Mellanox Technologies, Ltd. (Form: 10-Q, Received: 08/01/2019 16:09:08)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended:	June 30, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 001-33299

MELLANOX TECHNOLOGIES, LTD.

(Exact name of registrant as specified in its charter)



Israel		98-0233400
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Beit Mellanox, Yokneam, Israel 20692

(Address of principal executive offices, including zip code)

+972-4-909-7200

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Ordinary Shares, nominal value NIS 0.0175 per share	MLNX	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
						Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒

The total number of shares outstanding of the registrant's Ordinary Shares, nominal value NIS 0.0175 per share, as of July 26, 2019, was 54,799,274.

MELLANOX TECHNOLOGIES, LTD.



PART I		Page No.
FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) — June 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations (Unaudited) — Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) — Three and Six Months Ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Shareholders' Equity (Unaudited) — Six Months Ended June 30, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2019 and 2018	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	40
ITEM 4.	Controls and Procedures	41

	PART II
	OTHER INFORMATION

ITEM 1	Legal Proceedings	42
ITEM 1A.	Risk Factors	42
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
ITEM 3.	Defaults Upon Senior Securities	61
ITEM 4.	Mine Safety Disclosures	61
ITEM 5.	Other Information	61
ITEM 6.	Exhibits	62

PART I. FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



	June 30,		December 31,
	2019		2018
	(in thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	53,782	$	56,766
Short-term investments	556,806		381,724
Accounts receivable, net	200,351		150,625
Inventories	89,650		104,381
Other current assets	20,895		16,942
Total current assets	921,484		710,438
Property and equipment, net	108,142		105,334
Intangible assets, net	159,046		179,328
Goodwill	473,916		473,916
Other long-term assets	159,520		118,182
Total assets	$	1,822,108	$	1,587,198
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	73,790	$	70,336
Accrued and other liabilities	142,246		121,878
Deferred revenue	22,998		20,558
Total current liabilities	239,034		212,772
Deferred revenue, long-term	20,224		18,665
Other long-term liabilities	100,093		54,113
Total liabilities	359,351		285,550
Commitments and Contingencies - (see Note 9)
Shareholders’ equity:
Ordinary shares: NIS 0.0175 par value, 200,000 shares authorized, 54,795 and 53,918 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	237		233
Additional paid-in capital	1,051,985		982,677
Accumulated other comprehensive income (loss)	2,394		(1,051		)
Retained earnings	408,141		319,789
Total shareholders’ equity	1,462,757		1,301,648
Total liabilities and shareholders' equity	$	1,822,108	$	1,587,198

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(in thousands, except per share data)
Total revenues	$	310,324	$	268,462		$	615,541	$	519,462
Cost of revenues	110,034		103,668			218,120		192,666
Gross profit	200,290		164,794			397,421		326,796
Operating expenses:
Research and development	99,329		87,152			191,534		173,578
Sales and marketing	39,302		35,673			79,399		75,167
General and administrative	19,199		23,635			38,470		40,151
Restructuring and impairment charges	275		1,774			1,178		9,361
Total operating expenses	158,105		148,234			310,581		298,257
Income from operations	42,185		16,560			86,840		28,539
Interest and other, net	2,268		(338		)	10,499		(871		)
Income before taxes on income	44,453		16,222			97,339		27,668
Provision for (benefit from) taxes on income	6,024		(304		)	10,290		(26,701		)
Net income	$	38,429	$	16,526		$	87,049	$	54,369
Net income per share — basic	$	0.70	$	0.31		$	1.60	$	1.04
Net income per share — diluted	$	0.68	$	0.30		$	1.55	$	1.00
Shares used in computing net income per share:
Basic	54,707		52,615			54,469		52,219
Diluted	56,480		54,466			56,180		54,149

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(in thousands)
Net income	$	38,429	$	16,526		$	87,049	$	54,369
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on available-for-sale securities, net of tax	1,186		213			1,968		(80		)
Change in unrealized gains (losses) on derivative contracts, net of tax	189		(2,382		)	2,780		(3,720		)
Other comprehensive income (loss), net of tax	1,375		(2,169		)	4,748		(3,800		)
Total comprehensive income, net of tax	$	39,804	$	14,357		$	91,797	$	50,569

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)



						Accumulated
				Additional		Other					Total
	Ordinary Shares			Paid-in		Comprehensive			Retained		Shareholders'
	Shares	Amount		Capital		Income (Loss)			Earnings		Equity
	(In thousands, except share data)

Balance at December 31, 2018	53,918,208	$	233	$	982,677	$	(1,051	)	$	319,789	$	1,301,648

Net income									48,620		48,620
Unrealized gains on available-for-sale securities and derivative contracts, net of taxes						3,373					3,373
Share-based compensation				24,242							24,242
Issuances of shares through employee equity incentive plans	451,535	2		5,970							5,972
Issuance of shares through employee share purchase plan	162,573	1		11,054							11,055
Balance at March 31, 2019	54,532,316	$	236	$	1,023,943	$	2,322		$	368,409	$	1,394,910
Net income									38,429		38,429
Unrealized gains on available-for-sale securities and derivative contracts, net of taxes						72			1,303		1,375
Share-based compensation				26,949							26,949
Issuances of shares through employee equity incentive plans	262,557	1		1,093							1,094
Balance at June 30, 2019	54,794,873	$	237	$	1,051,985	$	2,394		$	408,141	$	1,462,757

Balance at December 31, 2017	51,487,650	$	221	$	873,979	$	1,618		$	181,630	$	1,057,448

Net income									37,843		37,843
Unrealized losses on available-for-sale securities and derivative contracts, net of taxes						(1,631		)			(1,631		)
Effect of adopting Topic 606									4,501		4,501
Share-based compensation				14,974							14,974
Issuances of shares through employee equity incentive plans	384,523	2		2,708							2,710
Issuance of shares through employee share purchase plan	288,017	1		11,347							11,348
Balance at March 31, 2018	52,160,190	$	224	$	903,008	$	(13	)	$	223,974	$	1,127,193
Net income									16,526		16,526
Unrealized losses on available-for-sale securities and derivative contracts, net of taxes						(2,169		)			(2,169		)
Share-based compensation				14,916							14,916
Issuances of shares through employee equity incentive plans	770,573	5		5,278							5,283
Balance at June 30, 2018	52,930,763	$	229	$	923,202	$	(2,182	)	$	240,500	$	1,161,749

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Six Months Ended June 30,
	2019			2018
	(in thousands)
Cash flows from operating activities:
Net income	$	87,049		$	54,369
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47,449			52,674
Deferred income taxes	—			(28,085		)
Share-based compensation	51,191			29,890
Gain on short-term investments, net	(6,558		)	(1,828		)
Gain on investments in privately-held companies	(9,569		)	—
Impairment charges	2,843			1,567
Changes in assets and liabilities:
Accounts receivable	(49,726		)	(1,451		)
Inventories	11,800			(30,598		)
Prepaid expenses and other assets	4,047			718
Accounts payable	1,969			12,530
Accrued and other liabilities	6,509			12,334
Net cash provided by operating activities	147,004			102,120

Cash flows from investing activities:
Purchase of short-term investments	(364,777		)	(82,486		)
Proceeds from sales and maturities of short-term investments	198,221			76,289
Proceeds from sales of property and equipment	—			3,239
Purchase of property and equipment	(15,208		)	(20,078		)
Purchase of intangibles and other assets	(2,850		)	(6,995		)
Proceeds from sale of an investment in a privately-held company	16,887			—
Purchase of investments in privately-held companies	(4,247		)	(6,000		)
Acquisition, net of cash acquired	—			(7,129		)
Net cash used in investing activities	(171,974		)	(43,160		)

Cash flows from financing activities:
Principal payments on term debt	—			(74,000		)
Payments on intangible asset financings	(4,019		)	(3,446		)
Proceeds from share issuances through employee stock plans	18,121			19,341
Net cash provided by (used in) financing activities	14,102			(58,105		)

Net increase (decrease) in cash, cash equivalents, and restricted cash	(10,868		)	855
Cash, cash equivalents, and restricted cash at beginning of period	64,650			70,498
Cash, cash equivalents, and restricted cash at end of period	$	53,782		$	71,353

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Company

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

Pending Merger with NVIDIA Corporation

On March 10, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with NVIDIA Corporation, a Delaware corporation ("NVIDIA"), NVIDIA International Holdings Inc., a Delaware corporation and wholly owned subsidiary of NVIDIA ("Parent") and Teal Barvaz Ltd., a wholly owned subsidiary of Parent organized under the laws of the State of Israel and wholly owned subsidiary of Parent ("Merger Sub"). NVIDIA has agreed to guarantee the payment and performance obligations of Parent under the Merger Agreement. The Merger Agreement and the Merger (as defined below) have been approved by the boards of directors of the Company, NVIDIA, Parent and Merger Sub.

The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company (the "Merger") in accordance with Sections 314-327 of the Companies Law 5759-1999 of the State of Israel, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent.

At the effective time of the Merger (the "Effective Time"), each ordinary share, par value NIS 0.0175 per share, of the Company (a "Company Share") issued and outstanding immediately prior to the Effective Time, other than any shares owned by the Company, Parent and their respective subsidiaries or any shares held in the Company’s treasury, will be deemed to have been transferred to the Parent in exchange for the right to receive $125.00 in cash, without interest and subject to applicable withholding taxes.

The Merger Agreement contains customary representations, warranties and covenants. The consummation of the Merger is conditioned on the receipt of the approval of the Company’s shareholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. At the Company’s extraordinary general meeting held on June 20, 2019, the Company’s shareholders approved the consummation of the Merger. Closing of the Merger is expected by the end of calendar year 2019.

The Merger Agreement contains certain customary termination rights by either the Company or Parent, including if the Merger is not consummated by December 10, 2019, subject to two three-month extensions in order to obtain required regulatory approvals. If the Merger Agreement is terminated under certain circumstances, including termination by the Company to enter into a superior proposal, a termination by Parent following a change of the Company’s board of directors’ recommendation or a termination by Parent as a result of a willful material breach of the Merger Agreement’s no-solicitation obligations by the Company, the Company will be obligated to pay to Parent a termination fee equal to $225 million in cash. If the Merger Agreement is terminated under certain circumstances involving the failure to obtain certain regulatory approvals, Parent will be obligated to pay the Company a termination fee equal to $350 million in cash.

The Company recorded transaction-related costs of $7.8 million, principally for investment banking and legal fees associated with the pending acquisition, during the six months ended June 30, 2019. These costs are recorded in general and administrative expenses included in the condensed consolidated statement of operations for the six months ended June 30, 2019. Additional transaction-related costs are expected to be incurred through the closing of the Merger.

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 balance sheet data were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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, 2018, filed with the SEC on February 21, 2019. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2019 or thereafter.

Certain prior year amounts have been reclassified for consistency with the current year presentation. On the balance sheet, the severance assets were reclassified to other long-term assets, and the accrued severance was reclassified to other long-term liabilities.

