner Material:
SmartTrack clear aligner material is a patented, custom-engineered Invisalign clear aligner material that delivers gentle, more constant force considered ideal for orthodontic tooth movements. Conventional aligner materials relax and lose a substantial percent of the force applied in the initial days of wear. SmartTrack material maintains more constant force over time. The flexible SmartTrack material also more precisely conforms to tooth morphology, attachments and interproximal spaces to improve control of tooth movement throughout treatment.
Systems and Services Segment
Intraoral scanning is a rapidly evolving technology that is having a substantial impact on the practice of dentistry. By enabling the dental practitioner to create a 3D image of a patient's teeth (digital scan) using a handheld intraoral scanner, digital scanning is faster, more efficient, precise and comfortable for patients. Beginning patient care with the early usage of our iTero intraoral scanners and combining the results with digital workflows designed to assist doctors and patients visualize and evaluate various treatment options with detailed imagery and CAD/CAM solutions is helping patients decide to undergo treatment and improve treatments, outcomes and satisfaction. The accuracy of digitally scanned models substantially reduces the rate of restoration "remakes," meaning patients are recalled less often and the appointment time for the restoration is shorter because of fewer adjustments, increasing overall patient satisfaction. Digital models also reduce the carbon footprint associated with the shipping of the materials used to create PVS impressions, the shipping of those impressions and their disposal. Moreover, the digital model file can be used for various procedures and services including fabrication of physical dental models for use by labs to create restorative units such as veneers, inlays, onlays, crowns, bridges and implant abutments; digital records storage; aid to caries detection; orthodontic diagnosis; orthodontic retainers and appliances; and Invisalign digital impression submission.
iTero Scanner. The iTero Element portfolio of intraoral scanners includes the iTero Element 2, the iTero Element Flex, iTero Element 5D Imaging System and iTero Element Plus Series which are each available in select regions and countries. These products build on the existing high precision, full-color imaging and fast scan times of the iTero Element portfolio and are available with software options for orthodontic and restorative procedures. The iTero scanner is interoperable with our Invisalign treatment such that a full arch or full mouth digital scan can be submitted as part of the Invisalign system case submission process.
Our iTero Element 5D imaging system is the first integrated dental imaging system that simultaneously records 3D, intraoral color camera images and near imaging (“NIRI”) technology and enables comparison over time using the iTero TimeLapse technology. NIRI technology, included in our iTero Element 5D and 5D Plus Imaging Systems, aids in detection and monitoring of interproximal caries lesions above the gingiva without using harmful radiation. The iTero Element 5D Imaging System is available in the U.S., Canada, China, and the majority of EMEA and select APAC and LATAM countries
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and is pending regulatory approval in others.
The iTero Element Plus Series of intraoral scanners and imaging systems was introduced in the first quarter of 2021 and offers restorative and orthodontic digital workflows that include enhanced visualization for optimized patient experience, including a fully integrated 3D intraoral camera in certain models,; seamless scanning with reduced processing time, artificial intelligence-based features, and, in certain models, NIRI technology.
Services and Ancillary Products.Our services include subscription software, disposables, rentals, and pay per scan as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.
Restorative software for iTero scanners and imaging systems. Our Restorative software is designed for GPs, prosthodontists, periodontists and oral surgeons and includes restorative workflows providing the ability to send digital impressions to the lab of their choice and communicate seamlessly with external treatment planning, custom implant abutment, chairside milling and laboratory CAD/CAM systems such as through our exocad Connector. iTero intraoral scans can enhance the accuracy and precision of a doctor’s downstream restorative process.
Orthodontic software for iTero scanners and imaging systems. Our iTero software is designed for orthodontists for digital records storage, orthodontic diagnosis, and for the fabrication of printed models and retainers.
CAD/CAM Services. Our exocad CAD/CAM software platform addresses restorative needs in an end-to-end digital platform workflow to facilitate ortho-restorative and comprehensive dentistry. The platform provides doctors and dental labs with digital clinical solutions that aid general dentists and dental labs in planning and delivering restorative dental treatments, adding restorative functionality to our comprehensive digital platform to deliver digital ortho-restorative workflows and interdisciplinary dentistry. Our exocad software is licensed and sold separately.
Ancillary Products. We sell disposable sleeves for the wand and other ancillary products for the iTero scanner.
iTero Models and Dies. An accurate physical model and dies are manufactured based on the digital scan and sent to the laboratory of the dentist’s choice for completion of the needed restoration. The laboratory also has the option to export the digital file for immediate production of coping and full-contour restorations on their laboratory CAD/CAM systems. The laboratory then completes the ceramic buildup or staining and glazing and delivers the end result - a precisely fitting restoration.
Third-Party Scanners and Digital scans. We accept case submissions for our clear aligner products in two ways: (1) PVS impressions of patients’ teeth or (2) intraoral scans of their teeth. With respect to intraoral scans, we accept scans from iTero scanners and certain third-party scanners that have an interoperability relationship with our systems and processes.
iTero Applications and Tools
Invisalign Outcome Simulator. The Invisalign Outcome Simulator is an exclusive chair-side and cloud-based application for the iTero scanner that allows doctors to help patients visualize how their teeth may look at the end of Invisalign treatment. This is achieved through a dual view layout that shows a prospective patient an image of their own current dentition next to a simulated final position after Invisalign treatment.
Invisalign Progress Assessment Tool. The Invisalign Progress Assessment tool provides the ability to compare a patient’s new scan with a specific stage of their ClinCheck treatment plan, allowing doctors to visually assess and communicate Invisalign treatment progress with an easy to read, color-coded tooth movement report.
TimeLapse Technology. Our TimeLapse technology allows doctors or practitioners to compare a patient’s historic 3D scans to a present-day scan, enabling clinicians to identify and measure orthodontic movement, tooth wear, and gingival recession. This highlights areas of diagnostic interest to dental professionals and helps foster a proactive conversation with the patient regarding potential restorative or orthodontic solutions.
Our iTero Element scanners are offered in a number of software configurations such as Ortho Comprehensive, Restorative Comprehensive and Restorative Foundation. These software packages are included in the price of the scanner and have a service period of 1 to 5 years. They enable various orthodontic and restorative workflows as well as provide other applications, including Invisalign Outcome Simulator, Invisalign Case Assessment tool, Invisalign Progress Assessment tool, and iTero TimeLapse technology. We also recently introduced our 5D Photo uploader enhanced workflow that simplifies the process for submitting images needed for treatment planning.
Other proprietary software mentioned in this Annual Report on Form 10-K, such as software embedded in our iTero
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scanners, ClinCheck and ClinCheck Pro software, the Invisalign Doctor Site,and feature enhancements included as part of the Invisalign system are not sold separately, nor do they contribute as individual items to revenues.
Business Strategy
Our technology and innovations are designed to meet the demands of today’s patients with treatment options that are convenient, comfortable, and affordable, while helping to improve overall oral health. We strive to help doctors and lab technicians move their businesses forward by connecting them with new patients, providing digital solutions that increase operational speed and efficiency and provide solutions that allow them to deliver the best possible treatment outcomes and experiences to millions of people around the world. We achieve this by focusing on and executing to our strategic growth drivers:
•International Expansion. We continue increasing our presence globally by making our products available in more countries to more customers. In 2021, the number of international doctors trained to prescribe treatment using the Invisalign system grew by approximately 21% compared to 2020. We continue expansion of our sales and marketing by reaching into new countries and regions, including new areas within Africa. By the end of 2021, we were selling directly or through authorized distributors in more than 100 countries. As our business continues to grow in both number of new Invisalign trained doctors and customer utilization, we support that growth through targeted investments such as increasing headcount, clinical support, product improvements, technological innovations, clinical education and advertising. In addition, we are scaling and expanding our operations and facilities to better support the growing numbers of global customers. For instance, for China and other APAC markets, we now primarily fabricate our clear aligners in Ziyang, China, and we perform digital treatment planning and interpretation for restorative cases worldwide, including in Costa Rica, China, Germany, Spain, Poland, and Japan, among others. In 2021, we announced similar plans to open a clear aligner manufacturing facility in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new manufacturing facility will be our third aligner fabrication facility and allow us to more quickly and effectively serve tens of thousands of customers throughout EMEA. By establishing and expanding our key operational activities in locations closer to our customers, we are creating an infrastructure that allows us to be responsive to local and regional needs, while providing global operational flexibility and scale needed for variations in global and regional demand. We expect to continue expanding our business in 2022 by investing in resources, infrastructure and initiatives that help drive Invisalign treatment growth, our intraoral scanners as the preferred scanning technology for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs in existing and new international markets.
•GP Adoption. We want to enable GPs, who have access to a large patient base, to more easily identify potential cases they can treat with the Invisalign system, monitor patient progress or, if needed, help refer cases to an orthodontist while providing high-quality restorative, orthodontic and dental hygiene care. We believe success with GPs can be achieved through doctor training and clinical education, by offering digital tools such as the iTero scanner and products like Invisalign Go treatment that address the distinctive needs of GP patients, all delivered by sales and marketing personnel specifically focused on the unique needs of this customer category. We encourage GPs to scan every patient with intraoral scanners that are without harmful radiation as a means to diagnose and treat patients over time and as an opportunity to drive future demand for their services and the Invisalign system. To support our belief in the benefits of using our iTero scanners, in October 2021 we announced the findings of a clinical study that validates and demonstrates that the NIRI technology of the iTero Element 5D imaging system was 66% more sensitive than bitewing x-ray radiography for detection of interproximal lesions, without the use of harmful radiation.
•Patient Demand & Conversion. Our goal is to make the Invisalign brand a highly recognized name brand worldwide by creating awareness for Invisalign treatment among consumers and motivating the potential 500 million patients who can benefit from treatment of malocclusion to seek treatment using the Invisalign system. We accomplish this through an integrated consumer marketing strategy that includes television, media, social networking and event marketing and strategic alliances with professional sports teams, as well as educating patients on treatment options and directing them to high volume Invisalign trained doctors. We further support our doctor customers as they adopt digital dentistry through programs such as the Align Digital and Practice Transformation (“ADAPT”). ADAPT is an expert and independent fee-based business consulting service designed to optimize dental operational workflow and processes to enhance patients' experiences and customer and staff satisfaction with the goal of increasing practice growth and efficiencies. To further drive consumer awareness, in 2021 we began offering additional dental-related Consumer Products under the Invisalign brand name available in certain e-commerce channels in the U.S.
