NOTE 1 — THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Company

Mellanox Technologies, Ltd. (the “Company” or “Mellanox”) was incorporated in Israel and commenced operations in March 1999. Mellanox is a supplier of high-performance interconnect products for computing, storage and communications applications.

Principles of presentation

The unaudited condensed consolidated financial statements include the Company’s accounts as well as those of its wholly owned subsidiaries after the elimination of all intercompany balances and transactions.

The unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end unaudited condensed balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained in this quarterly report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a quarterly report on Form 10-Q and are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 2, 2015. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2015 or thereafter.

Certain prior year amounts have been reclassified to conform to 2015 presentation. These changes and reclassifications did not impact net or comprehensive income. The Company has evaluated subsequent events through the date that the financial statements were issued.

Revision to Prior Period Financial Statements

During the year ended December 31, 2014, the Company became aware of and corrected immaterial errors primarily related to the accounting for liabilities for warranty, certain purchase orders, distributor price adjustment claims and purchase price allocation for the acquisitions of Kotura and IPtronics. The Company evaluated these errors and determined that the impact of the errors was not material to its results of operations, financial position or cash flows in previously issued financial statements. The Company has retrospectively revised financial information for all prior periods presented to reflect this correction. The impact of this revision for periods presented within this quarterly report on Form 10-Q is shown in the tables below:

	Three Months Ended								Six Months Ended
	June 30, 2014								June 30, 2014
	As reported			Adjustments		As revised			As reported			Adjustments		As revised
	(in thousands, except per share data)								(in thousands, except per share data)
Statement of operations:
Total revenues	$	102,574		$	249	$	102,823		$	201,279		$	546	$	201,825
Cost of revenues	34,292			141		34,433			68,111			53		68,164

Gross profit	68,282			108		68,390			133,168			493		133,661
Operating expenses:
Research and development	49,506			—		49,506			97,843			—		97,843
Sales and marketing	18,723			—		18,723			38,002			—		38,002
General and administrative	9,461			—		9,461			17,676			—		17,676

Total operating expenses	77,690			—		77,690			153,521			—		153,521

Loss from operations	(9,408		)	108		(9,300		)	(20,353		)	493		(19,860		)
Other income, net	357			—		357			591			—		591

Loss before taxes on income	(9,051		)	108		(8,943		)	(19,762		)	493		(19,269		)
(Provision for) benefit from taxes on income	76			—		76			(578		)	—		(578		)

Net loss	$	(8,975	)	$	108	$	(8,867	)	$	(20,340	)	$	493	$	(19,847	)

Net loss per share — basic	$	(0.20	)	—		$	(0.20	)	$	(0.46	)	$	0.01	$	(0.45	)
Net loss per share — diluted	$	(0.20	)	—		$	(0.20	)	$	(0.46	)	$	0.01	$	(0.45	)

	Three Months Ended								Six Months Ended
	June 30, 2014								June 30, 2014
	As reported			Adjustments		As revised			As reported			Adjustments		As revised
	(in thousands)								(in thousands)
Statement of comprehensive loss:
Net loss	$	(8,975	)	$	108	$	(8,867	)	$	(20,340	)	$	493	$	(19,847	)
Total comprehensive loss, net of tax	(8,924		)	108		(8,816		)	(21,009		)	493		(20,516		)

	Six Months Ended
	June 30, 2014
	As reported		Adjustments			As revised
	(in thousands)
Statement of cash flows:
Net cash provided by operating activities	$	17,832	$	122		$	17,954
Net cash provided by financing activities	6,548		(122		)	6,426

Risks and uncertainties

The Company is subject to all of the risks inherent in a company which operates in the dynamic and competitive semiconductor industry. Significant changes in any of the following areas could have a materially adverse impact on the Company’s financial position and results of operations: unpredictable volume or timing of customer orders; ordered product mix; the sales outlook and purchasing patterns of the Company’s customers based on consumer demands and general economic conditions; loss of one or more of the Company’s customers; decreases in the average selling prices of products or increases in the average cost of finished goods; the availability, pricing and timeliness of delivery of components used in the Company’s products; reliance on a limited number of subcontractors to manufacture, assemble, package and production test the Company’s products; the Company’s ability to successfully develop, introduce and sell new or enhanced products in a timely manner; product obsolescence and the Company’s ability to manage product transitions; the timing of announcements or introductions of new products by the Company’s competitors; and the Company’s ability to successfully integrate acquired businesses.