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 material 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 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, allowances for price adjustments, investment valuation, warranty reserves, inventory reserves, share-based compensation expense, long-term asset valuations, useful lives of property, equipment, and intangibles, accounting for business combinations, goodwill and purchased intangible asset valuation, investments in privately-held companies, accounting and fair value of financial instruments and derivatives, deferred income tax asset valuation, uncertain tax positions, and 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. The 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

Other than our accounting policy related to the new lease standard (see Note 14, "Leases"), 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, 2018, filed with the SEC on February 21, 2019.

Restricted cash

The Company maintained certain cash amounts that were restricted as to withdrawal or use over the long-term. The cash was securing bank guarantees primarily issued against long-term tenancy agreements. During the second quarter of 2019, the Company renegotiated the guarantee terms with the banks, and all restricted cash was released as of June 30, 2019. The long-term restricted cash balance of $7.9 million was reported in other long-term assets on the balance sheet as of June 30, 2018, and was included in the ending balance of cash, cash equivalents and restricted cash in the statement of cash flows for the six

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

months ended June 30, 2018. The following table provides a reconciliation of the cash and cash equivalents balances reported on the balance sheets and the cash, cash equivalents and restricted cash balances reported in the statements of cash flows:



	June 30,
	2019		2018
	(In thousands)
Cash and cash equivalents, as reported on the balance sheets	$	53,782	$	63,422
Restricted cash in other long-term assets, as reported on the balance sheets	—		7,931
Cash, cash equivalents, and restricted cash, as reported in the statements of cash flows	$	53,782	$	71,353

Concentration of credit risk

The following table summarizes the revenues from customers (including original equipment manufacturers) in excess of 10% of the total revenues:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Hewlett Packard Enterprise ("HPE")	13.5	%	13.0	%	10.5	%	15.0	%
Dell Technologies Inc. ("Dell")	*		14.0	%	11.3	%	12.0	%
____________________
* Less than 10%

There was no customer with an accounts receivable balance in excess of 10% of total accounts receivable as of June 30, 2019 and December 31, 2018.

Product warranty

The following table provides changes in the product warranty accrual for the six months ended June 30, 2019 and 2018:



	Six Months Ended June 30,
	2019			2018
	(in thousands)
Balance, beginning of the period	$	1,376		$	889
New warranties issued during the period	2,397			856
Reversal of warranty reserves	(18		)	—
Settlements during the period	(1,934		)	(784		)
Balance, end of the period	1,821			961
Less: long-term portion of product warranty liability	(362		)	(173		)
Current portion, end of the period	$	1,459		$	788

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Net income per share

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 30, 2019 and 2018:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands, except per share data)
Net income	$	38,429	$	16,526	$	87,049	$	54,369
Basic and diluted shares:
Weighted average ordinary shares outstanding	54,707		52,615		54,469		52,219
Effect of dilutive shares	1,773		1,851		1,711		1,930
Shares used to compute diluted net income per share	56,480		54,466		56,180		54,149
Net income per share — basic	$	0.70	$	0.31	$	1.60	$	1.04
Net income per share — diluted	$	0.68	$	0.30	$	1.55	$	1.00

There were no material amounts of potentially dilutive share options and restricted share units ("RSUs") that had an anti-dilutive effect for the computation of diluted net income per share for both the three and six months ended June 30, 2019. The Company excluded 0.2 million potentially dilutive share options and RSUs from the computation of diluted net income per share for both the three and six months ended June 30, 2018, respectively, because including them would have had an anti-dilutive effect.

Adoption of new accounting principles

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires lessees to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets or inventory.

The standard became effective for the Company on January 1, 2019. The Company elected the available practical expedients and implemented internal controls to enable the preparation of financial information on adoption. The adoption of the standard had a material impact on the Company's condensed consolidated balance sheets due to the recognition of the right-of-use ("ROU") assets and lease liabilities related to the Company's operating leases. In addition, a material portion of the Company's leases are denominated in currencies other than the U.S. Dollar, mainly in New Israeli Shekels ("NIS"). As a result, the associated lease liabilities were remeasured using the current exchange rate, which resulted in non-operating foreign exchange losses. The standard did not have a material impact on the Company's results of operations or cash flows. See Note 14, "Leases" for details about the impact from adopting the new lease standard and other required disclosures.

Recent accounting pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that are service contracts. This standard becomes effective for the Company beginning January 1, 2020. The Company is currently assessing the effect that this ASU will have on its condensed consolidated financial statements and related disclosures.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 2—REVENUE

Revenues by geographic region for the three and six months ended June 30, 2019 and 2018 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
United States	$	121,618	$	101,396	$	231,912	$	197,656
China	91,868		54,182		170,008		110,395
Europe	38,343		41,454		85,589		77,450
Other Americas	28,082		33,112		53,811		60,852
Other Asia	30,413		38,318		74,221		73,109
Total revenues	$	310,324	$	268,462	$	615,541	$	519,462

The following tables represent our total revenues for the three and six months ended June 30, 2019 and 2018 by product type and interconnect protocol:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
ICs	$	53,046	$	28,934	$	113,669	$	57,521
Boards	120,643		136,708		229,073		254,759
Switch systems	73,808		57,074		155,866		112,721
Cables, accessories and other	62,827		45,746		116,933		94,461
Total revenues	$	310,324	$	268,462	$	615,541	$	519,462



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands)
InfiniBand:
HDR	$	28,620	$	—	$	51,813	$	—
EDR	66,643		59,319		$	126,286	$	115,265
FDR	28,972		35,649		69,570		77,397
QDR/DDR/SDR	8,646		7,143		23,350		12,587
Total	132,881		102,111		271,019		205,249
Ethernet	169,131		157,470		330,024		294,418
Other	8,312		8,881		14,498		19,795
Total revenues	$	310,324	$	268,462	$	615,541	$	519,462

Contract balances

The Company recognizes contract liabilities, or deferred revenues, when it receives advance payments from customers before performance obligations primarily related to extended warranty and post-contract customer support have been performed. Advance payments are received at the beginning of the service period and the related deferred revenues are reclassified to revenue ratably over the service period. The balance of deferred revenues approximates the aggregate amount of the transaction price allocated to the unsatisfied performance obligations at the end of reporting period. The Company expects to recognize the long-term portion of deferred revenue over the remaining service period of up to five years.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table presents the significant changes in the deferred revenue balance during the six months ended June 30, 2019:



	(in thousands)
Balance, beginning of the period	$	39,223
New deferred revenue	21,013
Reclassification to revenues during the year (1)	(17,014		)
Balance, end of the period	43,222
Less: long-term portion of deferred revenue	20,224
Current portion, end of the period	$	22,998

(1) Of the total reclassification from deferred revenue to revenues, $11.7 million was related to the beginning balance, and $5.3 million was related to the new deferred revenue during the period.

Unsatisfied performance obligations, other than extended warranty and post-contract customer support, primarily represent contracts with future delivery dates. As of June 30, 2019, the Company had $57.5 million of unbilled transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied related to contracts with an original duration over one year. The Company expects to invoice and recognize the revenue as it satisfies each performance obligation during a period of three years. The foregoing excludes the value of the remaining unsatisfied performance obligations related to contracts that have original durations of one year or less.

The Company recognizes assets for the material incremental costs of obtaining contracts with customers if it expects the benefit of those costs to be longer than one year. The Company allocates these assets proportionally to the performance obligations in the contracts and amortizes them as the performance obligations are satisfied. During the six months ended June 30, 2019, the Company recognized $11.3 million of assets related to costs to obtain contracts, and amortized $6.7 million of these assets during the same period. The unamortized balance of the assets was $4.6 million as of June 30, 2019.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 3—BALANCE SHEET COMPONENTS:



	June 30, 2019			December 31, 2018
	(in thousands)
Accounts receivable, net:
Accounts receivable, gross	$	209,851		$	156,525
Less: unearned distribution price adjustments allowance	(9,000		)	(5,400		)
Less: allowance for doubtful accounts	(500		)	(500		)
	$	200,351		$	150,625
Inventories:
Raw materials	$	19,331		$	19,391
Work-in-process	32,580			39,425
Finished goods	37,739			45,565
	$	89,650		$	104,381
Property and equipment, net:
Computer, equipment, and software	$	189,505		$	180,125
Furniture and fixtures	1,886			2,140
Leasehold improvements	50,057			46,179
	241,448			228,444
Less: Accumulated depreciation and amortization	(133,306		)	(123,110		)
	$	108,142		$	105,334
Other long-term assets:
Right of use assets	$	62,376		$	—
Deferred taxes	50,660			50,660
Equity investments in privately-held companies	35,496			40,300
Long-term restricted cash	—			7,884
Severance assets	5,428			17,043
Other	5,560			2,295
	$	159,520		$	118,182
Accrued and other liabilities:
Payroll and related expenses	$	68,965		$	76,788
Accrued expenses	31,227			28,821
Lease liability, current	17,706			—
Intangible asset financings	5,379			4,488
Other	18,969			11,781
	$	142,246		$	121,878
Other long-term liabilities:
Lease liability, long term	$	51,490		$	—
Income tax payable	36,211			25,600
Accrued severance	6,778			21,645
Deferred rent	—			2,532
Other	5,614			4,336
	$	100,093		$	54,113

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 4—FAIR VALUE MEASUREMENTS:

Fair value hierarchy:

The Company measures its cash equivalents and marketable securities at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. The Company's investments in debt securities and certificates of deposits are classified within Level 2 as the market inputs to value these instruments consist of market yields, reported trades and broker/dealer quotes. In addition, foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Level 3 valuation inputs include the Company's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation. As of June 30, 2019 and December 31, 2018, the Company did not have any assets or liabilities valued based on Level 3 valuations.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The following table represents the fair value hierarchy of the Company's financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019:



	Level 1		Level 2		Total
	(in thousands)
Money market funds	$	4,048	$	—	$	4,048
Certificates of deposit	—		149,108		149,108
Government debt securities	—		150,144		150,144
Corporate debt securities	—		257,554		257,554
	4,048		556,806		560,854
Derivative contracts	—		706		706
Total financial assets	$	4,048	$	557,512	$	561,560
Derivative contracts	—		22		22
Total financial liabilities	$	—	$	22	$	22

The following table represents the fair value hierarchy of the Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:



	Level 1		Level 2		Total
	(in thousands)
Money market funds	$	1,265			$	1,265
Certificates of deposit			95,038		95,038
Government debt securities			100,478		100,478
Corporate debt securities			186,208		186,208
	1,265		381,724		382,989
Long-term restricted cash	—		7,884		7,884
Derivative contracts	—		96		96
Total financial assets	$	1,265	$	389,704	$	390,969
Derivative contracts	—		2,536		2,536
Total financial liabilities	$	—	$	2,536	$	2,536

There were no transfers between Level 1 and Level 2 securities during the six months ended June 30, 2019 and 2018.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 5—INVESTMENTS:

Cash, cash equivalents and short-term investments:

The short-term investments are classified as available-for-sale securities. The cash, cash equivalents and short-term investments at June 30, 2019 and December 31, 2018 were as follows:



	June 30, 2019
	Amortized Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	49,734		$	—	$	—		$	49,734
Money market funds	4,048			—		—			4,048
Certificates of deposit	149,074			39		(5		)	149,108
Government debt securities	149,683			474		(13		)	150,144
Corporate debt securities	256,457			1,124		(27		)	257,554
Total	608,996			1,637		(45		)	610,588
Less amounts classified as cash and cash equivalents	(53,782		)	—		—			(53,782		)
Short-term investments	$	555,214		$	1,637	$	(45	)	$	556,806



	December 31, 2018
	Amortized Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	55,501		$	—	$	—		$	55,501
Money market funds	1,265			—		—			1,265
Certificates of deposit	95,080			1		(43		)	95,038
Government debt securities	100,449			92		(63		)	100,478
Corporate debt securities	186,571			27		(390		)	186,208
Total	438,866			120		(496		)	438,490
Less amounts classified as cash and cash equivalents	(56,766		)	—		—			(56,766		)
Short-term investments	$	382,100		$	120	$	(496	)	$	381,724

Interest income and gains on short-term investments, net were $3.8 million and 1.0 million for the three months ended June 30, 2019 and 2018, respectively. Interest income and gains on short-term investments, net were $6.8 million and $1.9 million for the six months ended June 30, 2019 and 2018, respectively. At June 30, 2019, there were no material gross unrealized losses on investments that were in a gross unrealized loss position for a period greater than 12 months. These investments were not deemed to be other-than-temporarily impaired and the gross unrealized losses were recorded in other comprehensive income (loss) ("OCI").

