Stratasys (SSYS) 6-K 2020 Q2 Condensed Consolidated Interim Financial Statements

Exhibit 99.1

STRATASYS LTD.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2020

(UNAUDITED)

INDEX TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

(UNAUDITED)

Item	Page
Consolidated Balance Sheets	2
Consolidated Statements of Operations and Comprehensive Income (Loss)	3
Consolidated Statements of Changes in Equity	4
Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Interim Financial Statements	6-17

1

STRATASYS LTD.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited)

Consolidated Balance Sheets
(in thousands, except share data)
	June 30, 2020			December 31, 2019
ASSETS
Current assets
Cash and cash equivalents	$	284,742		$	293,484
Short-term Deposits		28,300			28,300
Accounts receivable, net		102,212			132,558
Inventories		164,588			168,504
Prepaid expenses		7,056			6,567
Other current assets		19,969			29,659
Total current assets		606,867			659,072
Non-current assets
Property, plant and equipment, net		194,437			189,706
Goodwill		385,636			385,658
Other intangible assets, net		75,638			87,328
Operating lease right-of-use assets		17,738			20,936
Other non-current assets		33,744			38,819
Total non-current assets		707,193			722,447
Total assets	$	1,314,060		$	1,381,519
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	30,600		$	35,818
Accrued expenses and other current liabilities		23,743			28,528
Accrued compensation and related benefits		29,548			34,013
Deferred revenues		48,617			52,268
Operating lease liabilities - short-term		8,667			9,292
Total current liabilities		141,175			159,919
Non-current liabilities
Deferred revenues - long-term		13,489			16,039
Operating lease liabilities - long-term		9,493			12,445
Other non-current liabilities		31,576			35,343
Total non-current liabilities		54,558			63,827
Total liabilities	$	195,733		$	223,746
Contingencies (see note 11)
Redeemable non-controlling interests		572			622
Equity
Ordinary shares, NIS 0.01 nominal value, authorized 180,000 thousands shares; 55,030 thousands shares and 54,441 thousands shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		150			148
Additional paid-in capital		2,717,963			2,706,894
Accumulated other comprehensive loss		(8,494	)		(7,716	)
Accumulated deficit		(1,591,864	)		(1,542,175	)
Total equity		1,117,755			1,157,151
Total liabilities and equity	$	1,314,060		$	1,381,519

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

2

STRATASYS LTD.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited)

Consolidated Statements of Operations and Comprehensive Income (Loss)
	Three Months Ended June 30,						Six Months Ended June 30,
in thousands, except per share data	2020			2019			2020			2019
Net sales
Products	$	73,877		$	110,341		$	157,049		$	215,432
Services		43,746			52,822			93,481			103,031
		117,623			163,163			250,530			318,463
Cost of sales
Products		39,969			47,095			79,217			91,264
Services		33,918			34,901			67,707			69,575
		73,887			81,996			146,924			160,839
Gross profit		43,736			81,167			103,606			157,624
Operating expenses
Research and development, net		21,303			24,040			45,497			46,614
Selling, general and administrative		51,711			56,322			107,287			113,476
		73,014			80,362			152,784			160,090
Operating income (loss)		(29,278	)		805			(49,178	)		(2,466	)
Financial income (expenses), net		149			1,755			(680	)		2,508
Income (loss) before income taxes		(29,129	)		2,560			(49,858	)		42
Income tax expenses (benefit)		(2,128	)		1,280			(1,907	)		2,498
Share in profits (losses) of associated companies		(950	)		(195	)		(1,788	)		1,228
Net income (loss)	$	(27,951	)	$	1,085		$	(49,739	)	$	(1,228	)
Net income (loss) attributable to non-controlling interests		35			(67	)		(50	)		(110	)
Net income (loss) attributable to Stratasys Ltd.	$	(27,986	)	$	1,152		$	(49,689	)	$	(1,118	)
Net earnings (loss) per ordinary share attributable to Stratasys Ltd. - basic and diluted	$	(0.51	)	$	0.02		$	(0.91	)	$	(0.02)
Weighted average ordinary shares outstanding -
Basic		54,917			54,231			54,733			54,102
Diluted		54,917			54,687			54,733			54,102
Comprehensive income (loss)
Net income (loss)		(27,951	)		1,085			(49,739	)		(1,228	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		287			(17	)		(1,667	)		(444	)
Unrealized gains on derivatives designated as cash flow hedges		67			155			889			1,150
Other comprehensive income (loss), net of tax		354			138			(778)			706
Comprehensive income (loss)		(27,597	)		1,223			(50,517	)		(522	)
Less: comprehensive income (loss) attributable to non-controlling interests		35			(67	)		(50	)		(110	)
Comprehensive income (loss) attributable to Stratasys Ltd.	$	(27,632	)	$	1,290		$	(50,467	)	$	(412	)

