SHARE INCENTIVE PLANS

6 Months Ended

Jun. 30, 2019

Share-based Payment Arrangement [Abstract]

Share option plans

On July 25, 2018, the Company's shareholders approved the Mellanox Technologies, Ltd. Third Amended and Restated Global Share Incentive Plan (2006) (the "Third Restated Plan"), which constitutes an amendment and restatement of the Mellanox Technologies, Ltd. Second Amended and Restated Global Share Incentive Plan (2006) (the "Second Restated Plan"). The Third Restated Plan increased the ordinary shares reserved for issuance under the Second Restated Plan by 2,077,000 shares to 4,467,000 shares plus any shares subject to issued and outstanding awards under certain of the Company’s prior equity plans that expire, are cancelled or otherwise terminated after March 14, 2016, the effective date of the first amendment and

restatement of the Global Share Incentive Plan (2006). The Third Restated Plan also implements certain additional amendments, including specifically providing for the grant of performance share units.

Share option activity

Share option activity under the Company's equity incentive plans in the six months ended June 30, 2019 is set forth below:



	Options Outstanding
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2018	494,503		$	50.73
Options exercised	(199,425	)	$	35.43
Options canceled	(1,040	)	$	91.91
Outstanding at June 30, 2019	294,038		$	60.96

The total pretax intrinsic value of options exercised in the six months ended June 30, 2019 and 2018 was $13.9 million and $19.4 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 $110.67 on June 28, 2019, the last trading day of the quarter ended June 30, 2019, the total pretax intrinsic value of options outstanding at June 30, 2019 was $14.6 million. The total pretax intrinsic value of options outstanding at December 31, 2018 was $21.8 million.

There were 293,621 and 493,462 options exercisable at June 30, 2019 and December 31, 2018, respectively. The total pretax intrinsic value of exercisable options at June 30, 2019 was $14.6 million. The total pretax intrinsic value of exercisable options at December 31, 2018 was $21.7 million.

Restricted share unit activity

RSU activity under the Company's equity incentive plans in the six months ended June 30, 2019 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, 2018	3,294,163		$	65.05
Restricted share units granted	1,241,432		$	103.59
Restricted share units vested	(514,667	)	$	50.81
Restricted share units canceled	(147,187	)	$	69.39
Non-vested restricted share units at June 30, 2019	3,873,741		$	79.13

The weighted average fair value of RSUs granted in the six months ended June 30, 2019 and 2018 was $103.59 and $70.32, respectively.

The total intrinsic value of all outstanding RSUs as of June 30, 2019 and December 31, 2018 was $428.7 million and $304.3 million, respectively.

The non-vested restricted share units at June 30, 2019 included 36,000 performance share units. The PSUs will vest and be earned based on the Company’s achievement of relative total shareholder return and average non-GAAP net operating margin over a three-year performance period commencing on January 1, 2018 and ending on December 31, 2020, subject to the continued service to the Company through the end of the performance period. The number of shares that will actually vest ranges from zero to 175% of the target.

Employee Stock Purchase Plan activity

There were 162,573 and 288,017 shares purchased under the ESPP for the six months ended June 30, 2019 and 2018 at an average price per share of $68.00 and $39.40, respectively.

Shares reserved for future issuance

The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of June 30, 2019:



	Number of Shares
Share options outstanding	294,038
Restricted share units outstanding	3,873,741
Shares authorized for future issuance	537,246
ESPP shares available for future issuance	2,772,773
Total shares reserved for future issuance as of June 30, 2019	7,477,798

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 six months ended June 30, 2019 and 2018:



	Six Months Ended June 30,
	2019		2018
Dividend yield	—	%	—	%
Expected volatility	42.6	%	37.2	%
Risk free interest rate	2.44	%	1.20	%
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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
Cost of goods sold	$	829	$	415	$	1,513	$	826
Research and development	14,486		8,340		27,727		16,514
Sales and marketing	6,504		3,646		12,156		7,245
General and administrative	5,130		2,515		9,795		5,305
Total share-based compensation expense	$	26,949	$	14,916	$	51,191	$	29,890

At June 30, 2019, there was $263.4 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 3.14 years.