The contractual maturities of short-term investments at June 30, 2019 and December 31, 2018 were as follows:



	June 30, 2019				December 31, 2018
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in less than one year	$	359,796	$	360,247	$	281,303	$	280,959
Due in one to three years	195,418		196,559		100,797		100,765
	$	555,214	$	556,806	$	382,100	$	381,724

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Equity investments in privately-held companies:

As of June 30, 2019 and December 31, 2018, the Company held a total of $35.5 million and $40.3 million, respectively, in equity investments in privately-held companies. During the first quarter of 2019, one of the investees of the Company's equity investments in privately-held companies was acquired. As a result, the Company recorded a gain on sale of $9.1 million in the first quarter of 2019. In addition, $3.2 million of the consideration owed to the Company was held back in an escrow account as of June 30, 2019. The final amount released from escrow, if any, will be recognized as an additional gain on sale when released. During the second quarter of 2019, the Company recorded a gain of $0.4 million from the conversion of a note receivable to equity in a privately-held company.

While performing its review for impairment for the first quarter of 2019, the Company noted an observable price change related to one of its investments in a privately-held company. As a result, the Company recorded an impairment charge of $1.8 million in the first quarter of 2019. The gains on the investments and the impairment charge were reported in interest and other, net on the condensed consolidated statement of operations.

NOTE 6—GOODWILL AND INTANGIBLE ASSETS:

There has been no change in the carrying amount of goodwill of $473.9 million during the six months ended June 30, 2019.

The carrying amounts of intangible assets as of June 30, 2019 were as follows:



	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Useful Life
	(in thousands)							(in years)
Licensed technology	$	56,526	$	(34,470	)	$	22,056	1-8
Developed technology	285,443		(183,849		)	101,594		4-7
Customer relationships	69,776		(34,380		)	35,396		4-9
Trade names	5,600		(5,600		)	—		3
Total intangible assets	$	417,345	$	(258,299	)	$	159,046

The carrying amounts of intangible assets as of December 31, 2018 were as follows:



	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Useful Life
	(in thousands)							(in years)
Licensed technology	$	49,546	$	(30,062	)	$	19,484	1-8
Developed technology	285,443		(164,406		)	121,037		4-7
Customer relationships	69,776		(31,246		)	38,530		4-9
Trade names	5,600		(5,323		)	277		3
Total intangible assets	$	410,365	$	(231,037	)	$	179,328

Amortization expense of intangible assets totaled approximately $14.6 million and $16.5 million for the three months ended June 30, 2019 and 2018, respectively. Amortization expense of intangible assets totaled approximately $29.6 million and $32.8 million for the six months ended June 30, 2019 and 2018, respectively.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The estimated future amortization expense from amortizable intangible assets is as follows:



	(in thousands)
2019 (remainder of the year)	$	32,245
2020	53,723
2021	43,113
2022	13,077
2023	8,291
Thereafter	8,597
Total	$	159,046

NOTE 7—DERIVATIVES AND HEDGING ACTIVITIES:

The Company enters into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks, mainly the exposure to changes in the exchange rate of the NIS against the U.S. dollar that are associated with forecasted cash flows and existing assets and liabilities. The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

Fair Value of Derivative Contracts

The fair value of derivative contracts in the unaudited condensed consolidated balance sheets at June 30, 2019 and December 31, 2018 were as follows:



		Other current assets		Accrued liabilities		Other current assets		Accrued liabilities
		June 30, 2019				December 31, 2018
		(in thousands)
Derivatives designated as hedging instruments
	Currency forward and option contracts	$	706	$	22	$	27	$	2,122
Derivatives not designated as hedging instruments
	Currency forward and option contracts	$	—	$	—	$	69	$	414
Total derivatives		$	706	$	22	$	96	$	2,536

The gross notional amounts of derivative contracts were NIS denominated. The notional amounts of outstanding derivative contracts in U.S. dollars at June 30, 2019 and December 31, 2018 were as follows:



	June 30, 2019		December 31, 2018
	(in thousands)
Derivatives designated as hedging instruments
Currency forward and option contracts	$	56,197	$	92,956
Derivatives not designated as hedging instruments
Currency forward and option contracts	$	—	$	57,844

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Effect of Derivatives Designated as Hedging Instruments on Accumulated Other Comprehensive Income

The following table represents the unrealized gains (losses) of derivatives designated as hedging instruments, net of tax effects, that were recorded in accumulated other comprehensive income as of June 30, 2019 and December 31, 2018 and their effect on OCI for the six months ended June 30, 2019:



	(in thousands)
December 31, 2018	$	(1,978	)
Amount of gain recognized in OCI (effective portion)	3,197
Amount of gain reclassified from OCI to income (effective portion)	(417		)
June 30, 2019	$	802

Effect of Derivative Contracts on the Unaudited Condensed Consolidated Statement of Operations

The effect of derivative contracts on the unaudited condensed consolidated statements of operations for the three months ended June 30, 2019 and 2018 was as follows:



	Derivatives designated as hedging instruments					Derivatives not designated as hedging instruments
	Three Months Ended June 30,					Three Months Ended June 30,
	2019		2018			2019		2018
	(in thousands)
Operating income (expenses)	$	455	$	(1,419	)	$	—	$	—
Interest and other, net	$	—	$	—		$	693	$	(1,814	)

The effect of derivative contracts on the unaudited condensed consolidated statements of operations for the six months ended June 30, 2019 and 2018 was as follows:



	Derivatives designated as hedging instruments					Derivatives not designated as hedging instruments
	Six Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(in thousands)
Operating income (expenses)	$	417	$	(884	)	$	—	$	—
Interest and other, net	$	—	$	—		$	2,256	$	(2,704	)

NOTE 8—EMPLOYEE BENEFIT PLANS:

As a general rule, under Israeli law, an employee whose employment has been terminated by an employer or an employee who has resigned under circumstances which entitle him/her to receive statutory severance, in each case after completing at least one year of service with a particular employer or in a particular workplace, is entitled to statutory severance. For Israeli employees hired prior to January 1, 2007 ("Group One"), the severance pay liability is calculated based on the last monthly salary of each employee multiplied by the number of years of such employee's employment and is presented in the Company's balance sheet in other long-term liabilities, as if it was payable at each balance sheet date on an undiscounted basis. This liability is partially funded by the amounts accrued in the severance component of the employees’ pension arrangements (the “Severance Fund”). The surrender value of Severance Funds is presented in other long-term assets.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The severance pay detail is as follows:



	June 30, 2019		December 31, 2018
	(in thousands)
Accrued severance liabilities	$	6,778	$	21,645
Severance assets	5,428		17,043
Unfunded portion	$	1,350	$	4,602

As a general rule, Israeli employees who were hired on or after January 1, 2007 ("Group Two"), are subject to the arrangement pursuant to Section 14 of the Severance Pay Law, 1963 (“Section 14 Arrangement”). When the Company makes the full monthly contribution equal to 8.3% of the employee's salary towards the Severance Fund and undertakes that the amounts accumulated in the Severance Fund will be released to the employee in the event that the employment relationship comes to an end, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments will be made by the Company to the employee. Further, the related obligation and amounts deposited for the employee by the Company for such obligation are not stated on the balance sheet, as the Company is legally released from the obligation to employees once the deposit amounts have been paid.

During the first quarter of 2019, a significant portion of the employees in Group One elected to move to Group Two under settlement agreements with the Company, which were permitted by a formal approval obtained by the Company from the Israeli Ministry of Labor. In accordance with the Ministry of Labor’s approval (which applied to each of the relevant employees individually), the Company undertook to make the necessary contributions to ensure coverage of severance based on the employees' entire salary for the period during which the employees were not subject to the Section 14 Arrangement up to June 30, 2018. The Company reclassified the accumulated amount of severance assets and accrued severance liabilities as of June 30, 2018 related to these employees to accrued and other liabilities as of March 31, 2019. The Company paid the net severance liabilities (i.e., it made the necessary contributions to each of these employees’ Severance Fund) in April 2019.

NOTE 9—COMMITMENTS AND CONTINGENCIES:

Commitments

Leases

See Note 14 "Leases" for lease-related commitments as of June 30, 2019.

Purchase commitments

At June 30, 2019, the Company had the following non-cancelable purchase commitments:



	(in thousands)
2019 (remainder of the year)	$	145,822
2020	30,001
2021	982
2022	353
Total	$	177,158

Other Commitments

Unrecognized tax benefits

Due to the inherent uncertainty with respect to the timing of future cash outflows associated with the Company's unrecognized tax benefits, it is unable to reliably estimate the timing of cash settlement with the respective taxing authorities. As of June 30, 2019, the Company's unrecognized tax benefits totaled $57.7 million, out of which an amount of $35.1 million would reduce the Company's income tax expense and effective tax rate, if recognized.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Contingencies

Legal proceedings

On May 1, 2019, a purported class action suit, entitled Marc Henzel v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California against the Company and the members of its board of directors. On May 2, 2019, a purported class action suit, entitled Michael Kent v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Southern District of New York. Also on May 2, 2019, a purported class action suit, entitled David Thornton v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California. On May 3, 2019, a purported class action suit, entitled Lewis Stein v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California against the Company, the members of its board of directors, NVIDIA International Holdings Inc., Teal Barvaz Ltd., and NVIDIA Corporation. Also on May 3, 2019, a lawsuit entitled Elaine Wang v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California against the Company and the members of its board of directors. All five suits alleged that the preliminary proxy statement filed by the Company on April 22, 2019 with the SEC in connection with the proposed Merger omits material information with respect to the transactions contemplated by the Merger Agreement, rendering it false and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. Each plaintiff sought, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. None of the plaintiffs moved for injunctive relief before the shareholder vote, which occurred on June 20, 2019. On June 25, 2019, the plaintiffs of the class action suit entitled Michael Kent v. Mellanox Technologies, Ltd., et al. filed a voluntary dismissal in the United States District Court for the Southern District of New York.

