SHARE INCENTIVE PLANS

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Share option plans

On July 25, 2019, the Company's shareholders approved the Mellanox Technologies, Ltd. Fourth Amended and Restated Global Share Incentive Plan (2006) (the "Fourth Restated Plan"), which constitutes an amendment and restatement of the Mellanox Technologies, Ltd. Third Amended and Restated Global Share Incentive Plan (2006) (the "Third Restated Plan"). The Fourth Restated Plan increased the ordinary shares reserved for issuance under the Third Restated Plan by 1,960,000 shares to 6,427,000 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 Fourth Restated Plan also clarifies the treatment of performance-based awards upon the occurrence of a change in control of the Company.

Share option activity

Share option activity under the Company's equity incentive plans in the nine months ended September 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	(205,625	)	$	35.08
Options canceled	(1,040	)	$	91.91
Outstanding at September 30, 2019	287,838		$	61.76

The total pretax intrinsic value of options exercised in the nine months ended September 30, 2019 and 2018 was $14.4 million and $25.5 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 $109.59 on September 30, 2019, the last trading day of the quarter ended September 30, 2019, the total pretax intrinsic value of options outstanding at September 30, 2019 was $13.8 million. The total pretax intrinsic value of options outstanding at December 31, 2018 was $21.8 million.

There were 287,671 and 493,462 options exercisable at September 30, 2019 and December 31, 2018, respectively. The total pretax intrinsic value of exercisable options at September 30, 2019 was $13.8 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 nine months ended September 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	1,548,174		$	105.21
Restricted share units vested	(1,024,385	)	$	60.06
Restricted share units canceled	(207,822	)	$	72.33
Non-vested restricted share units at September 30, 2019	3,610,130		$	83.28

The weighted average fair value of RSUs granted in the nine months ended September 30, 2019 and 2018 was $105.21 and $79.72, respectively.

The total intrinsic value of all outstanding RSUs as of September 30, 2019 and December 31, 2018 was $395.6 million and $304.3 million, respectively.

The non-vested restricted share units at September 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 309,723 and 490,123 shares purchased under the ESPP for the nine months ended September 30, 2019 and 2018, respectively, at an average price per share of $78.92 and $46.62, 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, 2019:



	Number of Shares
Share options outstanding	287,838
Restricted share units outstanding	3,610,130
Shares authorized for future issuance	2,251,139
ESPP shares available for future issuance	2,625,623
Total shares reserved for future issuance as of September 30, 2019	8,774,730

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, 2019 and 2018:



	Nine Months Ended September 30,
	2019		2018
Dividend yield	—	%	—	%
Expected volatility	11.6	%	24.9	%
Risk free interest rate	1.83	%	2.36	%
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,
	2019		2018		2019		2018
	(in thousands)
Cost of goods sold	$	1,010	$	515	$	2,523	$	1,341
Research and development	17,317		10,395		45,044		26,909
Sales and marketing	7,434		4,645		19,590		11,890
General and administrative	5,465		3,601		15,260		8,906
Total share-based compensation expense	$	31,226	$	19,156	$	82,417	$	49,046

At September 30, 2019, there was $264.2 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 2.82 years.