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

3

STRATASYS LTD.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited)

Consolidated Statements of Changes in Equity
(in thousands)
Three and Six Months Ended June 30, 2020 and 2019
	Ordinary Shares				Additional Paid-In		Accumulated			Accumulated Other Comprehensive			Total Equity
	Number of		Par
	shares		Value		Capital		deficit			Loss
Balance as of December 31, 2019		54,441		148		2,706,894		(1,542,175	)		(7,716	)		1,157,151
Issuance of shares in connection with stock-based compensation plans		358		1		29		-			-			30
Stock-based compensation		-		-		4,907		-			-			4,907
Comprehensive loss		-		-		-		(21,703	)		(1,132	)		(22,835	)
Balance as of March 31, 2020	$	54,799	$	149	$	2,711,830	$	(1,563,878	)	$	(8,848	)	$	1,139,253
Issuance of shares in connection with stock-based compensation plans		231		1		22		-			-			23
Stock-based compensation		-		-		6,111		-			-			6,111
Comprehensive income (loss)		-		-		-		(27,986	)		354			(27,632	)
Balance as of June 30, 2020	$	55,030	$	150	$	2,717,963	$	(1,591,864	)	$	(8,494	)	$	1,117,755

	Ordinary Shares				Additional Paid-In		Accumulated			Accumulated Other Comprehensive			Total Equity
	Number of		Par
	shares		Value		Capital		deficit			Loss
Balance as of December 31, 2018		53,881		146		2,681,048		(1,531,326	)		(7,753	)		1,142,115
Cumulative effect of changes in accounting principles		-		-		-		-			-			-
Issuance of shares in connection with stock-based compensation plans		167		*		2,222		-			-			2,222
Stock-based compensation		-		-		4,229		-			-			4,229
Comprehensive income (loss)		-		-		-		(2,270	)		568			(1,702	)
Balance as of March 31, 2019		54,048	$	146	$	2,687,499	$	(1,533,596	)	$	(7,185	)	$	1,146,864
Issuance of shares in connection with stock-based compensation plans		296		1		2,030		-			-			2,031
Stock-based compensation		-		-		6,093		-			-			6,093
Comprehensive income		-		-		-		1,152			138			1,290
Balance as of June 30, 2019		54,344	$	147	$	2,695,622	$	(1,532,444	)	$	(7,047	)	$	1,156,278

* Represents an amount less than 0.5 thousand

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

4

STRATASYS LTD.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited)

Consolidated Statements of Cash Flows
	Six Months Ended June 30,
in thousands	2020			2019
Cash flows from operating activities
Net loss	$	(49,739	)	$	(1,228	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		25,104			25,063
Stock-based compensation		11,018			10,322
Foreign currency transaction loss (gain)		1,006			(1,603	)
Deferred income taxes		(26	)		(1,123	)
Gain from sale of unconsolidated entity		-			(3,578	)
Share in losses (profits) of associated companies		1,788			(1,228	)
Other non-cash items, net		385			903
Change in cash attributable to changes in operating assets and liabilities:
Accounts receivable, net		29,858			6,372
Inventories		2,382			(27,128	)
Net investment in sales-type leases		679			1,801
Other current assets and prepaid expenses		5,512			(6,390	)
Other non-current assets		3,046			3,875
Accounts payable		(8,684	)		8,812
Other current liabilities		(7,992	)		(12,798	)
Deferred revenues		(6,092	)		(1,357	)
Other non-current liabilities		(6,723	)		122
Net cash provided by operating activities		1,522			837
Cash flows from investing activities
Purchase of property and equipment		(13,030	)		(10,423	)
Proceeds from sale of equity method investment		3,175			-
Net proceeds from divestitures of subsidiaries and associated companies		1,000			-
Proceeds from sale of plant and property		-			129
Purchase of intangible assets		(726	)		(800	)
Proceeds from sale of subsidiaries and unconsolidated entity		-			4,909
Other investing activities		144			(385	)
Net cash used in investing activities		(9,437	)		(6,570	)
Cash flows from financing activities
Repayment of debt		-			(27,293	)
Proceeds from exercise of stock options		53			4,252
Net cash provided by (used in) financing activities		53			(23,041	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(880	)		1,697
Net change in cash, cash equivalents and restricted cash		(8,742	)		(27,077	)
Cash, cash equivalents and restricted cash, beginning of period		293,597			393,734
Cash, cash equivalents and restricted cash, end of period	$	284,855		$	366,657
Supplemental disclosures of cash flow information:
Transfer of inventory to fixed assets		1,327			2,614
Transfer of fixed assets to inventory		21			127