The Company believes that the claims asserted in these lawsuits are without merit and intends to defend vigorously against all claims asserted. The Company is currently unable to estimate the reasonably possible loss or range of loss related to these lawsuits. Additional lawsuits arising out of or relating to the Merger Agreement and the transactions contemplated thereby may be filed in the future.

The Company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, securities, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.

The Company records a liability when it believes that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both the probability and the estimated amount of a loss or potential loss. The Company may be unable to estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.

NOTE 10—SHARE INCENTIVE PLANS

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

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 11—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the six months ended June 30, 2019 and 2018:



	Unrealized Gains (Losses) on Available-for-Sale Securities			Unrealized Gains (Losses) on Derivatives Designated as Hedging Instruments			Total
	(in thousands)
Balance at December 31, 2018	$	927		$	(1,978	)	$	(1,051	)
Other comprehensive income before reclassifications, net of taxes	1,976			3,197			5,173
Realized gains reclassified from accumulated other comprehensive income	(1,311		)	(417		)	(1,728		)
Net current-period other comprehensive income, net of taxes	665			2,780			3,445
Balance at June 30, 2019	$	1,592		$	802		$	2,394

Balance at December 31, 2017	$	693		$	925		$	1,618
Other comprehensive loss before reclassifications, net of taxes	(81		)	(4,604		)	(4,685		)
Realized loss reclassified from accumulated other comprehensive income	1			884			885
Net current-period other comprehensive loss, net of taxes	(80		)	(3,720		)	(3,800		)
Balance at June 30, 2018	$	613		$	(2,795	)	$	(2,182	)

The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the six months ended June 30, 2019 and 2018:



	Realized (Gains)/Losses Reclassified from Accumulated Other Comprehensive Income (Loss)					Affected Line Item in the Financial Statements
	Six Months Ended June 30,
	2019			2018
	(in thousands)
Realized (gains)/losses on derivatives designated as hedging instruments	$	(417	)	$	884	Cost of revenues and Operating expenses:
	(21		)	45		Cost of revenues
	(42		)	78		General and administrative
	(38		)	81		Sales and marketing
	(316		)	680		Research and development
Realized (gains)/losses on available-for-sale securities	(1,311		)	1		Retained earnings and interest and other, net
Total reclassifications for the period	$	(1,728	)	$	885	Total

NOTE 12—INCOME TAXES:

As of June 30, 2019 and December 31, 2018, the Company had gross unrecognized tax benefits of $57.7 million and $46.5 million, respectively. It is the Company’s policy to classify accrued interest and penalties as part of the unrecognized tax benefits and record the expense in the provision for income taxes. The amount of accrued interest and penalties related to unrecognized tax benefits totaled $3.2 million at June 30, 2019 and $2.6 million at December 31, 2018.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

As of June 30, 2019, the 2014 through 2018 tax years are open and may be subject to potential examinations in the United States. The Company has NOLs in the United States from prior tax periods beginning in 2003 which may be subject to examination upon utilization in future tax periods. As of June 30, 2019, the 2014 through 2018 tax years are open and may be subject to potential examinations in Denmark and Israel. As of June 30, 2019, the income tax returns of the Company and one of its subsidiaries in Israel are under examination by the Israeli Income Tax Authorities for certain years from 2014 to 2017.

The Company's operations in Israel were granted "Approved Enterprise" status by the Investment Center in the Israeli Ministry of Economy and Industry and "Beneficiary Enterprise" status from the Israeli Income Tax Authority, which makes the Company eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959 (the "Encouragement Law"). Under the terms of the Beneficiary Enterprise program, income that is attributable to the Company's operations in Yokneam, Israel, is exempt from income tax commencing fiscal year 2011 through 2021. Income that is attributable to the Company's operations in Tel Aviv, Israel is subject to a reduced income tax rate (generally between 10.0% and the current corporate tax rate, depending on the percentage of foreign investment in the Company) commencing fiscal year 2013 through 2021. The tax holiday has resulted in a cash tax savings of $19.7 million for the six months ended June 30, 2019, increasing diluted earnings per share by approximately $0.35 in the six months ended June 30, 2019.

On June 14, 2017, the Israeli government legislated new regulations regarding the "Preferred Technological Enterprise" regime, under which a company that complies with the terms may be entitled to certain tax benefits. The Company expects that its operation in Israel will comply with the terms of the Preferred Technological Enterprise regime. Therefore, the Company may utilize the tax benefits under this regime after the end of the benefit period of its Approved and Beneficiary Enterprise statuses (i.e., from fiscal year 2022 onwards). Under the new legislation, the majority of the Company’s income from its operations in Yokneam, Israel, will be subject to a corporate rate of 7.5%, while the majority of the income from its operations in Tel-Aviv, Israel, will be subject to a corporate rate of 12.0%.

The Company’s effective tax rate is highly dependent upon the geographic distribution of its worldwide earnings or losses, tax regulations and tax holiday benefits in Israel, and the effectiveness of the Company’s tax planning strategies. The Company’s effective tax rates were 10.6% and (96.5)% for the six months ended June 30, 2019 and 2018, respectively. The difference between the Company’s effective tax rate and the 21.0% federal statutory rate for the six months ended June 30, 2019 resulted primarily from the excess benefits related to share-based compensation, the tax holiday in Israel and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by the accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions and non-tax-deductible expenses such as share-based compensation.

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous, and the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. In addition, interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. Any changes in the Company’s subjective assumptions and judgments could materially affect amounts recognized in its condensed consolidated balance sheets and statements of operations.

At June 30, 2019, the Company maintained a valuation allowance against deferred tax assets related to capital loss carryforwards of certain subsidiaries. The Company assesses its ability to recover its deferred tax assets on an ongoing basis. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considers available positive and negative evidence including its recent cumulative losses, its ability to carry-back losses against prior taxable income and its projected financial results. The Company also considers, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. A valuation allowance may be recorded in the event it is deemed to be more-likely-than-not that the deferred tax asset cannot be realized. Previously established valuation allowances may also be released in the event it is deemed to be more-likely-than-not that the deferred tax asset can be realized. Any release of valuation allowance will be recorded as a tax benefit which will positively impact the Company’s operating results. Management has determined on the basis of the quarterly assessment performed at June 30, 2019, that these deferred tax assets are not more-likely-than-not to be realized.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 13—INTEREST AND OTHER, NET:

Interest and other, net is summarized in the following table:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Interest expense	$	(77	)	$	(871	)	$	(91	)	$	(2,042	)
Interest income and gains on short-term investments, net	3,792			972			6,795			1,939
Foreign exchange loss, net	(1,800		)	(399		)	(4,052		)	(579		)
Gain on investments in privately-held companies	441			—			9,569			—
Impairment of investment in a privately-held company	—			—			(1,755		)	—
Other	(88		)	(40		)	33			(189		)
Interest and other, net	$	2,268		$	(338	)	$	10,499		$	(871	)

NOTE 14—LEASES:

On January 1, 2019, the Company adopted Topic 842 and elected the available practical expedient to recognize the cumulative effect of initially adopting Topic 842 as an adjustment to the opening balance sheet of the period of adoption (i.e., January 1, 2019). The Company also elected the other available practical expedients, and will not separate lease components from non-lease components, and will not reassess whether contracts are or contain leases, lease classification, or initial direct costs for existing leases as of January 1, 2019. Only the minimum lease payments in accordance with Topic 840 were included in the calculation of the ROU and liability for existing leases as of January 1, 2019. The condensed consolidated balance sheets and results from operations for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under Topic 840.

The Company's leases include office buildings for its facilities worldwide and car leases in Israel, which are all classified as operating leases. Certain lease agreements include rental payments that are adjusted periodically for the consumer price index ("CPI"). The ROU and lease liability were calculated using the initial CPI and will not be subsequently adjusted. Certain leases include renewal options that are under the Company's sole discretion. The renewal options were included in the ROU and liability calculation if it was reasonably assured that the Company will exercise the option.

The cumulative effect of the changes made to the condensed consolidated balance sheet as of January 1, 2019 for the adoption of Topic 842 were as follows:



	December 31, 2018		Adjustments		January 1, 2019
	(in thousands)
Other long-term assets	$	118,182	$	69,102	$	187,284
Accrued and other liabilities	$	121,878	$	16,618	$	138,496
Other long-term liabilities	$	54,113	$	52,484	$	106,597

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The components of lease expense and supplemental cash flow information related to leases for the three and six months ended June 30, 2019 were as follows:



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
	(in thousands)
Components of lease expense
Operating lease cost	$	5,997	$	11,859
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	5,199	$	10,016
Supplemental non-cash information related to lease liabilities arising from obtaining right-of-use assets	$	1,545	$	2,862

For the six months ended June 30, 2019, the weighted average remaining lease term is 6.6 years, and the weighted average discount rate is 3.22 percent. The discount rate was determined based on the estimated collateralized borrowing rate of the Company, adjusted to the specific lease term and location of each lease.

Maturities of lease liabilities as of June 30, 2019 were as follows:



	(in thousands)
2019 (remainder of the year)	$	17,766
2020	16,081
2021	9,591
2022	7,012
2023	6,919
Thereafter	19,169
Total (1)	76,538
Less: Imputed interest	(7,342		)
Lease liability	$	69,196

(1) Future lease payments have not been reduced by minimum sublease rental income of $2.3 million owed to the Company in the future under noncancelable subleases.

The lease liabilities as of June 30, 2019 do not include the obligations under a lease agreement related to an office being built in Tel Aviv, Israel. The Company is not involved in the construction and will not be exposed to any risks during the construction period. The lease term expires 10 years after the expected lease inception. In addition, the lease contains a renewal option, which the Company determined is not reasonably assured to be exercised. As of June 30, 2019, the estimated total future lease obligation is approximately $31.1 million.

NOTE 15—RESTRUCTURING CHARGES:

In connection with the discontinuation of its 1550nm silicon photonics development activities, the Company initiated a restructuring plan in the first quarter of 2018 to wind down the business operations related to these activities, which primarily included terminating employees, exiting contracts with vendors, selling assets, and exiting facilities. The Company recorded $3.5 million, $3.4 million, and $2.4 million of employee separation and severance costs, contract exit costs with vendors, and impairment charges or losses on disposal of assets during the six months ended June 30, 2018, respectively. The Company does not expect any significant restructuring charges in the future.