•Orthodontist Utilization. We continue to innovate and increase product applicability and predictability to address a wide range of cases, from simple to complex, thereby enabling doctors to confidently diagnose and treat children and
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adults with the Invisalign system. This is especially important to treating teenage patients who make up the largest portion of the 21 million annual orthodontic case starts each year. We also continue to make improvements to our Invisalign treatment software, ClinCheck Pro software, designed to deliver an exceptional user experience and increase treatment control to help our doctors achieve their treatment goals. In combination with the new Invisalign system innovations that are part of the Align digital platform, we are enhancing the digital treatment planning experience for orthodontics and restorative dentistry by providing doctors with greater flexibility, consistency of treatment preferences and real-time treatment plan access and modification capabilities.
Manufacturing and Suppliers
We have manufacturing facilities located in Juarez, Mexico, where we conduct our aligner fabrication, distribution, and certain services and in Ziyang, China, where we fabricate aligners primarily for China and other APAC markets. In addition, we produce our handheld intraoral scanner wand, perform final scanner assembly and repair our scanners at our facilities in Ziyang, China and Or Yehuda, Israel and service and repair certain scanners in Juarez, Mexico. In the second quarter of 2021, we announced the start of a multi-million dollar project to bring operational facilities closer to our customers through the expansion of our manufacturing operations in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new aligner fabrication facility will be our third and allow us to more quickly and effectively serve tens of thousands of customers throughout EMEA. Additionally, in the third quarter of 2021, we opened our multi-story iTero scanner and services facilities in Petach Tikva, Israel to further the design and development of our portfolio of iTero intraoral scanners, imaging systems and services.
We also perform digital treatment planning and interpretation for restorative cases based on digital scans generated by our iTero intraoral scanners. Our digital treatment planning facilities are located worldwide, including in Costa Rica, China, Germany, Spain, Poland and Japan, among other international locations.
Our quality system is required to be in compliance with the Quality System regulations enforced by the FDA, and similar regulations enforced by other worldwide regulatory authorities. We are certified to ISO 13485:2016, an internationally recognized standard for medical device quality. We are routinely audited by third party certification bodies as well as global health authorities for our compliance to this quality standard as well as international regulations. We have a formal, documented quality system by which quality objectives are defined, understood and achieved. Systems, processes and procedures are implemented to ensure high levels of product and service quality. We monitor the effectiveness of the quality system based on internal data and direct customer feedback and strive to continually improve our systems and processes, taking corrective action, as needed.
Since the manufacturing process of our products requires substantial and varied technical expertise, we believe that our manufacturing capacity and capabilities are important to our success. In order to produce our highly customized, highly precise, medical quality products in volume, we have developed a number of proprietary processes and technologies. These technologies include complex software algorithms and solutions, CT scanning, stereolithography and automated aligner fabrication. To increase the efficiency of our manufacturing processes, we continue to focus our efforts on software development and the improvement of rate-limiting processes or bottlenecks. We continuously upgrade our proprietary, three-dimensional treatment planning software to enhance computer analysis of treatment data and to reduce time spent on manual and judgmental tasks for each case, thereby increasing the efficiency of our technicians. In addition, to improve efficiency and increase the scale of our operations, we continue to invest in the development of automated systems for the fabrication and packaging of aligners.
We are highly dependent on manufacturers of specialized scanning equipment, rapid prototyping machines, resin and other advanced materials for our aligners, as well as the optics, electronic and other mechanical components of our intraoral scanners. We maintain single supplier relationships for many of these machines and materials technologies. In particular, our CT scanning and stereolithography equipment used in our aligner manufacturing and many of the critical components for the optics of our intraoral scanners are provided by single or sole source suppliers. We also currently purchase our resin and polymer, the primary raw materials used in our manufacturing process for clear aligners, from a single source. A discussion of the risks of our supply and manufacturing operations, including foreign operations, may be found in Item 1A of this Annual Report on Form 10-K under the heading "Risk Factors."
Sales and Marketing
Our sales and marketing efforts are focused on increasing adoption and utilization of the Invisalign system and Vivera retainers by orthodontists and GPs worldwide and integrating the iTero scanner and exocad CAD/CAM products into dental labs and practices. The scanner is an important component to the customer experience and is central to a digital approach as well as overall customer utilization of Invisalign treatments. In each region, we have direct sales, marketing and support
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organizations, which include quota carrying sales representatives, sales management and sales administration. We also have distribution partners in certain markets. Our sales and marketing personnel are organized to support orthodontists and GPs separately, allowing highly trained and specialized personnel to serve each customer category, thereby increasing our focus and effectiveness on both. We continue to expand in existing markets through targeted investments in sales resources, professional marketing and education programs. Additionally, our consumer marketing programs are designed to create awareness and educate consumers on the benefits of Invisalign treatment and Vivera retainers, including where they can find a trained doctor to provide treatment.
We provide training, marketing and clinical support to orthodontists and GPs. As of December 31, 2021, we had approximately 122,500 active Invisalign trained doctors. We define doctors as active if they have submitted at least one case in the prior 12-month period.
Research and Development
We are committed to investing in world-class digital technology development, which we believe is critical to achieving our goal of establishing the Invisalign system as the standard method for treating malocclusion, our intraoral scanners as the preferred scanning technology for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs.
Our research and development activities are directed toward developing digital technology innovations that we believe will deliver our next generation of products and solutions to enable the Align digital platform. These activities range from accelerating product and clinical innovation to developing manufacturing process improvements to researching future technologies, products and software.
In an effort to demonstrate the broad treatment capabilities of the Invisalign system, various clinical case studies and articles have been published that highlight the clinical applicability of Invisalign treatment to malocclusion cases, including those of severe complexity. Similarly, various studies have also been published demonstrating the capabilities of our scanners, including advanced features such as our NIRI technology. We undertake pre-commercialization trials and testing of our technological improvements to our products and manufacturing process. We furthermore fund research in the field of orthodontics and dentistry through initiatives such as our Annual Research Award Program, which was in its 12th year in 2021, our donations to the American Association of Orthodontists Foundation and our partnership with MedTech Innovator Asia Pacific, a nonprofit startup accelerator for the medical technology industry that connects healthcare industry leaders with innovative medical technology startups for mentorship and support.
Intellectual Property
We believe our intellectual property portfolio represents a substantial business advantage. As of December 31, 2021, we had 642 active U.S. patents, 724 active foreign patents, and 736 pending global patent applications. Our active U.S. patents expire between 2022 and 2040. When patents expire, we lose the protection and competitive advantages they provided, which could negatively impact our operating results; however, as we continue to pursue new innovations, we seek intellectual property protection for new inventions and know-how through U.S. and foreign patent applications and non-disclosure agreements. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws. We furthermore have a broad and diverse trademark portfolio that we use to highlight and protect our universally recognized brands. Information regarding risks associated with our proprietary technology and our intellectual property rights may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”
Seasonal Fluctuations
General economic conditions impact our business and financial results, and we have historically experienced seasonal trends within our two operating segments, customer channels and the geographic locations that we serve. Sales of the Invisalign system are often weaker in Europe, especially southern European countries during the summer months due to our customers and their patients being on holiday and seasonally higher in China during the third quarter. Similarly, other international holidays like Lunar New Year can impact our sales in APAC. In North America, summer is typically the busiest season for orthodontists with practices that have a high percentage of adolescent and teenage patients as many parents want to get their teenagers started in treatment before the start of the school year; however, many GPs are on vacation during this time and therefore tend to start fewer cases. For our Systems and Services segment, capital equipment sales are often stronger in the fourth calendar quarter. Consequently, these seasonal trends have caused and may continue to cause fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates. Moreover, the COVID-19 pandemic with its consequent office closures or capacity constraints imposed to curtail the spread of the virus and its variants, and the easing and
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reimplementation of those restrictions, has exacerbated the timing and extent of seasonal patterns and it remains unclear when or if they will return to historical norms.
Competition
Our clear aligner products compete directly against traditional orthodontic treatments that use metal brackets and wires and increasingly against clear aligner products manufactured and distributed by various companies, both within and outside the U.S. Although the number of competitors varies by segment, product, geography and customer, they include new and well-established regional competitors in certain foreign markets, as well as larger companies or divisions of larger companies with substantial sales, marketing, research and financial capabilities. Due in part to the expiration of certain of our clear aligner key patents beginning in 2017 and the significant benefits of clear aligner treatment over traditional brackets and wires, competition in the clear aligner market is increasing. In addition, corresponding foreign patents began expiring in 2018 which has increased competition outside the U.S. These competitors include existing larger companies in certain markets who have the ability to leverage their existing channels in the dental market to compete directly with us, direct-to-consumer (“DTC”) companies that provide clear aligners requiring little or no in-office care from trained and licensed doctors, and doctors themselves who can manufacture custom aligners in their offices using modern 3D printing technology. Unlike our DTC competitors, we are committed to doctors being at the core of our business strategy, and Invisalign treatment requires a doctor's prescription and an in-person physical examination of the patient’s dentition before treatment can begin.
Additionally, we face competition in the emerging and rapidly evolving markets for intraoral scanners and software solutions, including CAD/CAM. The global intraoral scanner market is very dynamic with participants spanning from traditional dental conglomerates to companies dedicated primarily to scanner development and sales with new entrants from South Korea and China playing larger roles. Information regarding risks associated with increased competition may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”
We believe we are well positioned to compete in the markets we target. We have a dedicated sales force of over 4,000 employees who are focused on key demographics in our target markets that allow us to uniquely address customer needs and thereby enhance the customer experience. Our significant historical and ongoing investments in research and design around the movement of teeth, SmartTrack aligner materials and design, intraoral scanning, 3D manufacturing, global scale of manufacturing and treatment planning, strong brand name recognition, and an in depth understanding of the drivers and motivations within the orthodontic and GP dental markets are among a few of our key competitive factors that compare favorably with our competitors’ products and services.
Government Regulation
Many countries throughout the world have established regulatory frameworks for commercialization of medical devices. As a designer, manufacturer, and marketer of medical devices, we are obligated to comply with the respective frameworks of these countries to obtain and maintain access to these global markets. The frameworks often define requirements for marketing authorizations which vary by country. Failure to obtain appropriate marketing authorization and to meet all local requirements, including specific quality and safety standards in any country in which we currently market our products, could cause commercial disruption and/or subject us to sanctions and fines. Delays in receipt of, or a failure to receive, such marketing authorizations, or the loss of any previously received authorizations, could have a material adverse effect on our business, financial condition and results of operations.