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

5

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business Description and Basis of Presentation

Stratasys Ltd. (collectively with its subsidiaries, the “Company”) is a global provider of applied additive technology solutions for a broad range of industries. The Company focuses on customers’ business requirements and seeks to create new value for its customers across their product lifecycle processes, from design prototypes to manufacturing tools and final production parts. The Company operates a 3D printing ecosystem of solutions and expertise, comprised of: 3D printers ranging from entry-level desktop 3D printers to systems for rapid prototyping (“RP”) and large production systems for direct digital manufacturing (“DDM”) based on precise fused deposition modeling (“FDM”) and PolyJet technologies; advanced materials for use with its 3D printers; software with voxel level control; application-based services; on-demand parts; and key partnerships.

The condensed consolidated interim financial information herein is unaudited; however, such information reflects all adjustments (consisting of normal, recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim period. The condensed consolidated interim financial statements include the accounts of Stratasys Ltd. and its subsidiaries. All intercompany accounts and transactions, including profits from intercompany sales not yet realized outside the Company, have been eliminated in consolidation.

The Company financial statements are prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which requires the Company to make estimates based on assumptions about current and, for some estimates, future economic and market conditions which affect reported amounts and related disclosures in its financial statements. Although the Company current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from the Company expectations, which could materially affect its results of operations and financial position.

In particular, a number of estimates have been and will continue to be affected by the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. As a result, the accounting estimates and assumptions may change over time in response to COVID-19. Such changes could impact the Company’s goodwill, long-lived asset and intangible asset valuation; inventory valuation; assessment of the annual effective tax rate; and the allowance for expected credit losses and bad debt.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year. Certain financial information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The reader is referred to the audited consolidated financial statements and notes thereto for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) as part of the Company’s Annual Report on Form 20-F for such year on February 26, 2020.

Note 2. New Accounting Pronouncements

Accounting Pronouncements Adopted in the Current Period

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (an “ASU”) that clarifies the accounting for implementation costs in cloud computing arrangements. This ASU requires the implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customers in a software licensing arrangement. The Company adopted this guidance effective January 1, 2020, with no material impact on its consolidated financial statements.

In June 2016, the FASB issued an ASU that supersedes the existing impairment model for most financial assets to a current expected credit loss model. The new guidance requires an entity to recognize an impairment allowance equal to its current estimate of all contractual cash flows the entity does not expect to collect. The ASU also requires that credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses. The Company adopted this guidance effective January 1, 2020, with no material impact on its consolidated financial statements.

6

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the adoption of the new guidance on its consolidated financial statements.

7

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

Note 3. Revenues

Disaggregation of Revenues

The following table presents the Company’s revenues disaggregated by geographical region (based on the Company's customers' locations) and revenue type for the three and six months ended June 30, 2020 and 2019:

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(U.S. $ in thousands)				(U.S. $ in thousands)
Americas
Products	$	44,800	$	67,137	$	93,044	$	125,191
Service		33,901		40,888		72,230		79,332
Total Americas		78,701		108,025		165,274		204,523
EMEA
Products		15,743		23,323		36,490		51,408
Service		5,172		6,826		11,345		13,524
Total EMEA		20,915		30,149		47,835		64,932
Asia Pacific
Products		13,334		19,881		27,515		38,833
Service		4,673		5,108		9,906		10,175
Total Asia Pacific		18,007		24,989		37,421		49,008
Total Revenues	$	117,623	$	163,163	$	250,530	$	318,463