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition as of June 30, 2019 and results of operations for the three and six months ending June 30, 2019 and 2018 should be read together with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks, uncertainties and assumptions. Words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "predict," "potential" and similar expressions, as they relate to us, our business and our management, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to the pending merger with NVIDIA Corporation, our future revenues, product development and introductions, customer demand, our dependence on key customers for a substantial portion of our revenue, performance of our subcontractors, growth rates, market adoption of our products, competitive factors, gross margins, levels of research, development and other related costs, expenditures, protection of our proprietary rights and patents, tax expenses and benefits, cash flows, management’s plans and objectives for current and future operations, and worldwide economic conditions.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under the section entitled "Risk Factors" in Part II, Item 1A of this report and in the section entitled "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K for fiscal year ended December 31, 2018. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report. Quarterly financial results may not be indicative of the financial results of future periods.

Unless the context requires otherwise, references in this report to the "Company," "we," "us" and "our" refer to Mellanox Technologies, Ltd. and its wholly owned subsidiaries.

Overview

General

We are a fabless semiconductor company that designs, manufactures (through subcontractors) and sells high-performance interconnect products and solutions primarily based on the Ethernet and InfiniBand standards. Our products facilitate intelligent and efficient data transmission between servers, storage systems, communications infrastructure equipment and other embedded systems. We operate our business globally and offer products to customers at various levels of integration. The products we offer include ICs, adapter cards, switch systems, cables, modules, software, services and accessories. Together these products form a total end-to-end integrated networking solution focused on computing, storage and communication applications used in multiple markets, including HPC, cloud, Web 2.0, enterprise data center, storage, Big Data, machine learning, telecommunications, financial services, and media/entertainment markets. These solutions increase performance, application efficiency and improve return on investment. Through the successful development and implementation of multiple generations of our products, we have established significant expertise and competitive advantages.

As a leader in developing multiple generations of high-speed interconnect solutions, we have established strong relationships with our customers. Our products are incorporated in servers and associated networking solutions produced by the largest server vendors. We supply our products to leading storage and communications infrastructure equipment vendors. Additionally, our products are used in embedded solutions.

We are one of the pioneers of InfiniBand, an industry-standard architecture for high-performance interconnects. We believe InfiniBand interconnect solutions deliver industry-leading performance, efficiency and scalability for clustered computing and storage systems that incorporate our products. In addition to supporting InfiniBand, our products also support industry-standard Ethernet transmission protocols providing unique product differentiation and connectivity flexibility. Our products serve as building blocks for creating reliable and scalable Ethernet and InfiniBand solutions with leading performance. We are one of the early suppliers of 25/50/100/200Gb/s Ethernet adapters, switches, and cables to the market. This provides us with the opportunity to gain share in the Ethernet market as users upgrade from one or 10Gb/s directly to 25, 40, 50, 100, 200 and 400Gb/s.

Pending Merger with NVIDIA Corporation

On March 10, 2019, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with NVIDIA Corporation, a Delaware corporation ("NVIDIA"), NVIDIA International Holdings Inc., a Delaware corporation and wholly owned subsidiary of NVIDIA ("Parent") and Teal Barvaz Ltd., a wholly owned subsidiary of Parent organized under the laws of the State of Israel and wholly owned subsidiary of Parent ("Merger Sub"). NVIDIA has agreed to guarantee the payment and performance obligations of Parent under the Merger Agreement. The Merger Agreement and the Merger (as defined below) have been approved by our board of directors and the boards of directors of NVIDIA, Parent and Merger Sub.

The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into Mellanox (the "Merger") in accordance with Sections 314-327 of the Companies Law 5759-1999 of the State of Israel, with Mellanox continuing as the surviving corporation and a wholly owned subsidiary of Parent.

At the effective time of the Merger (the "Effective Time"), each ordinary share, par value NIS 0.0175 per share, of Mellanox (a "Company Share") issued and outstanding immediately prior to the Effective Time, other than any shares owned by Mellanox, Parent and their respective subsidiaries or any shares held in Mellanox’s treasury, will be deemed to have been transferred to the Parent in exchange for the right to receive $125.00 in cash, without interest and subject to applicable withholding taxes.

The Merger Agreement contains customary representations, warranties and covenants. The consummation of the Merger is conditioned on the receipt of the approval of our shareholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. At our extraordinary general meeting held on June 20, 2019, our shareholders approved the consummation of the Merger. Closing of the Merger is expected by the end of calendar year 2019.

The Merger Agreement contains certain customary termination rights by either us or Parent, including if the Merger is not consummated by December 10, 2019, subject to two three-month extensions in order to obtain required regulatory approvals. If the Merger Agreement is terminated under certain circumstances, including termination by us to enter into a superior proposal, a termination by Parent following a change of our board of directors’ recommendation or a termination by Parent as a result of a willful material breach of the Merger Agreement’s no-solicitation obligations by us, we will be obligated to pay to Parent a termination fee equal to $225 million in cash. If the Merger Agreement is terminated under certain circumstances involving the failure to obtain certain regulatory approvals, Parent will be obligated to pay us a termination fee equal to $350 million in cash.

The foregoing description of the Merger Agreement and the Merger does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement. For additional details on the transaction, please refer to the copy of the Merger Agreement attached as Exhibit 2.1 to our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on March 11, 2019.

We recorded transaction-related costs of $7.8 million, principally for investment banking and legal fees associated with the pending acquisition, during the six months ended June 30, 2019. These costs are recorded in general and administrative expenses included in the condensed consolidated statement of operations for the six months ended June 30, 2019. Additional transaction-related costs are expected to be incurred through the closing of the Merger.

The pending transaction with NVIDIA may have significant effects on us, including, among others, deferrals, delays or cancellations of purchase orders by our customers and the significant diversion of management and employee attention from ordinary course matters. For a more extensive discussion of those and other possible effects, please refer to "Risk Factors" in Part II, Item 1A of this report.

Our Business

Revenues. We derive revenues from sales of our ICs, boards, switch systems, cables, modules, software, accessories and other product groups. Revenues for the three months ended June 30, 2019 were $310.3 million compared to $268.5 million for the three months ended June 30, 2018, representing an increase of $41.8 million, or approximately 15.6%. Revenues for the six months ended June 30, 2019 were $615.5 million compared to $519.5 million for the six months ended June 30, 2018, representing an increase of $96.0 million, or approximately 18.5%. Our revenues for the six months ended June 30, 2019 are not necessarily indicative of our future results. In order to increase our annual revenues, we must continue to achieve design wins over other Ethernet providers and providers of competing interconnect technologies. We consider a design win to occur when an original equipment manufacturer ("OEM"), or contract manufacturer notifies us that it has selected our products to be incorporated into a product or system under development. Because the life cycles for our customers' products can last for several years if these products have successful commercial introductions, we expect to continue to generate revenues over an extended period of time for each successful design win.

Our products have broad adoption with multiple end customers across HPC, cloud, Web 2.0, enterprise data center, storage, Big Data, machine learning, telecommunications, financial services, and media/entertainment markets. These markets are mainly served by leading server, storage and communications infrastructure OEMs. Therefore, we have derived a substantial portion of our revenues from a relatively small number of OEM customers. Sales to our top ten customers represented 51.8% and 55.9% of our total revenues for the six months ended June 30, 2019 and 2018, respectively. The loss of one or more of our principal customers, the reduction or deferral of purchases, or changes in the mix of our products ordered by any one of these customers could cause our revenues to decline materially if we are unable to increase our revenues from other customers. Our customers, including our most significant customers, are not obligated by long-term contracts to purchase our products and may cancel orders with limited potential penalties. If any of our large customers reduces or cancels its purchases from us for any reason, it could have an adverse effect on our revenues and results of operations.

Cost of revenues and gross profit. The cost of revenues consists primarily of the cost of silicon wafers purchased from our foundry supplier, costs associated with the assembly, packaging and production testing of our ICs, outside processing costs associated with the manufacture of our board and system products, royalties due to third parties, warranty costs, excess and obsolete inventory costs, depreciation and amortization, and costs of personnel associated with production management, quality assurance and services. In addition, after we purchase wafers from our foundries, we also face yield risk related to manufacturing these wafers into semiconductor devices. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested as a finished IC. If our manufacturing yields decrease, our cost per unit increases, which could have a significant adverse impact on our cost of revenues. We do not have long-term pricing agreements with foundry suppliers and contract manufacturers. Accordingly, our costs are subject to price fluctuations based on the overall cyclical demand for semiconductors.

We purchase our inventory pursuant to standard purchase orders. We estimate that lead times for delivery of our finished semiconductors from our foundry supplier and assembly, packaging and production testing subcontractor are approximately three to four months, lead times for delivery from our adapter card manufacturing subcontractor are approximately eight to ten weeks, lead times for delivery from our cable and transceiver manufacturing subcontractor are approximately ten to twelve weeks, and lead times for delivery from our switch systems manufacturing subcontractors are approximately twelve weeks. We build inventory based on forecasts of customer orders rather than the actual orders themselves.

We expect our cost of revenues as a percentage of sales to increase in the future as a result of a reduction in the average sales price of our products and a lower percentage of revenue deriving from sales of ICs and boards, which generally yield higher gross margins than sales of switches and cables. This trend will depend on overall customer demand for our products, our product mix, competitive product offerings and related pricing and our ability to reduce manufacturing costs.

Operational expenses

Research and development expenses. Our research and development expenses consist primarily of salaries, share-based compensation and associated costs for employees engaged in research and development, depreciation, amortization of intangibles, allocable facilities related and administrative expenses and tape-out costs. Tape-out costs are expenses related to the manufacture of new ICs, including charges for mask sets, prototype wafers, mask set revisions and testing incurred before releasing new ICs into production.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, incentive compensation, share-based compensation and associated costs for employees engaged in sales, marketing and customer support, advertising, trade shows and promotions, travel, amortization of intangibles, and allocable facilities related and administrative expenses.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries, share-based compensation and associated costs for employees engaged in finance, legal, human resources and administrative activities, professional service expenses for accounting, corporate legal fees and allocable facilities related and administrative expenses.

Taxes on Income

Our operations in Israel have been granted "Approved Enterprise" status by the Investment Center of the Israeli Ministry of Economy and Industry and "Beneficiary Enterprise" status by the Israeli Income Tax Authority, which makes us eligible for tax benefits under the Encouragement Law. Under the terms of the Beneficiary Enterprise program, income that is attributable to our operations in Yokneam, Israel is exempt from income tax commencing fiscal year 2011 through 2021. Income that is attributable to our operations in Tel Aviv, Israel is subject to a reduced income tax rate (generally between 10.0% and the current corporate tax rate, depending on the percentage of foreign investment in the Company) commencing fiscal year 2013 through 2021.

in Israel will comply with the terms of the Preferred Technological Enterprise regime. Therefore, we may utilize the tax benefits under this regime after the end of the benefit period of its Approved and Beneficiary Enterprise statuses (i.e., from fiscal year 2022 onwards). Under the new legislation, the majority of our income from our operations in Yokneam, Israel, will be subject to a corporate rate of 7.5%, while the majority of the income from its operations in Tel-Aviv, Israel, will be subject to a corporate rate of 12.0%.