With regards to premarket authorization in the U.S., many of our products are classified as medical devices under the U.S. Food, Drug, and Cosmetic Act (“FD&C Act”). The FD&C Act requires these products, when sold in the U.S., to be safe and effective for their intended use and to comply with medical device regulations defined by the FDA. The regulatory framework depends on a set of written processes for ensuring consistent quality called a Quality Management System (“QMS”) coupled with a product marketing authorization which depends on the risk classification of the product.This regulatory framework is comparable to the framework established in the European Union (“EU”). Within the EU, our products are subject to the requirements defined by the Medical Device Regulation EU 2017/745 which replaced the Medical Device Directive 93/42/EEC with a final transition date of May 26, 2021. Similar market access regulations exist in Brazil, China, Japan and other countries.Our QMS is routinely audited by certification bodies as well as country regulators for compliance with applicable regulations. We believe we are in compliance with all state, federal, and international regulatory requirements applicable to our products.
We are also subject to various laws around the world that govern interactions with our customers as healthcare professionals or government officials. The laws govern different interactions and may include prohibiting improper influence of or payments to healthcare professionals and government officials, setting out rules for when and how to engage healthcare professionals as our vendors, requiring price reporting regulations, requiring proper and on label promotion, sale and marketing
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of our products and services, importation and exportation of our products, the operation of our facilities and distribution of our products, and disclosure of payments to healthcare professionals and entities. As we expand our operations footprint, countries to which we sell and invest in new business models, compliance with applicable laws becomes more complex and the general trend is toward increasingly stringent oversight and enforcement.
Initiatives sponsored by government agencies, legislative bodies, and the private sector to limit the growth of healthcare expenses generally are ongoing in markets where we do business. It is not possible to predict at this time the long-term impact of such cost containment measures on our future business.
Our customers are healthcare providers that may be reimbursed by state or federal funded programs such as Medicaid, a foreign national healthcare program or private pay insurance, each of which may offer some degree of oversight. As we expand our customer base and product offering, it is increasingly possible that there will be new opportunities to seek reimbursement from public and private payors for services that include our products, and additional laws or regulatory enforcement requirements may apply now or in the future. Also, as a medical device manufacturer and seller, we are subject to transparency reporting laws (also known as sunshine laws) that in certain countries require us to report transfers of value to healthcare professionals that perform services or receive other items from us (e.g., meals, travel, branded promotional or educational items, or other benefits of value). Many government agencies, both domestic and foreign, have increased their enforcement activities with respect to healthcare providers and companies in recent years. Enforcement actions and associated efforts to respond or defend against such actions can be expensive, and any resulting findings carry the risk of significant civil and criminal penalties.
In addition, we must comply with numerous data protection and storage requirements that span from individual state and national laws in the U.S., China and other countries, to multinational requirements in the EU, including laws that regulate or restrict cross border data transfers. In the U.S., we must comply with final regulations implementing amendments to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the associated HIPAA Security Rule. We are also required to comply with the California Consumer Privacy Act and are preparing for a number of state-level laws and bills in the U.S., including the California Privacy Rights Act of 2020. In the EU, we must comply with the General Data Protection Regulation, which serves as a harmonization of European data-privacy law and the Swiss Federal Act on Data Protection, where Align has its EMEA headquarters. In LATAM markets, we must comply with Brazil's Lei Geral de Proteção de Dados. Meanwhile, the APAC and EMEA regions have also seen rapid development of privacy laws including Turkey, Morocco, Ghana, India, Russia, China, South Korea, Singapore, Hong Kong, Israel, and Australia.
Information regarding risks associated with data security and privacy may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”
Human Capital
We believe our culture and commitment to employees provide unique value that benefits Align, its stockholders and the communities and other stakeholders we serve. Every employee, and every job, is important to our success and helps us achieve our purpose of transforming smiles and changing lives. Fostering open dialogue, open-mindedness, compassion, fairness, recognition, and shared goals allows us to attract and retain the best talent, which has ultimately led to the growth and success of our company.
As of December 31, 2021, we had approximately 22,540 employees, an increase of approximately 25% and 55% over December 31, 2020, and December 31, 2019, respectively. Included among our employees as of December 31, 2021, were approximately 14,200 in manufacturing and operations, 4,600 in sales and marketing (which includes customer care), 1,375 in research and development, and 2,365 in general and administrative functions. We are a global organization with the majority of our employees in direct-labor roles in our manufacturing and clinical treatment planning facilities. Set forth in the following paragraphs are some of the most important elements of our culture and commitment to our employees.
Governance. Our commitment to improving the lives of our employees and the communities in which we live and work, including conducting our business ethically, responsibly and transparently through open and clear disclosures that allow us and others to hold us accountable, begins with our Board of Directors (“Board”) and management team. They set the tone for our organization by establishing and clearly communicating our core values of Agility, Customer and Accountability that inform our culture. Our Global Code of Conduct (“Code”) and quality policies are designed to enable us to operate with integrity and deliver superior treatment outcomes and experiences to patients. We seek to create an environment that values the health, safety and well-being of our teams, and we work to equip them with the knowledge and skills to serve our business and develop in their careers. We believe that by effectively managing our business with these values as the foundation, we will drive long-term value for our stockholders and all stakeholders.
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To demonstrate our commitment to our environmental, social and governance (“ESG”) efforts, our Board has delegated ESG oversight responsibility to our Nominating and Governance Committee. In 2021, our Board took further steps to support ESG by amending the charter of our Compensation Committee to specifically empower the committee to oversee our diversity, equity and inclusion initiatives.
Diversity. Fostering diversity and encouraging inclusion in the workplace makes Align a more welcoming and enjoyable place to work. Our products and services are used broadly across age groups, gender identities, races, ethnicities, and cultures, so we aim to build a workforce that optimally reflects this diversity. We believe our success continues to be driven by our focus on integrating employees of all different backgrounds, orientations, beliefs, perspectives and capabilities into our workforce. Our approximately 22,540 employees bring a positive mix of ethnic and culturally diverse backgrounds to the more than 40 different countries in which we operate. Our management team is comprised of diverse individuals from varying countries and nationalities and who are committed to promoting and encouraging the health and well-being of our employees at work, at home and in society in general.
Our work culture is designed to create financial, health, career and personal benefits for our employees and organization. We sponsor diverse and cultural recognition events to increase awareness of inclusion and diversity, including its importance in creating an environment where every employee can thrive.
We also sponsor employee resource groups based on shared characteristics or life experiences which are open to all employees, including those who do not directly identify with other members but are passionate in supporting the group's members in creating an educated, supportive and inclusive culture.
Community. We provide opportunities for and actively encourage employees to support local charitable organizations through volunteerism, team building, and donation and matching programs and are extremely proud of the generosity and dedication of our employees especially during our annual Month of Smiles initiative in October. In addition, through our Align Foundation, we support organizations whose visions closely align with our own, including Operation Smile and America’s ToothFairy. We also provide product donations to the dental community to help patients in need of a healthy, beautiful smile. For more information on our charitable and community efforts, please refer to the Corporate Social Responsibility portion of our corporate website located at https://www.aligntech.com/about/corporate_social_responsibility.
Talent Recruitment and Engagement. We employ a variety of career development, employee benefits, compensation and other policies and programs designed to attract, develop, and retain employees. We focus on building a talent pipeline that nurtures those early in their careers, encourages continuous learning and growth, and incentivizes our employees to stay and contribute to our success over the long term. Our programs include early recruitment at high schools and universities, initiatives such as internships, co-ops, apprenticeships, and training programs, quarterly performance management check-ins focused on individual goals and commitment to values and conducting regular employee surveys to build trust and strengthen relationships. Our efforts have proven successful, resulting in numerous awards for our positive work environment and culture. In 2021 alone, we were recognized by:
•Forbes as one of their World’s Best Employers in 2021
•Great Places to Work and Best Places to Work based on our employee-validated great workplaces in the following countries - Brazil, Canada, China, Costa Rica, Germany, India, Poland, Singapore, U.S., and Vietnam
•Computerworld as Best Place to Work in IT, based in its survey of organizations across the U.S. to identify those that provide the best benefits and amenities for IT professionals
Training and Professional Development. Training is an integral part of developing and retaining our employees and creating a culture of leadership within the Company. In 2021, 54% of our employees engaged in some form of professional development activities. The U.S. Department of Labor uses the benchmark of 23% as a best practice standard for companies.
Training at Align begins with our Code and our strong commitment to ethical business practices in all aspects of our operations. Every employee and contractor is required to review the Code and confirm they understand it. We routinely reference the Code in presentations and as part of everyday operations.
As a further part of our standard onboarding program, we train employees on important environmental health and safety topics to protect them and our environment as we operate our business. As a general practice, employees are trained to perform their jobs in accordance with any and all applicable statutory and regulatory requirements and that training is routinely re-administered, updated and refreshed.
Employees are encouraged to participate in a variety of Company-provided learning resources through our corporate platform Align University. The platform offers a broad range of development tools with more than 1,000 courses available in multiple languages to serve our many employees globally, including professional development events, external training
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programs based on individual needs, business-led enterprise leader learning events, diversity and inclusion, online business skills courses and onsite classroom events. This is in addition to opportunities offered for job development such as our Early Leader program as well as the Align Leadership Journey, for which our program on creativity and curiosity was recognized with a Brandon Hall Innovation Award, and other management skills training and trainings that create opportunities for advancement.
Compensation and Benefits. Our commitment to our employees starts with benefit and compensation programs that reflect the value and the contributions our employees make. In addition to competitive base pay, we offer an assortment of benefits that vary by country, including health and welfare benefit plans, retirement planning services and benefits, holiday and leave policies, equity participation programs such as our Incentive Plan and Employee Stock Purchase Plan, and charitable and community service opportunities. Besides these, we also offer discounts to our employees and their dependents when they undergo Invisalign treatment.
We are furthermore committed to pay equity practices. We regularly review our pay equity practices, none of which have shown any systemic differences in pay or pay practices.
Recognizing that financial security is as important to the emotional health and well-being of our employees as physical precautions against the COVID-19 virus and its many variants, we committed at the outset of the pandemic to protect our employees and their families financially by declaring we would not furlough, lay off or cut employee pay. We have honored this commitment throughout the pandemic.
Health and Safety. Our employees are essential to us as a business and their health and well-being is critical to our success and their continuing achievements. Our objective is to prevent injuries and occupational diseases by focusing first and foremost on creating and maintaining environments that are safe. We therefore offer a wide variety of robust programs and initiatives designed to promote the overall health and welfare of all our employees and their families. In addition to the compensation and benefits listed above, we offer family support services, healthcare initiatives and career services support, among many others. In response to the COVID-19 pandemic and the impacts of remote working, we have encouraged employees to take time away from work to be with their families and implemented initiatives to promote better work-life balance. In addition, we have several health and safety programs in place to help protect our employees. For instance, we have training programs and courses that employees exposed to particular risks are required to take and update periodically. Examples include hazardous material training, emergency response and evacuation training, ergonomics training, biohazard and personal protective equipment training, and, more recently, COVID-19 related safety training.