The following table presents the Company’s revenues disaggregated based on the timing of revenue recognition (at a specific point in time or over the course of time) for the three and six months ended June 30, 2020 and 2019:

	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(U.S. $ in thousands)				(U.S. $ in thousands)
Revenues recognized in point in time from:
Products	$	73,877	$	110,341	$	157,049	$	215,432
Services		8,778		10,747		19,422		21,374
Total revenues recognized in point in time		82,655		121,088		176,471		236,806
Revenues recognized over time from:
Services		34,968		42,075		74,059		81,657
Total revenues recognized over time		34,968		42,075		74,059		81,657
Total Revenues	$	117,623	$	163,163	$	250,530	$	318,463

8

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Contract Assets and Contract Liabilities

Contract assets are recorded when the Company's right to consideration is conditional on constraints other than the passage of time. The Company had no material contract assets as of June 30, 2020 and December 31, 2019.

Contract liabilities include advance payments and billings in excess of revenue recognized, which are primarily related to advanced billings for service type warranty. Contract liabilities are presented under deferred revenues. The Company's deferred revenues as of June 30, 2020 and December 31, 2019 were as follows:

	June 30, 2020	December 31, 2019
	U.S. $ in thousands
Deferred revenues*	62,106	68,307

*Includes $13.5 million and $16.0 million under long term deferred revenue in the Company's consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively.

Revenue recognized in 2020 that was included in deferred revenue balance as of January 1, 2020 was $13.6 million and $31.6 million for the three and six months ended June 30, 2020, respectively.

Remaining Performance Obligations

Remaining Performance Obligations ("RPO") represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of June 30, 2020, the total RPO amounted to $84.0 million. The Company expects to recognize $66.8 million of this RPO during the next 12 months, $12.0 million over the subsequent 12 months and the remaining $5.2 million thereafter.

Incremental Costs of Obtaining a Contract

Sales commissions earned mainly by the Company’s sales agents are considered incremental costs of obtaining a contract with a customer, as the Company expects the benefit of those commissions to be longer than one year. The majority of the sales commissions are not subject to capitalization, as the commission expense is recognized as the related revenue is recognized. Sales commissions for initial contracts related to the service type warranty are deferred and then amortized on a straight-line basis over the expected customer relationship period if the Company expects to recover those costs. Amortization expense is included in selling, general and administrative expenses in the consolidated statements of operations. As of June 30, 2020 and December 31, 2019, the deferred commission amounted to $4.0 million and $3.9 million respectively.

9

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Note 4. Inventories

Inventories consisted of the following:

	June 30, 2020		December 31, 2019
	U.S. $ in thousands
Finished goods	$	84,616	$	87,967
Work-in-process		2,982		3,106
Raw materials		76,990		77,431
		164,588		168,504

Note 5. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying amount of the Company’s goodwill for the six months ended June 30, 2020 were as follows:

	U.S. $ in thousands
Goodwill as of January 1, 2020	$	385,658
Foreign currency translation adjustments		(22	)
Goodwill as of June 30, 2020	$	385,636

During the fourth quarter of 2019, the Company performed a quantitative assessment for goodwill impairment for its Stratasys-Objet reporting unit.

Following its quantitative assessment, the Company concluded that the fair value of its Stratasys-Objet reporting unit exceeded its carrying amount by approximately 8.7%, with a carrying amount of goodwill assigned to this reporting unit in an amount of $386 million.

When evaluating the fair value of its Stratasys-Objet reporting unit, the Company used a discounted cash flow model which utilized Level 3 measures that represent unobservable inputs into the valuation method. Key assumptions used to determine the estimated fair value include: (a) expected cash flows for five years following the assessment date which were based on, among other factors, expected revenue growth, costs to produce, operating profit margins and estimated capital needs; (b) an estimated terminal value that utilized a terminal year growth rate of 3.1% that was determined based on the growth prospects of the reporting unit; and (c) a discount rate of 13.5% based on management’s best estimate of the after-tax weighted average cost of capital. If any of these were to vary materially from the Company's estimates, the Company could face impairment of goodwill allocated to this reporting unit in the future.

Actual results may differ from those assumed in the Company's valuation method. It is reasonably possible that the Company's assumptions described above could change in future periods. If any of these were to vary materially from the Company's plans, it may record impairment of goodwill allocated to this reporting unit in the future.