To prepare our unaudited condensed consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheet.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, allowances for doubtful accounts, investment valuation, warranty reserves, inventory reserves, long-term asset valuations, useful lives of property, equipment, and intangibles, accounting for business combinations, goodwill and purchased intangible asset valuation, investments in privately-held companies, accounting and fair value of financial instruments and derivatives, deferred income tax asset valuation, uncertain tax positions, and litigation and other loss contingencies have the greatest potential impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

See our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019, for a discussion of critical accounting policies and estimates. There have been no changes in our critical accounting policies as compared to what was disclosed in the Form 10-K for the year ended December 31, 2018.

Results of Operations

The following table sets forth our condensed consolidated statements of operations as a percentage of revenues for the periods indicated:



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019		2018			2019		2018
Total revenues	100.0	%	100.0		%	100.0	%	100.0		%
Cost of revenues	35.5		38.6			35.4		37.1
Gross profit	64.5		61.4			64.6		62.9
Operating expenses:
Research and development	32.0		32.5			31.2		33.4
Sales and marketing	12.7		13.3			12.9		14.5
General and administrative	6.2		8.8			6.2		7.7
Restructuring and impairment charges	—		0.6			0.2		1.8
Total operating expenses	50.9		55.2			50.5		57.4
Income from operations	13.6		6.2			14.1		5.5
Interest and other, net	0.8		(0.1	)		1.7		(0.2	)
Income before taxes on income	14.4		6.1			15.8		5.3
Provision for (benefit from) taxes on income	2.0		(0.1	)		1.7		(5.1	)
Net income	12.4	%	6.2		%	14.1	%	10.4		%

Comparison of the Three Months Ended June 30, 2019 to the Three Months Ended June 30, 2018

The following tables represent our total revenues for the three months ended June 30, 2019 and 2018 by product type and interconnect protocol:



	Three Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
ICs	$	53,046	17.1	%	$	28,934	10.8	%
Boards	120,643		38.9	%	136,708		50.9	%
Switch systems	73,808		23.8	%	57,074		21.3	%
Cables, accessories and other	62,827		20.2	%	45,746		17.0	%
Total Revenues	$	310,324	100.0	%	$	268,462	100.0	%



	Three Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
InfiniBand:
HDR	$	28,620	9.2	%	$	—	—	%
EDR	66,643		21.5	%	59,319		22.1	%
FDR	28,972		9.3	%	35,649		13.3	%
QDR/DDR/SDR	8,646		2.8	%	7,143		2.6	%
Total	132,881		42.8	%	102,111		38.0	%
Ethernet	169,131		54.5	%	157,470		58.7	%
Other	8,312		2.7	%	8,881		3.3	%
Total revenues	$	310,324	100.0	%	$	268,462	100.0	%

Revenues. Revenues were $310.3 million for the three months ended June 30, 2019, compared to $268.5 million for the three months ended June 30, 2018, representing an increase of $41.8 million, or approximately 15.6%. Infiniband product sales increased by $30.8 million, which was mainly due to the introduction of our 200 gigabit HDR InfiniBand solutions and the transition from FDR products to the EDR product generation. Ethernet product sales increased by $11.7 million primarily due to the increased adoption of our 25 gigabit per second and above solutions. The revenues for the three months ended June 30, 2019 are not necessarily indicative of future results.

Gross Profit and Margin. Gross profit was $200.3 million for the three months ended June 30, 2019, compared to $164.8 million for the three months ended June 30, 2018, representing an increase of $35.5 million, or approximately 21.5%. Gross margin was 64.5% in the three months ended June 30, 2019, compared to the gross margin of 61.4% in the three months ended June 30, 2018. The lower gross margin in the three months ended June 30, 2018 was primarily due to a $9.3 million settlement of a contingent royalty obligation recorded during the second quarter of 2018. Gross margin for the three months ended June 30, 2019 is not necessarily indicative of future results.

Research and Development.

The following table presents details of our research and development expenses for the periods indicated:



	Three Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
Salaries and benefits	$	56,005	18.0	%	$	51,649	19.2	%
Share-based compensation	14,486		4.7	%	8,340		3.1	%
Development and tape-out costs	7,582		2.4	%	7,303		2.8	%
Other	21,256		6.9	%	19,860		7.4	%
Total Research and development	$	99,329	32.0	%	$	87,152	32.5	%

Research and development expenses were $99.3 million for the three months ended June 30, 2019, compared to $87.2 million for the three months ended June 30, 2018, representing an increase of $12.1 million, or approximately 14.0%. The increase in salaries and benefits was primarily attributable to merit-based salary increases and higher bonus expenses. The increase in other expense was primarily attributable to higher outsourcing of research and development activities during the three months ended June 30, 2019.

Please refer to "Share-based Compensation Expense" below for a discussion of its impact on research and development expenses.

Sales and Marketing.

The following table presents details of our sales and marketing expenses for the periods indicated:



	Three Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
Salaries and benefits	$	23,933	7.7	%	$	22,448	8.4	%
Share-based compensation	6,504		2.1	%	3,646		1.4	%
Trade shows and promotions	3,848		1.2	%	3,894		1.5	%
Other	5,017		1.7	%	5,685		2.0	%
Total Sales and marketing	$	39,302	12.7	%	$	35,673	13.3	%

Sales and marketing expenses were $39.3 million for the three months ended June 30, 2019, compared to $35.7 million for the three months ended June 30, 2018, representing an increase of $3.6 million, or approximately 10.2%. The increase in salaries and benefits was primarily attributable to merit-based salary increases.

Please refer to "Share-based Compensation Expense" below for a discussion of its impact on sales and marketing expenses.

General and Administrative.

The following table presents details of our general and administrative expenses for the periods indicated:



	Three Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
Salaries and benefits	$	6,362	2.1	%	$	5,763	2.1	%
Share-based compensation	5,130		1.7	%	2,515		0.9	%
Professional services	5,844		1.9	%	13,613		5.1	%
Other	1,863		0.5	%	1,744		0.7	%
Total General and administrative	$	19,199	6.2	%	$	23,635	8.8	%

General and administrative expenses were $19.2 million for the three months ended June 30, 2019, compared to $23.6 million for the three months ended June 30, 2018, representing a decrease of $4.4 million, or approximately 18.8%. The decrease in professional services was primarily due to $3.3 million of expenses related to the pending acquisition of Mellanox by NVIDIA recorded during the three months ended June 30, 2019, compared to $10.1 million of expenses related to the proxy contest during the three months ended June 30, 2018. The increase in salaries and benefits was primarily attributable to merit-based salary increases and higher bonus expenses.

Please refer to "Share-based Compensation Expense" below for a discussion of its impact on general and administrative expenses.

Share-based Compensation Expense.

The following table presents details of our share-based compensation expense that is included in each functional line item in our condensed consolidated statements of operations:



	Three Months Ended June 30,
	2019		2018
	(in thousands)
Cost of goods sold	$	829	$	415
Research and development	14,486		8,340
Sales and marketing	6,504		3,646
General and administrative	5,130		2,515
	$	26,949	$	14,916

Share-based compensation expense was $26.9 million for the three months ended June 30, 2019, compared to $14.9 million for the three months ended June 30, 2018, representing an increase of $12.0 million, or approximately 80.5%. The increase was mainly due to additional expenses related to focal grants during the third quarter of 2018 (which were deferred from the first quarter to the third quarter due to the timing of the Annual General Meeting) and the first quarter of 2019, as well as the increase in the value of our stock.

Restructuring and impairment charges for the three months ended June 30, 2019 primarily consisted of $0.3 million of facility charges related to the discontinuation of our 1550nm silicon photonics development activities. Restructuring and impairment charges for the three months ended June 30, 2018 primarily consisted of employee termination and severance costs of $0.1 million, contract exit costs with vendors of $0.2 million, and loss on disposal of assets of $1.4 million primarily related to the discontinuation of our 1550nm silicon photonics development activities.

Interest and other, net in the three months ended June 30, 2019 represented income of $2.3 million as compared to an expense of $0.3 million for the three months ended June 30, 2018. The change was primarily attributable to additional income of $2.8 million related to interest income and gains on short-term investments.

Provision for (benefit from) taxes on income. Our provision for taxes on income was $6.0 million for the three months ended June 30, 2019 as compared to a benefit from taxes on income of $0.3 million for the three months ended June 30, 2018.

Our effective tax rate was 13.6% and (1.9)% for three months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019, the difference between the 13.6% effective tax rate and the 21.0% federal statutory rate resulted primarily from the excess benefits related to share-based compensation, the tax holiday in Israel and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by the accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions and non-tax-deductible expenses such as share-based compensation.

We assess our ability to recover our deferred tax assets on an ongoing basis. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating our ability to recover deferred tax assets, we consider available positive and negative evidence including recent cumulative losses, our ability to carry-back losses against prior taxable income and our projected financial results. We also consider, commensurate with objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. A valuation allowance may be recorded in the event it is deemed to be more-likely-than-not that the deferred tax asset cannot be realized. Previously established valuation allowances may also be released in the event it is deemed to be more-likely-than-not that the deferred tax asset can be realized. Any release of valuation allowance will be recorded as a tax benefit which will positively impact our operating results.

Comparison of the Six Months Ended June 30, 2019 to the Six Months Ended June 30, 2018

The following tables represent our total revenues for the six months ended June 30, 2019 and 2018 by product type and interconnect protocol:



	Six Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
ICs	$	113,669	18.5	%	$	57,521	11.1	%
Boards	229,073		37.2	%	254,759		49.0	%
Switch systems	155,866		25.3	%	112,721		21.7	%
Cables, accessories and other	116,933		19.0	%	94,461		18.2	%
Total Revenues	$	615,541	100.0	%	$	519,462	100.0	%



	Six Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
InfiniBand:
HDR	$	51,813	8.4	%	$	—	—	%
EDR	126,286		20.5	%	115,265		22.2	%
FDR	69,570		11.3	%	77,397		14.9	%
QDR/DDR/SDR	23,350		3.8	%	12,587		2.4	%
Total	271,019		44.0	%	205,249		39.5	%
Ethernet	330,024		53.6	%	294,418		56.7	%
Other	14,498		2.4	%	19,795		3.8	%
Total revenues	$	615,541	100.0	%	$	519,462	100.0	%

Revenues. Revenues were $615.5 million for the six months ended June 30, 2019, compared to $519.5 million for the six months ended June 30, 2018, representing an increase of $96.0 million, or approximately 18.5%. Infiniband product sales increased by $65.8 million, which was mainly due to the introduction of our 200 gigabit HDR InfiniBand solutions and increased EDR and QDR/DDR/SDR revenues. Ethernet product sales increased by $35.6 million due to the increased adoption of our 25 gigabit per second and above solutions. The revenues for the six months ended June 30, 2019 are not necessarily indicative of future results.