We have an Environmental Health, Safety and Sustainability Director who is responsible for ensuring health and safety programs are maintained and effective at each of our locations. Major worksites, such as our aligner fabrication sites, and large offices have dedicated Environmental Health and Safety (“EHS”) departments that ensure health and safety programs are maintained while contributing Best Management Practices (“BMP”) and general input to corporate-wide programs. Each EHS department is responsible for ensuring all employees at their location are properly trained on various EHS topics and at the appropriate frequencies. A training suite is determined for each employee depending on their responsibilities and function modeled off of ISO 45001.
Available Information
Our corporate website is www.aligntech.com, and our investor relations website is http://investor.aligntech.com. The information on or accessible through our websites is not part of this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our proxy statement on Schedule 14A for our annual stockholders’ meeting and amendments to such reports are available, free of charge, on our investor relations website as soon as reasonably practicable after we electronically file or furnish such material with the SEC. Further, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.
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Information about our Executive Officers
The following table sets forth certain information regarding our executive officers as of February 25, 2022:
Name Age Position
Joseph M. Hogan 64 President and Chief Executive Officer
Julie Coletti 54 Executive Vice President, Chief Legal and Regulatory Officer
Stuart Hockridge 50 Executive Vice President, Global Human Resources
Emory M. Wright 52 Executive Vice President, Global Operations
Joseph M. Hogan has served as our President and Chief Executive Officer and as a member of our Board of Directors since June 2015. Prior to joining us, Mr. Hogan was Chief Executive Officer of ABB Ltd., a global power and automation technologies company based in Zurich, Switzerland from 2008 to 2013. Prior to working at ABB, Mr. Hogan worked at General Electric Company (GE) in a variety of executive and management roles from 1985 to 2008, including eight years as Chief Executive Officer of GE Healthcare from 2000 to 2008.
John F. Morici served as our Chief Financial Officer beginning in November 2016. His title was changed to Chief Financial Officer and Senior Vice President, Global Finance in February 2018 and was changed again in February 2022 to Chief Financial Officer and Executive Vice President. Prior to joining us, Mr. Morici was at NBC Universal from 2007 to 2016 where he held several senior management positions in their Universal Pictures Home Entertainment U.S. and Canadian business, including Chief Financial Officer, Chief Operating Officer, and most recently, Executive Vice President and Managing Director from 2014 to 2016. Prior to NBC Universal, Mr. Morici was in various senior financial management positions at GE Healthcare from 1999 to 2007, including Chief Financial Officer for its Diagnostic Imaging and Global Products units from 2002 to 2003.
Julie Coletti served as our Senior Vice President, Chief Legal and Regulatory Officer from May 2019 until February 2022 when her title was changed to Executive Vice President, Chief Legal and Regulatory Officer. Ms. Coletti joined Align in May 2018, serving as Vice President and Associate General Counsel, Strategic Commercial Affairs until her promotion in 2019. Prior to Align, Ms. Coletti was Vice President, Global General Counsel and Chief Compliance Officer for Danaher Corporation, a healthcare, environmental and industrial equipment manufacturer, in its dental platform business. Before Danaher, Ms. Coletti served in various senior legal management positions, including as Vice President, Chief Legal Officer and Corporate Secretary at Bayer HealthCare's MEDRAD/Radiology and Interventional Division, a leading manufacturer of pharmaceuticals and medical devices for imaging and interventional cardiology.
Stuart Hockridge served as our Vice President, Global Human Resources beginning in May 2016. His title was changed to Senior Vice President, Global Human Resources in February 2018 and was changed again in February 2022 to Executive Vice President, Global Human Resources. Prior to joining us, Mr. Hockridge was Senior Vice President of Talent at Visa Inc. from 2013 to 2016. Prior to Visa, Mr. Hockridge held a number of human resource management positions at GE Healthcare from 2002 to 2012 leading HR processes both globally and for various divisions.
Emory M. Wright served as our Vice President, Operations beginning in December 2007. His title changed to Senior Vice President, Global Operations in February 2018 and was changed again in February 2022 to Executive Vice President, Global Operations. He has been with us since March 2000 predominantly in manufacturing and operations roles including Vice President, Manufacturing and was General Manager of New Product Development. Prior to joining Align, from 1999 to 2000, Mr. Wright was Senior Manufacturing Manager at Metrika, Inc. a medical device manufacturer. Mr. Wright also previously served as Manager of Manufacturing and Process Development for Metra Biosystems Inc.
Item 1A. Risk Factors.
The following discussion is divided into two sections. The first, entitled “Risks Relating to our Business Operations and Strategy,” discusses some of the risks that may affect our business, results of operations and financial condition. The second, captioned “General Risk Factors,” discusses some of the risks that apply generally to companies and to owning our common stock, in particular. You should carefully review both sections, as well as our consolidated financial statements and notes thereto and other information appearing in this Annual Report on Form 10-K, for important information regarding these and other risks that may affect us. The order we have chosen to list the risks below or the sections in which we have identified them should not be interpreted to mean we deem any risks to be more or less important or likely to occur or, if any do occur, that their impact may be any less significant than others. These risk factors should be considered in connection with evaluating the
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forward-looking statements contained in this report because they could cause our actual results and conditions to differ materially from those statements. Before you invest in Align, you should know that investing involves risks, including those described below. The risks below are not the only ones we face. If any of the risks actually occur, our business, financial condition and results of operations could be negatively affected, the trading price of our common stock could decline, and you may lose all or part of your investment.
Summary of Risk Factors
The following is a summary of the risks that are more fully described below in this “Risk Factors” section:
Risks Relating to our Business Operations and Strategy
•Our results of operations have been materially adversely affected by global and regional efforts to mitigate the spread of COVID-19 and we expect this will continue in as yet unknown ways and to varying degrees as the virus evolves and circumstances dictate.
•Our net revenues are dependent primarily on our Invisalign system and iTero scanners and any decline in sales or average selling price of these products, for any reason, may adversely affect net revenues, gross margin and net income.
•Competition in the markets for our products is increasing and we expect aggressive competition from existing competitors, other companies that may introduce new technologies in the future and customers who alone or with others create orthodontic appliances and solutions or other products or services that compete with us.
•An increasingly larger portion of our total revenues are derived from international sales and we are dependent on our international operations, which exposes us to foreign operational, political, military and other risks that may harm our business.
•Demand for our products may not increase as rapidly as we anticipate or may decrease due to a variety of factors, including changing consumer demand, inflation, weakness in general economic conditions, recessions and resistance to non-traditional treatment methods.
•Our success depends on our ability to develop, successfully introduce, achieve market acceptance of, and manage new products and services.
•As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity and operational inefficiencies at our manufacturing and treat facilities.
•Our products and information technology systems are critical to our business. Issues with product development or enhancements, IT system integration, implementation, updates and upgrades along with security and data protection risks have previously and could again in the future disrupt our operations, which could have a material adverse impact on our business and operating results.
•If we are unable or fail to protect our customer or patient information or if we are unable to comply with applicable privacy, security and data protection laws, our operations may be severely adversely impacted, patient care could suffer, we could be liable for related damages, and our business, operations and reputation could be harmed.
•If we fail to sustain or increase revenue growth while controlling expenses, our profitability may decline.
•Our operating results have and will continue to fluctuate in the future, which makes predicting the timing and amount of our revenues, costs and expenditures difficult.
•A disruption in the operations of a primary freight carrier, higher shipping costs or shipping delays could disrupt our supply chain and cause a decline in our net revenues or a reduction in our earnings.
•If we fail to accurately predict our volume growth, hire too many or too few technicians, or manufacture too many or too few products, the delivery time for our products could be delayed or our costs may exceed our revenues, each of which could adversely affect our results of operations.
•We are dependent on our marketing activities to deepen our market penetration and raise awareness of our brand and products, which may not prove successful or may become less effective or more costly to maintain in the long term.
•Our success depends in part on our proprietary technology, and if we fail to successfully obtain or enforce our intellectual property (“IP”) rights, our competitive position may be harmed. Litigating claims of this type is costly and could distract our management and cause a decline in our results of operations and stock price.
•If we or any vendors on whose products or services we rely for our products and services infringe the patents or IP rights of other parties or are subject to a patent infringement claim, our ability to grow our business may be severely limited.
•Obtaining approvals and complying with governmental regulations, particularly those related to personal healthcare information, financial information, quality systems and data privacy, is expensive and time-consuming, and any failure to obtain or maintain approvals or comply with regulations regarding our products or services or the products and services of our suppliers or customers could materially harm our sales, result in substantial penalties and cause harm to our reputation.
•We are highly dependent on third-party suppliers, some of whom are sole source suppliers, for certain key machines, components and materials, and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials used in our manufacturing process increases.
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•We rely on highly skilled personnel and, if we fail to attract, motivate, train or retain highly skilled personnel, it may be more difficult to grow effectively and pursue our strategic priorities.
•We use distributors for a portion of the importation, marketing and sales efforts related to our products and services, which exposes us to risks that may be harmful to our sales and operations, including that these distributors do not comply with applicable laws or our internal procedures.
•Our business exposes us to potential liability for the quality and safety of our products and services, how we advertise and market those products and services and how and to whom we sell them, and we may incur substantial expenses or be found liable for substantial damages or penalties if we are subject to claims or litigation.
•Compliance with current or future environmental, social, and governance (“ESG”) laws may materially increase our costs, expose us to potential liability and otherwise materially impact our business.
General Risk Factors
•We rely on our personnel and, if we fail to attract, motivate or retain personnel, or if our growth harms our corporate culture, it may be more difficult to grow effectively and pursue our strategic priorities.
•Business disruptions could seriously harm our financial condition.
•Changes in, or interpretations of, accounting rules and regulations, could result in unfavorable accounting charges.
•We are required to annually assess our internal control over financial reporting and any adverse results from such assessment may result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
•We are exposed to fluctuations in currency exchange rates and inflation, each of which could negatively affect our financial condition and results of operations.
•If we fail to manage our exposure to global financial and securities market risks successfully, our operating results and financial statements could be materially impacted.
•If our goodwill or long-lived assets become impaired, we may be required to record a significant charge to earnings.
•Our effective tax rate may vary significantly from period to period.
•New tax laws and practice, changes to existing tax laws and practice, or disputes regarding the positions we take regarding tax laws, could negatively affect our provision for income taxes as well as our ongoing operations.
•We have in the past and may again in the future invest in or acquire other businesses, products or technologies which may require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations.
•Historically, the market price for our common stock has been volatile.
