SHARE INCENTIVE PLANS

Stock Option Plans

On April 25, 2017, the Company's shareholders approved the Mellanox Technologies, Ltd. Second Amended and Restated Global Share Incentive Plan (2006) (the “Second Restated Plan”) during the 2017 annual shareholder meeting. Please see Note 14, "Subsequent Events" for further detail.

Assumed EZchip restricted stock units

In connection with the acquisition of EZchip, the Company assumed 891,822 unvested EZchip RSUs and converted them into 499,894 Mellanox RSUs using an exchange ratio of 0.56. The aggregate value of the 499,894 Mellanox RSUs was $23.2 million of which $1.0 million related to service prior to the acquisition date and was included in the EZchip purchase price consideration. The remaining fair value of $22.2 million represents post-acquisition share-based compensation expense that will be recognized over the requisite service period of approximately 2.25 years from the date of acquisition. The assumed RSUs retained all applicable terms and vesting periods.

Share option activity

Share option activity under the Company's equity incentive plans in the three months ended March 31, 2017 is set forth below:



	Options Outstanding
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2016	1,634,485		$	32.79
Options exercised	(105,010	)	$	14.54
Options canceled	(6,960	)	$	59.28
Outstanding at March 31, 2017	1,522,515		$	33.93

The total pretax intrinsic value of options exercised in the three months ended March 31, 2017 and 2016 was $3.6 million and $3.4 million, respectively. This intrinsic value represents the difference between the fair market value of the Company's ordinary shares on the date of exercise and the exercise price of each option. Based on the closing price of the Company's ordinary shares of $50.95 on March 31, 2017, the total pretax intrinsic value of options outstanding at March 31, 2017 was $37.5 million. The total pretax intrinsic value of options outstanding at December 31, 2016 was $29.0 million.

There were 1,517,015 and 1,624,756 options exercisable at March 31, 2017 and December 31, 2016, respectively. The total pretax intrinsic value of exercisable options at March 31, 2017, was $37.4 million. The total pretax intrinsic value of exercisable options at December 31, 2016 was $28.9 million.

Restricted share unit activity

RSU activity under the Company's equity incentive plans in the three months ended March 31, 2017 is set forth below:



	Restricted Share Units Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested restricted share units at December 31, 2016	3,324,519		$	46.67
Restricted share units granted	101,760		$	44.83
Restricted share units vested	(239,568	)	$	44.55
Restricted share units canceled	(93,776	)	$	47.07
Non-vested restricted share units at March 31, 2017	3,092,935		$	46.76

The weighted average fair value of RSUs granted in the three months ended March 31, 2017 and 2016 was $44.83 and $49.93, respectively.

The total intrinsic value of all outstanding RSUs as of March 31, 2017 and December 31, 2016 was $157.6 million and $136.0 million, respectively.

Employee Stock Purchase Plan activity

There were 269,698 and 218,943 shares purchased under the ESPP for the three months ended March 31, 2017 and 2016 at an average price per share of $37.63 and $33.30, respectively.

Shares reserved for future issuance

The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of March 31, 2017:



	Number of Shares
Share options outstanding	1,522,515
Restricted share units outstanding	3,092,935
Shares authorized for future issuance	525,692
ESPP shares available for future issuance	3,724,647
Total shares reserved for future issuance as of March 31, 2017	8,865,789

Share-based compensation

The Company accounts for share-based compensation expense based on the estimated fair value of the share equity awards as of the grant dates.

The following weighted average assumptions were used to value ESPP shares issued pursuant to the Company's share incentive plans for the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,
	2017		2016
Dividend yield	—	%	—	%
Expected volatility	25.3	%	37.6	%
Risk free interest rate	0.91	%	0.46	%
Expected life, years	0.5		0.5

The following table summarizes the distribution of total share-based compensation expense in the unaudited condensed consolidated statements of operations:



	Three Months Ended March 31,
	2017		2016
	(in thousands)
Cost of goods sold	$	482	$	475
Research and development	8,690		9,152
Sales and marketing	3,338		3,648
General and administrative	2,258		4,991
Total share-based compensation expense	$	14,768	$	18,266

Share-based compensation expense for the three months ended March 31, 2016 included cash payments of $4.8 million for the settlement of accelerated RSUs for individuals terminated on the closing date of the EZchip acquisition.

At March 31, 2017, there was $119.8 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements. The costs are expected to be recognized over a weighted average period of approximately 2.68 years.