Gross Profit and Margin. Gross profit was $397.4 million for the six months ended June 30, 2019, compared to $326.8 million for the six months ended June 30, 2018, representing an increase of $70.6 million, or approximately 21.6%. Gross margin was 64.6% in the six months ended June 30, 2019, compared to the gross margin of 62.9% in the six months ended June 30, 2018. The lower gross margin in the six months ended June 30, 2018 was primarily due to a $9.3 million settlement of a contingent royalty obligation recorded during the second quarter of 2018. Gross margin for the six months ended June 30, 2019 is not necessarily indicative of future results.

Research and Development.

The following table presents details of our research and development expenses for the periods indicated:



	Six Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
Salaries and benefits	$	109,195	17.8	%	$	104,186	20.2	%
Share-based compensation	27,727		4.5	%	16,514		3.2	%
Development and tape-out costs	11,563		1.9	%	11,983		2.3	%
Other	43,049		7.0	%	40,895		7.7	%
Total Research and development	$	191,534	31.2	%	$	173,578	33.4	%

Research and development expenses were $191.5 million for the six months ended June 30, 2019, compared to $173.6 million for the six months ended June 30, 2018, representing an increase of $17.9 million, or approximately 10.3%. The increase in salaries and benefits was primarily attributable to merit-based salary increases and higher bonus expenses. The increase in other expense was primarily attributable to higher outsourcing of research and development activities during the six months ended June 30, 2019.

Please refer to "Share-based Compensation Expense" below for a discussion of its impact on research and development expenses.

Sales and Marketing.

The following table presents details of our sales and marketing expenses for the periods indicated:



	Six Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
Salaries and benefits	$	48,736	7.9	%	$	47,460	9.0	%
Share-based compensation	12,156		2.0	%	7,245		1.4	%
Trade shows and promotions	8,126		1.3	%	8,519		1.6	%
Other	10,381		1.7	%	11,943		2.5	%
Total Sales and marketing	$	79,399	12.9	%	$	75,167	14.5	%

Sales and marketing expenses were $79.4 million for the six months ended June 30, 2019, compared to $75.2 million for the six months ended June 30, 2018, representing an increase of $4.2 million, or approximately 5.6%. The increase in salaries and benefits was primarily attributable to merit-based salary increases.

Please refer to "Share-based Compensation Expense" below for a discussion of its impact on sales and marketing expenses.

General and Administrative.

The following table presents details of our general and administrative expenses for the periods indicated:



	Six Months Ended June 30,
	2019		% of Revenues		2018		% of Revenues
	(dollars in thousands)
Salaries and benefits	$	12,303	2.0	%	$	11,643	2.2	%
Share-based compensation	9,795		1.6	%	5,305		1.0	%
Professional services	12,736		2.1	%	19,453		3.7	%
Other	3,636		0.5	%	3,750		0.8	%
Total General and administrative	$	38,470	6.2	%	$	40,151	7.7	%

General and administrative expenses were $38.5 million for the six months ended June 30, 2019, compared to $40.2 million for the six months ended June 30, 2018, representing a decrease of $1.7 million, or approximately 4.2%. The decrease in professional services was primarily due to $7.8 million of expenses related to the pending acquisition of Mellanox by NVIDIA recorded during the six months ended June 30, 2019, compared to $13.5 million of expenses related to the proxy contest during the six months ended June 30, 2018.

Please refer to "Share-based Compensation Expense" below for a discussion of its impact on general and administrative expenses.

Share-based Compensation Expense.

The following table presents details of our share-based compensation expense that is included in each functional line item in our condensed consolidated statements of operations:



	Six Months Ended June 30,
	2019		2018
	(in thousands)
Cost of goods sold	$	1,513	$	826
Research and development	27,727		16,514
Sales and marketing	12,156		7,245
General and administrative	9,795		5,305
	$	51,191	$	29,890

Share-based compensation expense was $51.2 million for the six months ended June 30, 2019, compared to $29.9 million for the six months ended June 30, 2018, representing an increase of $21.3 million, or approximately 71.3%. The increase was mainly due to additional expenses related to focal grants during the third quarter of 2018 (which were deferred from the first quarter to the third quarter due to the timing of the Annual General Meeting) and the first quarter of 2019, as well as the increase in the value of our stock.

Restructuring and impairment charges for the six months ended June 30, 2019 primarily consisted of an $0.9 million impairment charge related to fixed assets and $0.3 million of facility charges related to the discontinuation of our 1550nm silicon photonics development activities. Restructuring and impairment charges for the six months ended March 31, 2018 primarily consisted of employee termination and severance costs of $3.5 million, contract exit costs with vendors of $3.4 million, and loss on disposal of assets of $2.4 million primarily related to the discontinuation of our 1550nm silicon photonics development activities.

Interest and other, net in the six months ended June 30, 2019 represented income of $10.5 million as compared to an expense of $0.9 million for the six months ended June 30, 2018. The change was primarily attributable to a gain of $9.1 million related to the sale of an investment in a privately-held company, $4.9 million of additional interest income and gains on short-term investments and a $2.0 million decrease in interest expense, partially offset by $3.5 million of additional foreign exchange losses.

Provision for (benefit from) taxes on income. Our provision for taxes on income was $10.3 million for the six months ended June 30, 2019 as compared to a benefit from taxes on income of $26.7 million for the six months ended June 30, 2018.

Our effective tax rate was 10.6% and (96.5)% for six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019, the difference between the 10.6% effective tax rate and the 21.0% federal statutory rate resulted primarily from the excess benefits related to share-based compensation, the tax holiday in Israel and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by the accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions and non-tax-deductible expenses such as share-based compensation. For the six months ended June 30, 2018, the difference between the (96.5)% effective tax rate and the 21.0% federal statutory rate resulted primarily from the release of a valuation allowance of $26.3 million against the deferred tax assets related to our U.S. subsidiaries, the excess benefits of share-based compensation, the tax holiday in Israel and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by the accrual of unrecognized tax positions, interest and penalties associated with unrecognized tax positions, non-tax-deductible expenses such as share-based compensation expense, and losses generated from subsidiaries without tax benefits.

Liquidity and Capital Resources

Historically, we have financed our operations through a combination of sales of equity securities and cash generated by operating activities. As of June 30, 2019, our principal sources of liquidity consisted of cash and cash equivalents of $53.8 million and short-term investments of $556.8 million.

We are an Israeli company and as of June 30, 2019, our subsidiaries outside of Israel held approximately $39.1 million in cash, cash equivalents and short-term investments.

Our cash, cash equivalents, short-term investments and working capital balances at June 30, 2019 and December 31, 2018 were as follows:



	June 30, 2019		December 31, 2018
	(in thousands)
Cash and cash equivalents	$	53,782	$	56,766
Short-term investments	556,806		381,724
Total	$	610,588	$	438,490
Working capital	$	682,450	$	497,666

Our ratio of current assets to current liabilities was 3.9:1 and 3.3:1 at June 30, 2019 and December 31, 2018, respectively.

Operating Activities

Net cash provided by our operating activities amounted to $147.0 million in the six months ended June 30, 2019. The adjustments from net income of $87.0 million to net cash provided by operating activities mainly included net non-cash items of $101.5 million, partially offset by the gain on investments in a privately-held companies of $9.6 million and the gain on investments of $6.6 million. Non-cash items consisted primarily of $47.4 million of depreciation and amortization, $51.2 million of share-based compensation and impairment charges of $2.8 million. The $25.4 million cash outflow from changes in assets and liabilities was attributed to an increase in accounts receivable of $49.7 million primarily due to timing of invoicing and collections, partially offset by a decrease in inventory of $11.8 million primarily due to management's efforts to increase inventory turns, an increase of $6.5 million in accrued and other liabilities, a decrease in prepaid and other assets of $4.0 million, and an increase in accounts payable of $2.0 million primarily due to the timing of purchases and payments.

Net cash provided by our operating activities amounted to $102.1 million in the six months ended June 30, 2018. The adjustments from net income of $54.4 million to net cash provided by operating activities mainly included net non-cash items of $56.0 million, partially offset by changes in assets and liabilities of $6.5 million and a gain on investments of $1.8 million. Non-cash items consisted primarily of $52.7 million of depreciation and amortization, and $29.9 million of share-based compensation, partially offset by the increase in deferred tax assets of $28.1 million primarily due to the release of a valuation allowance. The $6.5 million cash outflow from changes in assets and liabilities was attributed to an increase in inventory of $30.6 million primarily due to higher demand and an increase in accounts receivable of $1.5 million primarily due to timing of invoicing and collections, partially offset by an increase in accounts payable of $12.5 million primarily due to an increase in inventory related purchases and timing of payments and an increase of $12.3 million in accrued liabilities and other liabilities primarily due to accruals related to the proxy contest.

Investing Activities

Net cash used in investing activities was $172.0 million in the six months ended June 30, 2019. Cash used in investing activities was primarily attributable to the net purchases of short-term investments of $166.6 million, $15.2 million for purchases of property and equipment, $4.2 million for purchases of investments in privately-held companies, and $2.9 million for purchases of intangible assets, partially offset by the proceeds from the sale of an investment in a privately-held company of $16.9 million.

Net cash used in investing activities was $43.2 million in the six months ended June 30, 2018. Cash used in investing activities was primarily attributable to $20.1 million for purchases of property and equipment, $7.1 million for acquisitions, $6.4 million for purchases of intangible assets, net purchases of short-term investments of $6.2 million, and $6.0 million for purchases of investments in private companies, partially offset by the proceeds from sales of property and equipment of $3.2 million.

Financing Activities

Net cash provided by financing activities was $14.1 million in the six months ended June 30, 2019. Cash provided by financing activities was primarily due to $18.1 million of proceeds from share issuances through employee stock plans, partially offset by $4.0 million of payments on intangible asset financings.

Net cash used in financing activities was $58.1 million in the six months ended June 30, 2018. Cash used in financing activities was primarily due to $74.0 million of principal payments on the Term Debt and $3.4 million of payments on intangible asset financings. These were partially offset by $19.3 million of proceeds from issuances of ordinary shares through our employee equity incentive plans.

Contractual Obligations

See Note 9, "Commitments and Contingencies" in the notes to the unaudited condensed consolidated financial statements for more details about our contractual obligations at June 30, 2019 and the effect those obligations are expected to have on our liquidity and cash flows in future periods.

Purchase commitments. Purchase commitments are defined as agreements that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase orders for inventory are based on our current manufacturing needs and are generally fulfilled by our subcontractors within a period of eight to twelve weeks. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Leases. We adopted the new lease standard on January 1, 2019. As a result, the contractual obligations related to future lease payments are reflected on the balance sheet as lease liabilities as of June 30, 2019. See Note 14, "Leases" in the notes to the unaudited condensed consolidated financial statements for more details about the maturity of lease liabilities, and significant future obligations related to one of our building leases that has not yet commenced and therefore was not included in the lease liabilities as of June 30, 2019.

Other Commitments

For additional information about other commitments, see Note 9, "Commitments and Contingencies" in the notes to the unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements

See Note 1, "The Company and Summary of Significant Accounting Policies—Recent accounting pronouncements" in the notes to the unaudited condensed consolidated financial statements for a full description of recent accounting standards, including the respective dates of adoption and effects on our condensed consolidated financial position, results of operations and cash flows.