•We cannot guarantee that we will continue to repurchase our common stock in the future, and any repurchases that we may make may not achieve our desired objectives.
•Future sales of significant amounts of our common stock may depress our stock price.
•Increased scrutiny of our ESG policies and practices have and will likely continue to result in additional costs and risks, and may adversely impact our reputation, employee retention, and willingness of customers and suppliers to do business with us.
Risks Relating to our Business Operations and Strategy
Our results of operations have been materially adversely affected by global and regional efforts to mitigate the spread of COVID-19 and we expect this will continue in as yet unknown ways and to varying degrees as the virus evolves and circumstances dictate.
The broad and extensive impact of the COVID-19 pandemic on virtually all aspects of our business and society has exacerbated many pre-existing risks to our business by making them more likely to occur or more impactful when they do occur. Accordingly, you should consider the risks described in this risk factor in addition to, and not in lieu of, the risks described elsewhere throughout these risk factors.
COVID-19 has created significant, widespread and unprecedented volatility, uncertainty, and economic instability, disrupting broad aspects of the global economy, our operations and the businesses of our customers and suppliers. Many of these effects continue to varying degrees and further mutated variants and outbreaks globally or regionally continue to harm recovering consumer confidence and have led to renewed implementation of harsh preventative measures by local and regional governments and businesses. Therefore, comparing our financial results for the reporting periods of 2021 to the same reporting periods of 2020 or 2019 may not be a useful means by which to evaluate the health of our business and our results of operations.
As a result of the pandemic, customer demand and doctor availability has been inconsistent and difficult to predict. Although the practices of the doctors, dental service organizations and labs that are our principal customers have largely reopened, many continue to operate at less than pre-pandemic capacities. In addition, new variants of the virus have caused unpredictable fluctuations in the number of patients seeking treatment and the number of doctors providing the services and
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treatments. While the pandemic increased demand for digital solutions such as the products and solutions we offer for the dental field, it is unclear whether increased demand for our products will continue. For instance, if the use of video conferencing declines when employees return to office work environments or the availability of travel, dining, entertainment and other consumer spending categories rebound, demand for our products or the growth rates for our products may decline. These fluctuations have adversely impacted our results of operations from time to time in the recent past and are expected to continue to impact our results, particularly in the near term.
In response to the pandemic, in 2020 we implemented measures aimed at limiting its spread for the health and safety of our employees, customers, patients and the communities in which we live and work as well as in accordance with orders and decrees of governmental agencies. These measures included diagnostic screenings at our facilities, increased social distancing mandates, closures of physical offices, manufacturing and treatment planning facilities, including our U.S. corporate headquarters and regional facilities worldwide, implementing remote working where feasible, and prohibiting non-essential travel. Many of these actions remain in effect to varying degrees and we may implement new or revise existing measures as circumstances require. The actions and reactions to voluntary and involuntary protective measures have been highly disruptive to our business and may continue to be disruptive.
The rules and regulations for reopening and operating our offices will likely increase in complexity, making compliance more difficult. Furthermore, if employees perceive the protocols and requirements we implement to create a safe and effective work environment to be inadequate, overly burdensome or no longer necessary, or alternatively, if we require employees to return to the office when they prefer the safety or convenience of working from home, employees may choose to leave, productivity may decline or we may experience employee unrest, slowdowns, stoppages or other demands. Additionally, we may fail to timely meet customer demand or fulfill orders, the costs to maintain or implement protective measures or deliver our products may increase, and we may be subject to increased litigation, including product liability and occupational safety and condition claims. For further discussion or the risks related to employee satisfaction, retention and engagement see the risk factor “We rely on our personnel and, if we fail to attract, motivate or retain personnel, or if our growth harms our corporate culture, it may be more difficult to grow effectively and pursue our strategic priorities.”
As the economic and societal impact of the pandemic continues, we are continually evaluating macroeconomic as well as industry-specific factors, including the extent our business and financial results and the business and financial results of our customers’ and suppliers’ have been and in the future may be impacted. The financial health and stability of businesses and consumers overall depends on numerous evolving factors, many of which we cannot control nor accurately predict. Examples include:
•the duration, scope, and severity of governmental, business and societal actions in response to the pandemic;
•the impact on worldwide economic activity, employment rates and actions taken by central banks and governments;
•customer and consumer purchasing behavior changes as pandemic-related restrictions are curtailed, lifted or reinstated, and travel and discretionary spending patterns shift;
•the response of employees, customers and suppliers to the reimplementation or easing of social distancing mandates and returning to in-office or facility working, including anxieties regarding the continuing risks of the spread of the virus or any of its variants, vaccination requirements, and other mandates that may impact employee productivity and engagement, retention or require additional costly protective measures;
•the liquidity of funds and financial stability of consumers, customers, and patients, including their willingness to purchase our products and services, delays paying for products or services, requests for extended payment terms, or payment defaults;
•disruptions and shortages impacting the cost, availability and timing of the procurement, delivery, manufacturing and overall supply chain for raw materials, components, parts and products, including semiconductor chips;
•delays and cancellations as a result of port congestion and intermittent supplier shutdowns;
•travel and gathering restrictions, including those that adversely impair or prohibit our sales personnel from interacting with customers or that limit patients from visiting their doctors or capacity limits on the number of patients doctors can see in their offices;
•actions by competitors such as price reductions, aggressive product promotions, changes in or the launch or termination of products or product lines, and mergers, consolidations and liquidations;
•the confidence of our customers and patients that our products and solutions are sanitary and safe to use;
•data privacy and cybersecurity risks from new or expanded use of remote working and/or teledentistry by our suppliers, customers, and us, including new or expanded use of online service platforms, products and solutions such as video conferencing applications, doctor, consumer and patient apps, inadequately secured computing networks, servers, software or software applications, overheard telephone conversations, viewable computer screens, stolen passwords or access information, increased phishing and other cyber threats;
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•the impact of remote working arrangements on our financial reporting systems and internal control over financial reporting, including our ability to ensure information required to be disclosed is timely and accurately recorded, processed, summarized, reported, and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure; and
•diversion of management’s attention as they focus on the short- and long-term ramifications of the pandemic.
The effects of the pandemic continue to linger and evolve and we cannot predict future direct and ancillary impacts on our business or results of operations, although they may have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price as well as the businesses of our customers, suppliers and economic activity generally.
Our net revenues are dependent primarily on our Invisalign system and iTero scanners and any decline in sales or average selling price of these products, for any reason, may adversely affect net revenues, gross margin and net income.
Our net revenues remain largely dependent on sales of our Invisalign system of clear aligners and iTero intraoral scanners. Of the two, we expect net revenues from the sale of the Invisalign system, primarily our comprehensive products, will continue to account for the majority of our net revenues, making the continued and widespread acceptance of the Invisalign system by orthodontists, GPs and consumers critical to our future success. Our iTero scanners have become a material percentage of our overall revenues. Although exocad and its CAD/CAM software solutions are important to the continuing evolution of the Align digital platform, the contributions to our total net revenues from the exocad solutions remain immaterial. Our operating results could be harmed if:
•orthodontists and GPs experience a reduction in consumer demand for orthodontic services;
•consumers prove unwilling to adopt Invisalign system treatment as rapidly or in the volumes we anticipate and at the prices offered;
•orthodontists or GPs choose to continue using wires and brackets or competitive products rather than the Invisalign system or the rates at which they utilize the Invisalign system fail to increase or increase as rapidly as anticipated;
•sales of our iTero scanners decline or fail to grow sufficiently or as expected;
•the growth of CAD/CAM solutions does not produce the results expected; or
•if the average selling price of our products declines.
The average selling prices of our products, particularly our Invisalign system, are influenced by numerous factors, including the type and timing of products sold (particularly the timing of orders for additional clear aligners for certain Invisalign products) and foreign exchange rates. In addition, we sell a number of products at different list prices which may differ based on country. Our average selling prices have been impacted in the past and may be adversely affected again in the future if:
•we introduce new or change existing promotions, general or volume-based discount programs, product or services bundles, or consumer rebate programs;
•participation in any promotions or programs unexpectedly increases or decreases or drives demand in unexpected and material ways;
•our geographic, channel, or product mix shifts to lower priced products or to products that have a higher percentage of deferred revenue;
•we decrease prices on one or more products or services in response to increasing competitive pricing pressures;
•we introduce new or change existing products or services, or modify how we market or sell any of our new or existing products or services; or
•our critical accounting estimates materially differ from actual behavior or results.
If any of the foregoing were to occur, our net revenues, gross profit, gross margin and net income may decline.
Competition in the markets for our products is increasing and we expect aggressive competition from existing competitors, other companies that may introduce new technologies in the future and customers who alone or with others create orthodontic appliances and solutions or other products or services that compete with us.
The dental industry is in a period of immense and rapid digital transformation involving products, technologies, distribution channels and business models. While solutions such as our Invisalign system, iTero scanners and CAD/CAM software facilitate this transition, whether our technologies will achieve market acceptance and, if adopted, whether and when they may become obsolete as new offerings become available remains unclear.
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Currently, the Invisalign system competes directly against traditional metal wires and brackets and increasingly against clear aligners manufactured and distributed by new market entrants and manufacturers of traditional wires and brackets, both within and outside the U.S., and from traditional medical device companies, laboratories, startups and, in some cases, doctors and DSOs themselves. Due in part to market opportunities and the expiration of certain of our key patents beginning in 2017, competition in the clear aligner market is increasing. The number and types of competitors are diverse and growing rapidly. They vary by segment, geography, and size, and include new and well-established regional competitors, as well as larger companies or divisions of larger companies with substantial sales, marketing, research financial capabilities, and existing dental market channels. Our competitors also include direct-to-consumer (“DTC”) companies that provide clear aligners using a remote teledentistry model requiring little or no in-office care from trained and licensed doctors, and doctors and DSOs who can manufacture custom aligners in their offices using modern 3D printing technology. Large consumer product companies may also enter the orthodontic supply market.
The manipulation and movement of teeth and bone is a complex and delicate process with potentially painful and debilitating results if improperly performed or monitored. Accordingly, we are committed to delivering our Invisalign system solutions primarily through trained and skilled doctors. Invisalign system treatment requires a doctor's prescription and an in person physical examination of the patient’s dentition before beginning treatment; however, with the advent of DTC providers, there has been a shift away from traditional dental practices that may impact our primary selling channels. Doctors and DSOs are sampling alternative products and taking advantage of competitive promotions and sale opportunities. In addition, we face competition from companies that introduce new technologies and we may be unable to compete with these competitors or they may render our technology obsolete or economically unattractive. If we are unable to compete effectively with existing products or respond effectively to any new technologies, our business could be harmed.