A hypothetical decrease in the growth rate of 1% or an increase of 1% to the discount rate would have reduced the fair value of Stratasys-Objet reporting unit by approximately $45 million and $81 million, respectively.

Based on the Company’s assessment as of December 31, 2019, no goodwill was determined to be impaired.

10

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

During the first quarter of 2020, the Company performed an analysis of the impact of recent events, including business and industry specific considerations, on the fair value of Stratasys-Objet reporting unit. As part of this analysis the Company considered the potential impacts of COVID-19 and the sensitivity of estimates and assumptions used in the last annual impairment test as well as changes in market capitalization.

During the second quarter of 2020, the Company announced a restructuring plan to reduce operating expenses as part of a cost realignment program to focus on profitable growth (the "Plan"). The Plan’s cost-cutting measures included workforce reductions affecting approximately 10% of employees, as well as other cost-mitigation measures. Please refer to Note 12 for further discussion. The Company reassessed its analysis from the first quarter in light of macroeconomic developments and its cost-cutting measures.

While the goodwill of the reporting unit is not currently impaired, there can be no assurances that goodwill will not be impaired in future periods. The Company will continue to monitor the impact of COVID-19 as well as events and changes in circumstances such as a deterioration in the business climate or operating results, significant decline in the Company's share price, changes in management’s business strategy or downward changes to the Company's cash flows projections.

Other Intangible Assets

Other intangible assets consisted of the following:

	June 30, 2020							December 31, 2019
	Carrying Amount, Net of Impairment		Accumulated Amortization			Net Book Value		Carrying Amount, Net of Impairment		Accumulated Amortization			Net Book Value
	U.S. $ in thousands
Developed technology	$	294,105	$	(254,881	)	$	39,224	$	299,100	$	(252,136	)	$	46,964
Patents		15,839		(7,768	)		8,071		15,142		(7,067	)		8,075
Trademarks and trade names		26,004		(20,544	)		5,460		25,991		(19,966	)		6,025
Customer relationships		101,589		(78,706	)		22,883		102,936		(76,813	)		26,123
Capitalized software development costs		18,489		(18,489	)		-		18,630		(18,489	)		141
	$	456,026	$	(380,388	)	$	75,638	$	461,799	$	(374,471	)	$	87,328

Amortization expenses relating to intangible assets for the three-month periods ended June 30, 2020 and 2019 were approximately $6.2 million and $6.0 million, respectively. Amortization expenses relating to intangible assets for the six-month periods ended June 30, 2020 and 2019 were approximately $12.4 million and $12.1 million, respectively.

As of June 30, 2020, the estimated amortization expenses relating to intangible assets for each of the following periods were as follows:

	Estimated
	amortization expense
	(U.S. $ in thousands)
Remaining 6 months of 2020	$	12,421
2021		24,734
2022		24,668
2023		7,732
Thereafter		6,083
Total		75,638

11

STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Note 6. Earnings (Loss) Per Share

The following table presents the numerator and denominator of the basic and diluted net earnings (loss) per share computations for the three and six months ended June 30, 2020 and 2019:

	Three months ended June 30,					Six months ended June 30,
	2020			2019		2020			2019
	In thousands, except per share amounts					In thousands, except per share amounts
Numerator:
Net income (loss) attributable to Stratasys Ltd.	$	(27,986	)	$	1,152	$	(49,689	)	$	(1,118	)
Denominator:
Weighted average shares - denominator for
Basic		54,917			54,231		54,733			54,102
Diluted		54,917			54,687		54,733			54,102
Net earnings (loss) per share attributable to  Stratasys Ltd.
Basic	$	(0.51	)	$	0.02	$	(0.91	)	$	(0.02	)
Diluted	$	(0.51	)	$	0.02	$	(0.91	)	$	(0.02	)

The computation of diluted net loss per share excluded share awards of 4.9 million shares and 5.1 million shares for the six months ended June 30, 2020 and 2019, respectively, because their inclusion would have had an anti-dilutive effect on the diluted net loss per share.

The computation of diluted net earnings (loss) per share excluded share awards of 4.9 million shares and 3.5 million shares for the three months ended June 30, 2020 and 2019, respectively, because their inclusion would have had an anti-dilutive effect on the diluted net earnings (loss) per share.