Use of estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, investment valuation, warranty reserves, inventory reserves, share-based compensation expense, long-term asset valuations, goodwill and purchased intangible asset valuation, hedge effectiveness, deferred income tax asset valuation, uncertain tax positions, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. Actual results that the Company experiences may differ materially and adversely from the Company’s original estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Significant accounting policies

There have been no changes in the Company’s significant accounting policies that were disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2014. See our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015, for a discussion of significant accounting policies and estimates.

Concentration of credit risk

The following table summarizes the revenues from customers (including original equipment manufacturers) in excess of 10% of the total revenues for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Hewlett Packard	15	%	*		14	%	*
IBM	*		11	%	*		10	%
Dell	*		*		*		11	%

* Less than 10%

The following table summarizes the accounts receivable balance in excess of 10% of the total accounts receivable for the periods indicated:

	June 30, 2015		December 31, 2014
Hewlett Packard	18	%	17	%
Hon Hai Precision Ind., Co. Ltd.	11	%	*
IBM	*		11	%
Ingram Micro	*		10	%

* Less than 10%

Product warranty

The following table provides the changes in the product warranty accrual for the six months ended June 30, 2015 and 2014:

	Six Months Ended
	June 30,
	2015			2014
	(in thousands)
Balance, beginning of the period	$	1,932		$	4,198
New warranties issued during the period	1,514			2,950
Reversal of warranty reserves	(67		)	(803		)
Settlements during the period	(1,572		)	(2,490		)

Balance, end of the period	$	1,807		$	3,855

Less: long-term portion of product warranty liability	(450		)	(400		)


Balance, current portion of product warranty liability at end of the period	$	1,357		$	3,455

Net income per share

The following table sets forth the computation of basic and diluted net loss per share for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2014			2015		2014
	(in thousands except per share data)
Net income (loss)	$	19,248	$	(8,867	)	$	29,744	$	(19,847	)

Basic and diluted shares:
Weighted average ordinary shares	46,191		44,671			45,943		44,475
Dilutive effect of employee stock option	1,377		—			1,398		—

Shares used to compute diluted net income	47,568		44,671			47,341		44,475

Net income (loss) per share — basic	$	0.42	$	(0.20	)	$	0.65	$	(0.45	)

Net income (loss) per share — diluted	$	0.40	$	(0.20	)	$	0.63	$	(0.45	)

The Company excluded 508,326 and 517,409 outstanding shares for the three and six months ended June 30, 2015, respectively, from the computation of diluted net income per ordinary share, because including these outstanding shares would have had an anti-dilutive effect.

The Company excluded 1,372,376 and 839,133 outstanding shares for the three and six months ended June 30, 2014, respectively, from the computation of diluted net loss per ordinary share, because including these outstanding shares would have had an anti-dilutive effect.

Recent accounting pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued guidance applying to inventory measured using any other method other than last-in, last-out method. Under this guidance inventory is measured at the lower of cost and net realizable value. The net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is applied prospectively and is effective for the Company in its first fiscal quarter beginning January 1, 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements and related disclosures.

In May 2015, the FASB issued guidance eliminating the requirement to categorize within the fair value hierarchy investments whose fair values are measured at net asset value (“NAV”). Entities will be required to disclose the fair values of investments measured at NAV and provide a general description of redemption terms and conditions including the probability these investments will be sold at amounts other than NAV. The guidance is applied retrospectively and is effective for the Company in its first fiscal quarter beginning January 1, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements and related disclosures.

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. In July 2015, the FASB deferred the effective date of this guidance by one year. This guidance will be effective for the Company in its first fiscal quarter beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment at the date of adoption. The guidance may be adopted as early as the Company’s first fiscal quarter beginning January 1, 2017, the effective date of the original guidance. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard will be effective for the Company in its first fiscal quarter beginning January 1, 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements and related disclosures.