To stimulate product and services demand, we have a history of offering volume discounts, price reductions and other promotions to targeted customers and consumers. Whether or not successful, these promotional campaigns have had and may in the future again have unexpected and unintended consequences, including reduced gross margins, profitability and average selling prices, net revenues, volume growth, and net income.
We cannot assure that we will be able to compete successfully against our current or future competitors or that competitive pressures will not have a material adverse effect on our business, results of operations and financial condition.
An increasingly larger portion of our total revenues are derived from international sales and we are dependent on our international operations, which exposes us to foreign operational, political, military and other risks that may harm our business.
We earn an increasingly larger portion of our total revenues from international sales generated through our foreign direct and indirect operations and we expect to increase our sales and presence outside the U.S., particularly in markets we believe have high-growth potential. Moreover, we perform many of our key production steps in locations outside of the U.S. For instance, our digital treatment planning and aligner fabrication are performed in multiple international locations, including large-scale operations in Mexico, Costa Rica and China and we continue to establish additional sites closer to our international customers, such as our manufacturing facility in Poland currently under construction. Also, we maintain significant regional sales and marketing operations in Switzerland, Singapore and China along with research and development operations globally, including in the U.S., Russia, Israel and Germany. Our reliance on international operations exposes us to risks and uncertainties that may affect our business or results of operations, including:
•difficulties managing international operations, including any travel restrictions on us or our customers;
•fluctuations in currency exchange rates;
•import and export risks, including shipping delays, cost increases, penalties, controls, license requirements and restrictions;
•controlling production volume and quality of the manufacturing process;
•the engagement in activities by our employees, contractors, partners and agents prohibited by our policies and procedures as well as international and local trade, labor and other laws such as those prohibiting bribery and corrupt payments to government officials, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and export control laws;
•delays, disruptions and increasing costs to us and our suppliers for raw materials or components, manufacturing, and transportation, including as a result of customs clearance, port congestion, workforce unrest or labor shortages, slowdowns or stoppages, unionization efforts, or disasters, whether natural forces or human caused;
•increased expense of developing, testing, manufacturing and marketing localized versions of our products;
•threats, tensions, actions and responses to any social, economic, business, geopolitical, military, terrorism, or acts of war, including the possibility, threat of, imposition of, or changes in sanctions, trade restrictions and tariffs, as well as
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retaliatory military actions, sanctions, trade restrictions and tariffs particularly involving key customers, development or manufacturing markets such as China, Mexico, Russia, the Middle East, Eastern Europe or other countries;
•Some of our employees in Israel are obligated to perform annual reserve duty in the Israeli military and may be called for additional active duty under emergency circumstances which may materially impair all or a portion of our business critical to our iTero operations. Additionally, we have significant research and development activities in Russia that may be impaired should any threatened or actual military actions occur in the Ukraine or other countries. If any of these events or conditions occur, the impact to us, our employees and customers is uncertain, particularly if emergency circumstances, armed conflicts or an escalation in political instability or violence disrupts our product development, data or information exchange, payroll or banking operations, product or materials shipping by us or our suppliers and other unanticipated business disruptions, interruptions and limitations in telecommunication services or critical systems or applications reliant on a stable and uninterrupted communications infrastructure. Moreover, we have developed a multi-dimensional business continuity plan designed to mitigate the impact of potential actions and reactions to a military incursion in Ukraine and other areas, but it is unclear if it will successfully and adequately mitigate against any actions taken or sanctions imposed;
•burdens of complying with a wide variety of regional and local laws, including anti-trust, fair competition and environmental laws;
•the impact of initiatives to encourage the purchase or support of domestic vendors, which can influence customers to purchase products from, or collaborate to promote interoperability of products with, companies whose headquarters or primary operations are not domestic;
•reduced IP rights protections as compared to the protections afforded under the laws of the U.S.;
•longer customer payment cycles and greater difficulty in accounts receivable collection; and
•potential adverse tax consequences.
The potential impacts of the United Kingdom’s (“UK”) withdrawal from the EU are still unfolding and have impacted varying parts of its economy at different times since the withdrawal. As the UK negotiates new trade deals and implements new laws and regulations following its withdrawal, the UK’s actions could, among other potential outcomes, adversely affect the tax, tax treaty, currency, operational, legal and regulatory regimes to which our businesses are subject, including those involving data privacy and the regulation of medical devices. The withdrawal could also, among other potential outcomes, disrupt the free and timely movement of goods, services, people, data and information and significantly disrupt trade. Further, uncertainty around these and related issues could lead to adverse effects on the economies and political stability of the UK, EU and the other economies in which we operate.
Should any of these factors, either individually or in combination, occur they could materially impact our international operations and adversely affect our business as a whole.
Demand for our products may not increase as rapidly as we anticipate or may decrease due to a variety of factors, including changing consumer demand, inflation, weakness in general economic conditions, recessions and resistance to non-traditional treatment methods.
Consumer spending habits are affected by, among other things, pandemics, inflation, weakness in general economic conditions, recessions, levels of employment, salaries and wage rates, debt obligations, discretionary income, consumer confidence and consumer perception of current and future economic conditions. Declines in, or uncertain economic outlooks for, the U.S. or certain international economies could adversely affect consumer spending habits which may, among other things, result in a decrease in the number of overall orthodontic and dental case starts, reduce patient traffic in dentists’ offices, reduce or shift spending away from elective, non-urgent, or higher value procedures or reduce demand for dental services generally, any of which could materially adversely affect our revenues and operating results. Conversely, to the extent social distancing, travel, work and other restrictions have limited options for consumer spending, demand for our products may decline once any or all of these restrictions ease. Inflation, weakness in the global or regional economies and recessions can decrease demand for dental technologies, causing dentists to postpone investments in capital equipment, such as intraoral scanners and CAD/CAM software. In addition, Invisalign treatment represents a significant change from traditional metal wires and brackets orthodontic treatment, and customers and consumers may not find it cost-effective or preferable to traditional treatment. For instance, a number of dental professionals continue to believe the Invisalign treatment is appropriate for only a limited percentage of patients. Increased market acceptance of our products depends in part upon the recommendations of dental professionals, as well as other factors including effectiveness, safety, ease of use, reliability, aesthetics, and price compared to competing products and treatment methods.
Our success depends on our ability to develop, successfully introduce, achieve market acceptance of, and manage new products and services.
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Our success depends on our ability to profitably and quickly develop, manufacture, market and obtain regulatory approval or clearance of new products and services along with improvements to existing products and services. There is no assurance we can successfully develop, sell and achieve market acceptance of our new products and services. The extent of, and rate at which, new products or offerings may achieve market acceptance and penetration is a function of many variables, including our ability to:
•successfully predict and timely innovate and develop new technologies and applications with the features and functionality customers desire or expect;
•successfully and timely obtain approval or clearance of new products or services from government agencies such as the FDA and analogous agencies in other countries;
•cost effectively manufacture, bring to market, market, and sell new products and services offerings;
•properly forecast the amount and timing of new product demand;
•allocate our research and development funding to products with higher growth prospects;
•ensure compatibility of our technology, services and systems with those of our customers;
•anticipate and rapidly innovate in response to new competitive products, product offerings and technologies;
•differentiate our products and product offerings from our competitors as well as other products in our own portfolio and successfully articulate the benefits to our customers;
•qualify for third-party reimbursement for procedures involving our products; and
•encourage customers to adopt new technologies and provide the needed technical, sales and marketing support to make new product and services launches successful.
If we fail to accurately predict customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products that do not lead to significant revenues. Even if we successfully innovate and develop new products and product enhancements, we may incur substantial costs doing so and our profitability may suffer. It may be difficult to gain market share and acceptance for new or enhance products. Introduction and acceptance of new products may take significant time and effort if the products or services require doctor education and training to understand the benefits of the new products or they measure the success of a product only after using it to treat patients. For instance, it can take up to 24 months or longer to treat patients using our Invisalign system. Consequently, doctors may be unwilling to adopt our products until they successfully complete one or more cases or until more historical clinical results are available.
In addition, as part of our effort to accommodate our customers’ needs and demands, we periodically introduce new business and sales initiatives, such as our commercial teeth whitening products announced in 2021. In general, our internal resources support these new businesses or sales initiatives, and we frequently provide such support without clear indications it will prove successful or be without short-term execution challenges.
As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity and operational inefficiencies at our manufacturing and treat facilities.
We are subject to growth related risks, including excess or constrained capacity and pressure on our internal systems, personnel and suppliers. In order to manage current operations and future growth effectively, we must continue implementing and improving our operational, financial and management information systems, hire, train, motivate, manage and retain employees, and ensure our suppliers remain diverse and capable of meeting growing demand for the systems, raw materials, parts and components essential to the manufacture and delivery of our products. We may be unable to manage such growth effectively while balancing near-term efforts to meet existing demand, including adding personnel, creating scalable, secure and robust systems and operations, and automating processes needed for long term efficiencies. Any such failure could have a material adverse impact on our business, operations and prospects.
We continue to establish treatment planning and manufacturing facilities closer to our international customers in order to provide them with better experiences, improve their confidence in using the Invisalign system and iTero intraoral scanners to treat more patients, and provide redundancy should other facilities be temporarily or permanently unavailable. Our ability to obtain regulatory clearance and certifications for, move into, plan, construct and equip additional facilities is subject to significant risk and uncertainty, including risks related to establishing facilities, hiring and retaining employees and delays and cost overruns, any of which may be all or partially out of our control and can negatively impact our gross margin. In addition, operating facilities located in higher cost regions compared to Mexico, China and Costa Rica negatively impacts our gross margin. If the construction or transition into additional facilities is significantly delayed, if a facility is required to temporarily or permanently, partially or fully shut down, or demand for our products outpaces our ability to hire qualified personnel and effectively implement systems and infrastructure, we may be unable to fulfill orders timely, or at all, which may negatively impact our financial results, reputation and overall business.
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In addition, because adapting production capacity and related cost structures to changing market conditions takes time, our facilities’ capacity may at times exceed or fall short of our production requirements. For instance, as a result of the COVID-19 pandemic, sales in the final weeks of the first quarter of 2020 declined substantially and operations at our manufacturing facilities declined shortly thereafter. Then, as dental practices reopened we experienced a rapid increase in demand. These fluctuations in demand and sales have recurred several times since the first quarter of 2020 corresponding with increases in the number of people infected with COVID-19 and variants such as Delta and Omicron, and may continue to arise in the future. If product demand decreases or increases more than forecast, we could be required to write off inventory or record excess capacity charges, we may be required to purchase or lease additional or larger facilities and additional equipment, or we may be unable to fulfill customer demand in the time frames and with the quantities required, any of which may take time to accomplish, lower our gross margin, inhibit sales or harm our reputation. Additionally, if we are required to implement new or modify existing health and safety protocols to safeguard our employees, customers or their patients, productivity could decline. Production of our clear aligners and intraoral scanners are also limited by capacity constraints due to a variety of factors, including labor shortages, shipping delays, our dependency on third-party vendors for key materials, parts, components and equipment, and limited production yields. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise harm our business and financial results.