Note 7. Income Taxes

The Company had income tax benefit of $2.1 million for the three-month period ended June 30, 2020 compared to income tax expenses of $1.3 million for the three month period ended June 30, 2019, and income tax benefit of $1.9 million for the six-month period ended June 30, 2020 compared to income tax expenses of $2.5 million for the six-month period ended June 30, 2019. The Company’s effective tax rate as of June 30, 2020 was primarily impacted by higher discrete tax benefits following expiration of applicable tax statute of limitations as well as geographic mix of its earnings and losses.

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STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Note 8. Fair Value Measurements

Financial instruments measured at fair value

The following tables summarize the Company’s financial assets and liabilities that are carried at fair value on a recurring basis, in its consolidated balance sheets:

	June 30, 2020			December 31, 2019
	(U.S. $ in thousands)
Assets:
Foreign exchange forward contracts not designated as hedging instruments	$	207		$	63
Foreign exchange forward contracts designated as hedging instruments		479			315
Liabilities:
Foreign exchange forward contracts not designated as hedging instruments		(162	)		(388	)
Foreign exchange forward contracts designated as hedging instruments		(19	)		(326	)
	$	505		$	(336	)

The Company’s foreign exchange forward contracts are classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs, including interest rate curves and both forward and spot prices for currencies (Level 2 inputs).

Other financial instruments consist mainly of cash and cash equivalents, current and non-current receivables, net investment in sales-type leases, accounts payable and other current liabilities. The fair value of these financial instruments approximates their carrying values.

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STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Note 9. Derivative instruments and hedging activities

Since the Company conducts its operations globally, it is exposed to global market risks and to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign currency exchange rates. The Company enters into transactions involving foreign currency exchange derivative financial instruments. The Company manages its foreign currency exposures on a consolidated basis, which allows the Company to net exposures and take advantage of any natural hedging. The transactions are designed to manage the Company’s net exposure to foreign currency exchange rates and to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The Company does not enter into derivative transactions for trading purposes.

The Company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities and forecasted transactions denominated in the New Israeli Shekel (“NIS”), Euro, Korean Won, Chinese Yuan and the Japanese Yen. The gains and losses on the hedging instruments partially offset losses and gains on the hedged items. Financial markets and currency volatility may limit the Company’s ability to hedge these exposures. These contracts mature through April 2021.

The following table summarizes the consolidated balance sheets classification and fair values of the Company’s derivative instruments:

		Fair Value						Notional Amount
	Balance sheet location	June 30, 2020			December 31, 2019			June 30, 2020		December 31, 2019
						U.S. $ in thousands
Assets derivatives - Foreign exchange contracts, not designated as hedging instruments	Other current assets	$	207		$	63		$	62,627	$	11,001
Assets derivatives-Foreign exchange contracts, designated as cash flow hedge	Other current assets		479			315			49,980		25,045
Liability derivatives -Foreign exchange contracts, not designated as hedging instruments	Accrued expenses and other current liabilities		(162	)		(388	)		29,348		92,929
Liability derivatives - Foreign exchange contracts, designated as hedging instruments	Accrued expenses and other current liabilities		(19	)		(326	)		9,555		45,262
		$	505		$	(336	)	$	151,510	$	174,237

Foreign exchange contracts not designated as hedging instruments

As of June 30, 2020, the notional amounts of the Company’s outstanding exchange forward contracts, not designated as hedging instruments, were $92.0 million, and were used to reduce foreign currency exposures. With respect to such derivatives, losses of $1.1 million and $0.04 million were recognized under financial income (expense), net for the three-month periods ended June 30, 2020 and 2019, respectively and gains of $0.9 million and $1.2 million were recognized under financial income (expense), net for the six-month periods ended June 30, 2020 and 2019, respectively. Such gains or losses partially offset the foreign currencies revaluation changes of the balance sheet items. These foreign currencies revaluation changes are also recognized under financial income (expense), net.

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Payroll

As of June 30, 2020, the Company had in effect foreign exchange forward contracts, designated as cash flow hedge for accounting purposes, for the conversion of $25.5 million into NIS. The Company uses short-term cash flow hedge contracts to reduce its exposure to variability in expected future cash flows resulting mainly from payroll costs denominated in NIS. The changes in fair value of those contracts are included in the Company’s accumulated other comprehensive loss.

