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”), which constitutes a second amendment and restatement of the Mellanox Technologies, Ltd. Global Share Incentive Plan (2006) and its appendices (the “2006 Plan”), as amended and restated by the Mellanox Technologies, Ltd. Amended and Restated Global Share Incentive Plan (2006) as of March 14, 2016 (the “First Restated Plan”). The Second Restated Plan became effective on February 14, 2017. The Second Restated Plan increases the ordinary shares reserved for issuance under the First Restated Plan by 1,640,000 shares to 2,390,000 shares plus any shares subject to issued and outstanding awards under the other equity incentive plans that existed prior to the First Restated Plan that expire, are cancelled or otherwise terminated after the effective date of the First Restated Plan. The Second Restated Plan also extends the term of the First Restated Plan to February 14, 2027. In addition, the Second Restated Plan implements additional amendments to reflect compensation and governance best practices.

Share option activity

Share option activity under the Company's equity incentive plans in the nine months ended September 30, 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	(193,791	)	$	15.54
Options canceled	(32,355	)	$	70.53
Outstanding at September 30, 2017	1,408,339		$	34.30

The total pretax intrinsic value of options exercised in the nine months ended September 30, 2017 and 2016 was $6.3 million and $9.8 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 $47.15 on September 30, 2017, the total pretax intrinsic value of options outstanding at September 30, 2017 was $30.5 million. The total pretax intrinsic value of options outstanding at December 31, 2016 was $29.0 million.

There were 1,405,804 and 1,624,756 options exercisable at September 30, 2017 and December 31, 2016, respectively. The total pretax intrinsic value of exercisable options at September 30, 2017 was $30.5 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 nine months ended September 30, 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	1,784,670		$	50.05
Restricted share units vested	(1,086,886	)	$	46.43
Restricted share units canceled	(296,321	)	$	47.52
Non-vested restricted share units at September 30, 2017	3,725,982		$	48.29

The weighted average fair value of RSUs granted in the nine months ended September 30, 2017 and 2016 was $50.05 and $48.58, respectively.

The total intrinsic value of all outstanding RSUs as of September 30, 2017 and December 31, 2016 was $175.7 million and $136.0 million, respectively.

Employee Stock Purchase Plan activity

There were 568,876 and 491,968 shares purchased under the ESPP for the nine months ended September 30, 2017 and 2016 at an average price per share of $38.83 and $35.50, respectively.

Shares reserved for future issuance

The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of September 30, 2017:



	Number of Shares
Share options outstanding	1,408,339
Restricted share units outstanding	3,725,982
Shares authorized for future issuance	710,722
ESPP shares available for future issuance	3,425,469
Total shares reserved for future issuance as of September 30, 2017	9,270,512

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 nine months ended September 30, 2017 and 2016:



	Nine Months Ended September 30,
	2017		2016
Dividend yield	—	%	—	%
Expected volatility	24.6	%	36.4	%
Risk free interest rate	1.20	%	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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)
Cost of goods sold	$	473	$	627	$	1,530	$	1,773
Research and development	10,811		10,396		29,799		30,318
Sales and marketing	4,336		3,837		11,684		11,374
General and administrative	2,940		2,716		7,980		10,471
Total share-based compensation expense	$	18,560	$	17,576	$	50,993	$	53,936

Share-based compensation expense for the nine months ended September 30, 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 September 30, 2017, there was $162.0 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 2.86 years.