Our products and information technology systems are critical to our business. Issues with product development or enhancements, IT system integration, implementation, updates and upgrades along with security and data protection risks have previously and could again in the future disrupt our operations, which could have a material adverse impact on our business and operating results.
We rely on the efficient, uninterrupted and secure operation of our own complex information technology systems (“IT systems”) and are dependent on key software of third parties embedded in our products and IT systems as well as third-party hosted IT systems to support our operations. All software and IT systems are vulnerable to damage, attack or interruption from a variety of sources. As our business has grown in size and complexity, including through the integration of acquired businesses, which to date have been smaller organizations with less-mature or less sophisticated systems, securities practices or training, the growth has placed, and will continue to place, significant demands on our operations and such systems and have increased the risk of security incidents. To effectively manage our existing operations and continue to grow, our IT systems and applications require an ongoing commitment of significant resources to maintain, protect, enhance and restore existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, increasingly sophisticated cyber threats, and changing customer preferences. Expanded remote working and increased usage of online and hosted technology platforms by us, our customers and suppliers have increased the demands on and risks to our IT systems and personnel. Moreover, we continue to transform certain business processes, extend established processes to new subsidiaries and/or implement additional functionality in our enterprise resource planning (“ERP”), product development, manufacturing, and other software and IT systems which entails certain risks, including disruption of our operations, such as our ability to develop and update products that are safe and secure, track orders and timely ship products, manage our supply chain and aggregate financial and operational data.
System upgrades, development of new releases and enhancements require significant expenditures and allocation of valuable employee resources. Delays in integration or disruptions to our business from implementation of these new or upgraded systems could have a material adverse impact on our financial condition and operating results.
Additionally, we continuously upgrade and issue new releases of our products and customer facing software applications, such as our iTero intraoral scanners, exocad CAD/CAM solutions, my iTero, our ClinCheck software, MyAligntech and the Invisalign Doctor Site as well as our internal software applications upon which customer facing, manufacturing and treatment planning operations are dependent. Software applications and products containing software frequently contain errors or defects, especially when first introduced or when new versions are released. Additionally, the third-party software integrated into or interoperable with our products and services will routinely reach end of life, and as a consequence, certain models of our intraoral scanners may be exposed to additional vulnerabilities, including increased security risks, errors and malfunctions that may be irreparable or difficult to repair. The discovery of a defect, error or security vulnerability in our products, software applications or IT systems, incompatibility with customers’ computer operating systems and hardware configurations with a new release or upgraded version or the failure of our products or primary IT systems may cause adverse consequences, including: delay or loss of revenues, significant remediation costs, delay in market acceptance, loss of data, disclosure of financial, health or other personal information of our customers or their patients, product recalls, damage to our reputation, loss of market share or increased service costs, any of which could have a material adverse effect on our business, financial condition or results of operations.
A significant portion of our clear aligner production is dependent on digital scans from our iTero and third-party intraoral scanners.Failures of all or any portion of ours or third-party software or other components or systems to interoperate with iTero
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or third-party scanners, termination of interoperability with third-party scanners, malware or ransomware attacks, product or system vulnerabilities or defects, or a system outage for any reason have harmed our operations previously and in the future could affect materially and adversely our ability to accept scans, manufacture clear aligners or restorative procedures or treatments and services or otherwise service our customers which may, amongst other things, harm our sales, damage our reputation, adversely impact our strategic partners or result in litigation.
Additionally, our globally-dispersed installed base of iTero intraoral scanners at customer, strategic business partner or other locations may be independently or collectively the target of a cybersecurity incident or attack or subject to the intrusion of a virus, bug, or other similar negative intruder. Due to the large and growing number of these decentralized locations, we may not be able to, or not have the capacity, knowledge, or infrastructure to, respond to or remedy a cybersecurity issue in a timely manner or sufficiently, either of which may cause loss or damage to us or our customers or strategic business partners or may cause further malfunctions in, or damage to, our servers, databases, systems or products and services, loss or damage of our data, interruption or temporary cessation of our operations, or an overall negative impact to our business or reputation.
If the information we rely on to run our businesses is inaccurate or unreliable, or if the data governance controls in place fail or change, or if compliance with such controls fails, or if we fail to properly maintain, secure or restore our IT systems, or if the integrity of our products or IT systems is compromised or questioned or data is lost, or if we fail to develop new capabilities to meet our business needs in a timely manner, we could suffer operational disruptions, have customer disputes, and fail to produce timely, accurate or complete reports. We may also be required to respond to regulatory inquiries or actions, forced to defend against litigation or pay damages, penalties or fines, experience increases in operating and administrative expenses, find it necessary to recall or repair products, rebuild networks or systems, lose existing customers or strategic business partners, experience difficulties attracting new customers or implementing our growth strategies, or suffer other adverse consequences. In addition, experienced computer programmers and hackers may be able to penetrate the security features of our products, IT systems or our cloud-based software servers hosted by third parties and misappropriate, destroy or damage our confidential information or that of third parties, expose health, financial data, or other personal information of our customers and their patients, create system disruptions or cause shutdowns. Furthermore, sophisticated hardware and operating system software and applications that we either internally develop or procure from third parties may contain defects or present risks in design, development, manufacture or distribution, including “bugs,” security vulnerabilities, and other problems that can unexpectedly interfere with the operation of the system or compromise or exploit the safety and security of our products, networks or data. The costs to eliminate, mitigate or recover from security problems, viruses and bugs could be significant and depending on the nature and extent of the problem and the networks or products impacted, may result in network or systems interruptions, decreased product sales, or data loss that may have a material adverse impact on our operations, net revenues and operating results.
There can be no assurance that our process of improving existing or developing new products or IT systems, integrating new IT systems, protecting confidential patient health information, and improving service levels will not be delayed or that additional product or IT systems issues will not arise in the future. Failure to adequately protect and maintain the integrity of our products and IT systems and data may result in a material adverse effect on our financial position, results of operations and cash flows.
If we are unable or fail to protect our customer or patient information or if we are unable to comply with applicable privacy, security and data protection laws, our operations may be severely adversely impacted, patient care could suffer, we could be liable for related damages, and our business, operations and reputation could be harmed.
We retain confidential customer financial as well as patient health information in addition to our own proprietary information and data essential to our business operations. Therefore, it is critical that the facilities and infrastructure on which we depend to run our business and the products we develop remain secure and are also perceived by the marketplace and our customers to be secure. Despite the implementation of security features in our products and security measures in our IT systems, our products as well as the infrastructure and IT systems on which we depend are vulnerable to physical break-ins, computer viruses, programming errors or other technical malfunctions, hacking or phishing attacks by third parties, malware and ransomware, employee error or malfeasance or similar disruptive problems. For example, we have experienced cybersecurity incidents and may again in the future. Further, the frequency of third-party cyber attacks has increased since the onset of the COVID-19 pandemic. Significant service disruptions, breaches in our infrastructure and IT systems or other cybersecurity incidents could expose us to litigation or regulatory investigations, impair our reputation and competitive position, be distracting to our management, and require significant time and resources to address. Affected parties or regulatory agencies could initiate legal or regulatory action against us, which could prevent us from resolving the issues quickly or in unanticipated ways, cause us to incur significant expense and liability, or result in judicial or governmental orders forcing us to cease operations or modify our business practices in ways that could materially limit or restrict the products and services we provide. Concerns over our privacy practices could adversely affect others’ perception of us and deter customers, patients and partners from using our products. In addition, patient care could suffer, and we could be liable if our products or IT systems fail
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to deliver accurate and complete information in a timely manner. We have cybersecurity and other forms of insurance coverage related to a breach event covering expenses for notification, credit monitoring, investigation, crisis management, public relations and legal advice. The policy also provides coverage for regulatory action defense including oversight, investigations and disclosure obligations as well as fines and penalties, potential payment card industry fines and penalties and costs related to cyber extortion; however, damages and claims arising from such incidents may not be covered or may exceed the amount of any coverage and do not cover the time and effort we incur investigating and responding to any incidents, which may be significant.
We are also subject to federal, state and foreign laws and regulations, including ones relating to privacy, data security and protection, content regulation, and consumer protection among others. We are subject to various national and regional data localization or data residency laws which generally require that certain types of data collected within a country be stored and processed only within that country or approved countries and other countries are considering enacting similar data localization or data residency laws. We have and likely will again in the future be required to implement new or expand existing data storage protocols, build new storage facilities, and/or devote additional resources to comply with such laws, any of which could be costly. We are also subject to data export restrictions and international transfer laws which prohibit or impose conditions upon the transfer of such data from one country to another. These laws and regulations are constantly evolving and may be interpreted, applied, created or amended in a manner that could adversely affect our business.
In addition, we must comply with numerous data privacy and data security requirements that span from individual state and national laws in the U.S. and China to multinational requirements in the EU. For instance, China has enacted complex and highly restrictive cybersecurity, data localization, and cross border data transfer laws. In the EU, we must comply with the General Data Protection Regulation which serves as a harmonization of EU data-privacy laws, and in the U.S., we must comply with data privacy and data security provisions of the U.S. Health Insurance Portability and Accountability Act regulations. Moreover, the number of local and national governments enacting data privacy laws continues to increase and we expect this trend to continue. Maintaining compliance with these laws and regulations is costly and could require complex changes in the way we do business or provide services to our customers and their patients. Additionally, our success may be dependent on the success of healthcare providers, many of whom are comprised of individual or small operations with limited IT experience and inadequate or untested security protocols, in managing data privacy and data security requirements.
If we fail to sustain or increase revenue growth while controlling expenses, our profitability may decline.
If we are to sustain or increase profitability in future periods, we need to continue increasing our net revenues while controlling expenses. Because our business and the markets we target are evolving, it is difficult to predict our future operating results or levels of growth or declines. We have not in the past and may be unable in the future to sustain or regain our historical growth rates which may cause our profitability to decline.
Our operating results have and will continue to fluctuate in the future, which makes predicting the timing and amount of our revenues, costs and expenditures difficult.