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STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue

As of June 30, 2020, the Company had in effect foreign exchange forward contracts, designated as cash flow hedges for accounting purposes, for the conversion of 30.0 million Euro into U.S. dollars. The Company transacts business in U.S. dollars and in various other currencies. The Company may use foreign exchange or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. The Company enters into these foreign exchange contracts to hedge a portion of its forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.

Note 10. Equity

a. Stock-based compensation plans

Stock-based compensation expenses for equity-classified stock options, restricted share units (“RSUs”) and performance stock units ("PSUs") were allocated as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	U.S $ in thousands				U.S $ in thousands
Cost of sales	$	497	$	541	$	900	$	895
Research and development, net		1,702		1,511		3,259		2,270
Selling, general and administrative		3,912		4,041		6,859		7,157
Total stock-based compensation expenses	$	6,111	$	6,093	$	11,018	$	10,322

A summary of the Company’s stock option activity for the six months ended June 30, 2020 is as follows:

	Number of Options			Weighted Average Exercise Price
Options outstanding as of January 1, 2020		1,961,532		$	31.16
Granted		360,000			17.10
Exercised		(2,237	)		8.09
Forfeited		(76,753	)		28.74
Options outstanding as of June 30, 2020		2,242,542		$	29.01
Options exercisable as of June 30, 2020		1,732,704		$	32.24

As of June 30, 2020, the unrecognized compensation cost of $2.96 million related to all unvested, equity-classified stock options is expected to be recognized as an expense over a weighted-average period of 3.1 years.

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STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

A summary of the Company’s RSUs and PSUs activity for the six months ended June 30, 2020 is as follows:

	Number of RSUs and PSUs			Weighted Average Grant Date Fair Value
Unvested as of January 1, 2020		2,362,991		$	24.10
Granted		1,189,436			18.17
Vested		(587,225	)		23.57
Forfeited		(286,091	)		22.45
Unvested as of June 30, 2020		2,679,111		$	21.76

The fair value of RSUs and PSUs is determined based on the quoted price of the Company’s ordinary shares on the date of the grant.

As of June 30, 2020, the unrecognized compensation cost of $48.8 million related to all unvested, equity-classified RSUs and PSUs is expected to be recognized as expense over a weighted-average period of 2.8 years.

b. Accumulated other comprehensive loss

The following tables present the changes in the components of accumulated other comprehensive income (loss), net of taxes, for the six months ended June 30, 2020 and 2019, respectively:

	Six months ended June 30, 2020
	Net unrealized gain (loss) on cash flow hedges			Foreign currency translation adjustments			Total
		U.S. $ in thousands
Balance as of January 1, 2020	$	(10	)	$	(7,706	)	$	(7,716	)
Other comprehensive income (loss) before reclassifications		856			(1,667	)		(811	)
Amounts reclassified from accumulated other comprehensive loss		33			-			33
Other comprehensive income (loss)		889			(1,667	)		(778	)
Balance as of June 30, 2020	$	879		$	(9,373	)	$	(8,494	)

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STRATASYS LTD.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

	Six months ended June 30, 2019
	Net unrealized gain (loss) on cash flow hedges			Foreign currency translation adjustments			Total
				U.S. $ in thousands
Balance as of January 1, 2019	$	(627	)	$	(7,126	)	$	(7,753	)
Other comprehensive income (loss) before reclassifications		1,277			(444	)		833
Amounts reclassified from accumulated other comprehensive loss		(127	)		-			(127	)
Other comprehensive income (loss)		1,150			(444	)		706
Balance as of June 30, 2019	$	523		$	(7,570	)	$	(7,047	)

Note 11. Contingencies

Legal proceedings

The Company is a party to various legal proceedings from time to time, the outcome of which, in the opinion of management, will not have a significant effect on the financial position, profitability or cash flows of the Company.

Note 12. Restructuring Plan

On June 2, 2020, the Company announced a restructuring plan to reduce operating expenses as part of a cost realignment program to focus on profitable growth (the "Plan"). The Plan’s cost-cutting measures included workforce reductions affecting approximately 10% of employees, as well as other cost-mitigation measures.

The Company recorded $5.2 million and $3.6 million of employee related charges and other related charges, respectively, during the second quarter of 2020. With regards to the employee related charges, $0.6 million was paid during the current period and the rest are expected to be paid during the third quarter. The Company expects to incur additional restructuring charges of approximately $0.5 million, as part of this Plan.

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