Stockholders’ Equity

Summary of Stock-Based Compensation Expense

As of September 30, 2018, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares of which 6,063,095 shares are available for issuance.

Stock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period. Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation related to all of our stock-based awards and employee stock purchases for the three and nine months ended September 30, 2018 and 2017 is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of net revenues	$	966	$	833	$	2,747	$	2,526
Selling, general and administrative	15,403		11,880		41,197		34,814
Research and development	2,829		2,254		7,974		6,684
Total stock-based compensation	$	19,198	$	14,967	$	51,918	$	44,024

Stock Options

We have not granted options since 2011 and all outstanding options were fully vested and associated stock-based compensation expenses was recognized as of December 31, 2015. Activity for the nine months ended September 30, 2018 under the stock option plans is set forth below:



	Number of Shares Underlying Stock Options (in thousands)		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2017	75		$	11.36
Exercised	(63	)	11.99
Cancelled or expired	—		—
Outstanding as of September 30, 2018	12		$	7.99	0.41	$	4,534
Vested at September 30, 2018	12		$	7.99	0.41	$	4,534
Exercisable at September 30, 2018	12		$	7.99	0.41	$	4,534

Restricted Stock Units (“RSUs”)

The fair value of RSUs is based on our closing stock price on the date of grant. A summary for the nine months ended September 30, 2018 is as follows:



	Shares Underlying RSUs (in thousands)		Weighted Average Grant Date Fair Value		Weighted Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Nonvested as of December 31, 2017	1,341		$	82.30
Granted	225		261.52
Vested and released	(516	)	73.44
Forfeited	(74	)	105.53
Nonvested as of September 30, 2018	976		$	126.52	1.23	$	381,710

As of September 30, 2018, we expect to recognize $90.1 million of total unamortized compensation cost, net of estimated forfeitures, related to RSUs over a weighted average period of 2.1 years.

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

We grant MSUs to our executive officers. Each MSU represents the right to one share of Align’s common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period, and certain MSU grants are also based on Align’s stock price at the end of the performance period. Generally, the vesting period of MSUs is three years. For MSUs granted during the nine months ended September 30, 2018, the maximum number of MSUs which will be eligible to vest are between 250% to 300% of the MSUs initially granted.

The following table summarizes the MSU performance for the nine months ended September 30, 2018:



	Number of Shares Underlying MSUs (in thousands)		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Nonvested as of December 31, 2017	428		$	78.53
Granted	208		266.78
Vested and released	(312	)	62.41
Forfeited	—		—
Nonvested as of September 30, 2018	324		$	215.07	1.41	$	126,834

As of September 30, 2018, we expect to recognize $44.6 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.4 years.

Employee Stock Purchase Plan (“ESPP”)

In May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which will continue until terminated by either the Board of Directors or its administrator. The maximum number of shares available for purchase under the 2010 Purchase Plan is 2,400,000 shares. As of September 30, 2018, we have 571,778 shares available for future issuance.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected term (in years)	1.2			1.2			1.3			1.2
Expected volatility	35.7		%	28.8		%	35.2		%	26.8		%
Risk-free interest rate	2.5		%	1.2		%	2.2		%	1.0		%
Expected dividends	—			—			—			—
Weighted average fair value at grant date	$	109.58		$	47.02		$	94.71		$	31.36

As of September 30, 2018, there was $3.3 million of total unamortized compensation costs related to employee stock purchases which we expect to be recognized over a weighted average period of 0.6 years.