Our quarterly and annual operating results have and will continue to fluctuate for a variety of reasons, including as a result of changing doctor and consumer product demand. Some of the factors that have historically and in the future could cause our operating results to fluctuate include:
•limited visibility into, and difficulty predicting from quarter to quarter, the types of procedures and level of activities in our customers’ practices;
•fluctuations in the number of patients seeking treatment and the number of doctors providing services and treatment as a result of the pandemic and new variants in the virus;
•changes in demand based on geographies, channels, or product mix;
•the level of confidence of doctors in our products and changes in the rates at which they recommend or utilize our products for their patients;
•weakness in consumer spending and confidence, inflation, a slowdown or recession in domestic or international economies;
•higher manufacturing, delivery and inventory costs;
•unanticipated delays and disruptions in the manufacturing process caused by insufficient capacity or availability of raw materials, parts or components, shortages or turnover in the labor force or the introduction of new production processes, power outages or insufficient power, natural or other disasters, pandemics or general economic conditions impacting the solvency of vendors in our supply chain;
•competition in general and competitive developments in our target markets;
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•new programs or business models, new product or services introductions or changes or modifications to existing products and services offerings, including any impacts related to the timing of orders, product mix or market cannibalization;
•changes in relationships with DSOs and distributors, including the timing of orders;
•changes in the timing of revenue recognition and changes in our average selling prices, including as a result of the timing of receipt of product orders and shipments, product and services mix, geographic mix, product and services deferrals, the introduction of new products and software releases, product pricing, bundling and promotions, pricing for fees or expenses, modifications to our terms and conditions such as payment terms, or as a result of new accounting pronouncements or changes to critical accounting estimates including, without limitation, those estimates based on such matters as our predicted usage of additional aligners;
•the creditworthiness, liquidity and solvency of our customers and their ability to timely make payments when due;
•fluctuations in currency exchange rates against the U.S. dollar;
•our inability to scale, suspend or reduce production and treatment operations based on variations in product demand;
•seasonal fluctuations, including those related to patient demographics such as the seasonality of teen treatments in the U.S., China and Europe as well as the number of doctors in their offices and their availability to take appointments;
•costs and expenditures in connection with such things as the establishment of new treatment planning and fabrication facilities, the hiring and deployment of personnel, and litigation, and the success of or changes to our marketing programs from quarter to quarter;
•timing and fluctuation of spending around marketing and brand awareness campaigns and industry trade shows;
•our reliance on our contract manufacturers for the production of sub-assemblies for our intraoral scanners;
•increased advertising or marketing efforts or aggressive price competition from competitors;
•changes to our effective tax rate;
•major changes in available technology or the preferences of customers may cause our current product offerings to become less competitive or obsolete;
•unanticipated delays or disruptions in our receipt of patient records made through intraoral scanners for any reason;
•disruptions to our business due to political, economic or other social instability or any governmental regulatory or similar actions, including the impact of epidemics and pandemics such as COVID-19, any of which results in changes in consumer spending habits, limiting or restricting patient visits to orthodontists or general practitioners, as well as any impact on workforce absenteeism;
•inaccurate forecasting of net revenues, production and other operating costs;
•investments in research and development to develop new products and enhancements; and
•material impairments of goodwill and long-lived assets.
To respond to these and other factors, we may make business decisions that adversely affect our operating results such as modifications to our pricing policy and payment terms, promotions, development efforts, product releases, business structure or operations. Most of our expenses, such as employee compensation and lease obligations, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations for future revenues. As a result, if our net revenues for a particular period fall below expectations, we may be unable to timely or effectively reduce spending to offset any shortfall in net revenues. Due to these and other factors, we do not believe that quarter-to-quarter comparisons of our operating results are meaningful.
A disruption in the operations of a primary freight carrier, higher shipping costs or shipping delays could disrupt our supply chain and cause a decline in our net revenues or a reduction in our earnings.
We are dependent on commercial freight carriers, primarily UPS, to deliver our products. If the operations of these carriers are disrupted for any reason, we may be unable to timely deliver our products to our customers who may choose alternative products causing our net revenues and gross margin to decline, possibly materially. When fuel costs increase, our freight costs generally do so as well. In addition, we earn an increasingly larger portion of our total revenues from international sales. International sales carry higher shipping costs which could negatively impact our gross margin and results of operations. If freight costs materially increase and we are unable to successfully pass all or significant portions of the increase along to our customers, or we cannot otherwise offset such increases in our cost of net revenues, our gross margin and financial results could be adversely affected.
If we fail to accurately predict our volume growth, hire too many or too few technicians, or manufacture too many or too few products, the delivery time for our products could be delayed or our costs may exceed our revenues, each of which could adversely affect our results of operations.
If we fail to accurately predict our volume growth, we may inaccurately estimate the staffing, materials or storage required to manufacture our products. If we underestimate volume growth, our growth may exceed our manufacturing capacity of one or more of our suppliers or manufacturing facilities, we may be understaffed and we may not have sufficient materials.
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Specifically, our manufacturing process relies on sophisticated computer software and requires new technicians to undergo a relatively long training process, often 120 days or longer. As a result, if we are unable to accurately predict our volume growth, we may have an insufficient number of trained technicians to ensure products are manufactured and delivered within the time frames our customers expect. Without sufficient capacity, trained personnel or materials, we may be unable to provide our products to customers in a timely manner, which could damage our relationships with our existing customers or harm our ability to attract new customers. This could cause a decline in our net revenues and net income and could adversely affect our results of operations.
Conversely, if we over estimate our growth, we may have excess expenses caused by excess staffing, materials, and capacity. If we hire and train too many technicians in anticipation of volume growth that does not materialize, materializes at a rate slower than anticipated, or if volumes decline, our costs and expenditures may outpace our revenues or revenue growth, harming our gross margin and financial results. Additionally, in order to secure supplies for production of products, we sometimes enter into non-cancelable minimum purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges and our profitability may suffer.
We are dependent on our marketing activities to deepen our market penetration and raise awareness of our brand and products, which may not prove successful or may become less effective or more costly to maintain in the long term.
Our marketing efforts and costs are significant and include national and regional campaigns in multiple countries involving television, print media, social media and, more recently, alliances with professional sports teams, social media influencers and other strategic partners. We attempt to structure our advertising campaigns to increase brand awareness, adoption and goodwill; however, there is no assurance our campaigns will achieve the returns on advertising spend desired, increase brand or product awareness sufficiently to sustain or increase our growth goals or generate goodwill and positive reputational goals. Moreover, should any entity or individual endorsing us or our products take actions, make or publish statements in support of, or lend support to events or causes which may be perceived by all or any portion of society negatively, our sponsorships or support of these entities or individuals may be called into question, boycotts of our products announced, and our reputation may be harmed, any of which could have an adverse effect on our gross margin and business overall.
In addition, various countries prohibit certain types of marketing activities. For example, some countries restrict direct to consumer advertising of medical devices. We could run afoul of restrictions and be ordered to stop certain marketing activities. Moreover, competitors do not always follow these restrictions, creating an unfair advantage and making it more difficult and costly for us to compete.
Additionally, we rely heavily on data generated from our campaigns to target specific audiences and evaluate their effectiveness, particularly data generated from internet activities on mobile devices. To obtain this data, we are dependent on third parties and popular mobile operating systems, networks, technologies, products, and standards that we do not control, such as the Android and iOS operating systems and mobile browsers. Any changes in such systems that degrade, reduce or eliminate our ability to target or measure the results of ads or increase costs to target audiences could adversely affect the effectiveness of our campaigns. For example, Apple has released mobile operating systems that include significant data privacy changes that may limit our ability to interpret, target and measure ads effectively.
Our success depends in part on our proprietary technology, and if we fail to successfully obtain or enforce our intellectual property (“IP”) rights, our competitive position may be harmed. Litigating claims of this type is costly and could distract our management and cause a decline in our results of operations and stock price.
Our success depends in part on our ability to maintain existing IP rights and to obtain and maintain further IP protection for our products. Our inability to do so could harm our competitive position.
We rely on our portfolio of issued and pending patent applications in the U.S. and other countries to protect a large part of our IP and our competitive position; however, these patents may be insufficient to protect our IP rights because our patents may be challenged, invalidated, held unenforceable, circumvented, or may not be sufficiently broad to prevent third parties from producing competing products similar in design to our products and foreign patents protections may be more limited than those provided under U.S. patents and IP laws.
We may not be afforded the protection of a patent if our currently pending or future patent filings do not result in the issuance of patents or we fail to apply for patent protection. We may fail to apply for a patent if our personnel fail to disclose or recognize new patentable ideas or innovations. Remote working can decrease the opportunities for our personnel to collaborate, thereby reducing the opportunities for effective invention disclosures and patent application filings. We may choose not to file a
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foreign patent application if the limited protections provided by a foreign patent outweigh the costs to obtain it. Our foreign patent portfolio is less extensive than our U.S. portfolio.
We also rely on protection of our copyrights, trademarks, trade secrets, know-how and proprietary information. We generally enter into confidentiality agreements with our employees, consultants and collaborative partners upon commencement of a relationship with us; however, these agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, and adequate remedies may not exist when unauthorized uses or disclosures occur.
Our inability to maintain the proprietary nature of our technology through patents, copyrights or trade secrets would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. In particular, a failure to protect our IP rights might allow competitors to copy our technology or create counterfeit or pirated versions of our products, which could adversely affect our reputation, pricing and market share.
Litigation, interferences, oppositions, re-exams, inter partes reviews, post grant reviews or other proceedings have been necessary and will likely be needed in the future to determine the validity and scope of certain of our IP rights and the IP rights claimed by third parties to determine the validity, scope or non-infringement of certain patent rights pertinent to the manufacture, use or sale of our products and the products of competitors. Asserting or defending these types of proceedings can be unpredictable, protracted, time consuming, expensive and distracting to management and technical personnel. The outcome of such proceedings could adversely affect the validity and scope of our patent or other IP rights, hinder our ability to manufacture and market our products, require us to seek a license for infringing products or technologies or result in the assessment of significant monetary damages. An unfavorable ruling could include monetary damages, an injunction prohibiting us from selling our products, or an exclusion order preventing us from importing our products in one or more countries. Moreover, independent actions by competitors, customers or others have been brought alleging that our efforts to assert or attempt to enforce our patent or other IP rights constitute unfair competition or violations of antitrust laws in the U.S. and other jurisdictions and investigations and additional litigation based on the same or similar claims may be brought in the future. The potential effects on our business operations resulting from litigation, whether or not ultimately determined in our favor or settled by us, are costly and could adversely affect our results of operations and stock price.
If we or any vendors on whose products or services we rely for our products and services infringe the patents or IP rights of other parties or are subject to a patent infringement claim, our ability to grow our business may be severely limited.