Off-Balance Sheet Arrangements

As of June 30, 2019, we did not have any off-balance sheet arrangements.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate fluctuation risk

Investments. Our investments consist of cash, money market funds, certificates of deposits and interest bearing investments in government and corporate debt securities with an average maturity of 10.1 months. The primary objective of our investment activities is to preserve principal and ensure liquidity while maximizing income without significantly increasing risk. By policy, we limit the amount of our credit exposure through diversification and restricting our investments to highly rated securities. At the time of purchase, we do not invest more than 4% of the total investment portfolio in individual securities, except U.S. Treasury or agency securities. Highly rated long-term securities are defined as having a minimum Moody's, Standard & Poor's or Fitch rating of A2 or A, respectively. Highly rated short-term securities are defined as having a minimum Moody's, Standard & Poor's or Fitch rating of P-1, A-1 or F-1, respectively. We have not experienced any significant losses on our cash equivalents or short-term investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. An immediate 100 basis point change in interest rates would have a $3.7 million effect on the fair market value of our portfolio.

Foreign currency exchange risk

To reduce the impact of foreign exchange risks associated with forecasted future cash flows and certain existing assets and liabilities, we have established a balance sheet and anticipated transaction risk management program in order to reduce the volatility in our condensed consolidated statement of operations. Currency derivative instruments and natural hedges are generally utilized in this hedging program. We do not enter into derivative instruments for trading or speculative purposes. We account for our derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

Our hedging program reduces, but does not eliminate the impact of currency exchange rate movements (see Part II, Item 1A, "Risk Factors"). If we were to experience an immediate strengthening of NIS against USD of 10%, the impact on assets and liabilities denominated in NIS, after taking into account hedges and offsetting positions, would result in a loss before taxes of approximately $10.6 million at June 30, 2019. There would also be an impact on future operating expenses denominated in currencies other than the U.S. dollar. For the month ended June 30, 2019, approximately $21.6 million of our monthly expenses were denominated in NIS. As of June 30, 2019, we had derivative contracts designated as cash flow hedges in the notional amount of approximately 200.4 million NIS, or approximately $56.2 million based upon the exchange rate on that day.

Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. However, failure of one or more of these financial institutions is possible and could result in incurred losses.

Inflation related risk

We believe that the rate of inflation in Israel has not had a material impact on our business to date. Our cost in Israel in U.S. dollar terms will increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

ITEM 4—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO (principal executive officer) and CFO (principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2019 to provide the reasonable assurance described above.

Changes in Internal Control Over Financial Reporting

There were no changes during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

On May 1, 2019, a purported class action suit, entitled Marc Henzel v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California against us and the members of our board of directors. On May 2, 2019, a purported class action suit, entitled Michael Kent v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Southern District of New York. Also on May 2, 2019, a purported class action suit, entitled David Thornton v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California. On May 3, 2019, a purported class action suit, entitled Lewis Stein v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California against us, the members of our board of directors, NVIDIA International Holdings Inc., Teal Barvaz Ltd., and NVIDIA Corporation. Also on May 3, 2019, a lawsuit entitled Elaine Wang v. Mellanox Technologies, Ltd., et al., was filed in the United States District Court for the Northern District of California against us and the members of our board of directors. All five suits alleged that the preliminary proxy statement filed by us on April 22, 2019 with the SEC in connection with the proposed Merger omits material information with respect to the transactions contemplated by the Merger Agreement, rendering it false and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. Each plaintiff sought, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. None of the plaintiffs moved for injunctive relief before the shareholder vote, which occurred on June 20, 2019. On June 25, 2019, the plaintiffs of the class action suit entitled Michael Kent v. Mellanox Technologies, Ltd., et al. filed a voluntary dismissal in the United States District Court for the Southern District of New York.

We believe that the claims asserted in these lawsuits are without merit and intend to defend vigorously against all claims asserted. We are currently unable to estimate the reasonably possible loss or range of loss related to these lawsuits. Additional lawsuits arising out of or relating to the Merger Agreement and the transactions contemplated thereby may be filed in the future.

See Note 9, "Commitments and Contingencies—Contingencies—Legal Proceedings" in the notes to the unaudited condensed consolidated financial statements, included in Part I, Item 1 of this report, for a description of other legal proceedings and related contingencies and their effects on our condensed consolidated financial position, results of operations and cash flows.

We may, from time to time, become a party to various other legal proceedings arising in the ordinary course of business. We may also be indirectly affected by administrative or court proceedings or actions in which we are not involved, but which have general applicability to the semiconductor industry.

ITEM 1A—RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, in addition to the other information set forth in this report, before purchasing our ordinary shares. Each of these risk factors could harm our business, financial condition and results of operations, as well as decrease the value of an investment in our ordinary shares.

Risks Related to Our Business

The announcement and pendency of our agreement to be acquired by a wholly-owned subsidiary of NVIDIA may adversely affect our business, results of operations and share price.

Our pending acquisition by NVIDIA International Holdings Inc., a wholly-owned subsidiary of NVIDIA, could have an adverse effect on our revenue in the near term if our customers delay, defer or cancel purchases pending completion of the Merger. While we are attempting to address this risk through communications with our customers, current and prospective customers may be reluctant to purchase our products due to uncertainty about the direction of our product offerings and the support and service of our products after the Merger is consummated. Additionally, we are subject to additional risks in connection with the announcement and pendency of the Merger, including:


•	various conditions to the closing of the Merger may not be satisfied or waived;


•	the pendency and outcome of any legal proceedings that may be instituted against us, our directors and others relating to the transactions contemplated by the Merger Agreement;


•	potential adverse effects on our business and operations under the Merger Agreement, which may prevent us from pursuing opportunities without NVIDIA’s approval or taking other actions, whether in the form of dividend payments,

share repurchases, restructurings, asset dispositions or otherwise, that we might have undertaken in the absence of this transaction;


•	that the Merger Agreement contains customary provisions that may limit our ability to pursue alternative sale proposals;


•	that we may forego opportunities we might otherwise have pursued absent the Merger Agreement;


•	the required regulatory approvals from governmental entities may delay the Merger or result in the imposition of conditions that could cause NVIDIA to abandon the Merger;


•	potential adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Merger; and


•	the significant diversion of our employees’ and management’s attention resulting from the transactions contemplated by the Merger Agreement.

The failure of our pending acquisition by a wholly-owned subsidiary of NVIDIA to be completed may adversely affect our business, results of operations and share price.

Each of our and NVIDIA’s obligations to consummate the Merger is subject to a number of conditions specified in the Merger Agreement, including the following: (a) approval of the Merger Agreement by the requisite affirmative vote of our shareholders, which was received at our extraordinary general meeting of shareholders held on June 20, 2019, (b) no governmental authority in any jurisdiction has by any law or order restrained, enjoined or otherwise prohibited the consummation of the Merger that remains in effect, (c) expiration or termination of the applicable Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), waiting period, clearance or approval, as applicable, by the Anti-Monopoly Bureau of the State Administration for Market Regulation ("SAMR") in the People’s Republic of China, and clearance or affirmative approval by or expiration of the mandatory waiting period with respect to certain specified antitrust jurisdictions, (d) at least fifty (50) days shall have elapsed after the filing of the merger proposal with the Companies Registrar of the Israeli Corporations Authority and at least thirty (30) days shall have elapsed after the approval of the Merger by our shareholders has been received, (e) with specified qualifications and exceptions, the truth and correctness of the representations and warranties of Mellanox, NVIDIA International Holdings Inc., Teal Barvaz Ltd. and NVIDIA and compliance in all material respects by Mellanox, NVIDIA International Holdings Inc. and Teal Barvaz Ltd. with their respective covenants contained in the Merger Agreement, and (f) the absence of a material adverse effect on Mellanox’s business, except any effects that, individually or in the aggregate, would prevent or materially impair Mellanox from consummating the Merger or performing any of its material obligations under the Merger Agreement. There can be no assurance that these conditions to the completion of the Merger will be satisfied in a timely manner or at all.

If the Merger is not completed, our share price could fall to the extent that our current share price reflects an assumption that the Merger will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business, results of operations and share price, including the following:


•	we could be required to pay a termination fee of up to $225.0 million to NVIDIA under certain circumstances as described in the Merger Agreement;


•	we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated;


•	the failure of the Merger to be consummated may result in adverse publicity and a negative impression of us in the investment community;


•	the pendency and outcome of any legal proceedings may be instituted against us, our directors and others relating to the transactions contemplated by the Merger Agreement;


•	any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, vendors and employees, may continue or intensify in the event the Merger is not consummated;


•	we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and


•	we may experience employee departures.

Any delay in completing the Merger may significantly reduce the benefits expected to be obtained from the Merger.

In addition to the required regulatory clearances and approvals described above under "The failure of our pending acquisition by a wholly-owned subsidiary of NVIDIA to be completed may adversely affect our business, results of operations and share price," the Merger is subject to a number of other conditions described in the Merger Agreement that are beyond our control. We cannot predict whether and when these conditions, and the other required regulatory clearances and approvals, will be satisfied.

The semiconductor industry may be adversely impacted by worldwide economic uncertainties which may cause our revenues and profitability to decline.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From time to time, the semiconductor industry has experienced significant downturns characterized by decreases in product demand and excess customer inventories. Economic volatility can cause extreme difficulties for our customers and vendors to accurately forecast and plan future business activities. This unpredictability could cause our customers to reduce spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers and vendors may face issues gaining timely access to sufficient credit, which could affect their ability to make timely payments to us. As a result, we may experience growth patterns that are different than the end demand for products, particularly during periods of high volatility.

We cannot predict the timing, strength or duration of any economic slowdown or recovery or the impact of such events on our customers, our vendors or us. The combination of our lengthy sales cycle coupled with challenging macroeconomic conditions could have a compound impact on our business. The impact of market volatility is not limited to revenue but may also affect our product gross margins and other financial metrics. Any downturn in the semiconductor industry may be severe and prolonged, and any failure of the industry to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations.

The adoption of InfiniBand is largely dependent on third-party vendors and end users and InfiniBand may not be adopted at prior rates or to the extent that we anticipate.

While the usage of InfiniBand has increased since its first specifications were completed in October 2000, continued adoption of InfiniBand is dependent on continued collaboration and cooperation among IT vendors. In addition, the end users that purchase IT products and services from vendors must find InfiniBand to be a compelling solution to their IT system requirements. We cannot control third-party participation in the development of InfiniBand as an industry standard technology. We rely on server, storage, communications infrastructure equipment and embedded systems vendors to incorporate and deploy InfiniBand ICs in their systems. InfiniBand may fail to effectively compete with other technologies, which may be adopted by vendors and their customers in place of InfiniBand. The adoption of InfiniBand is also affected by the general replacement cycle of IT equipment by end users, which is dependent on factors unrelated to InfiniBand. These factors may reduce the rate at which InfiniBand is incorporated by our current server vendor customers and impede its adoption in the storage, communications infrastructure and embedded systems markets, which in turn would harm our ability to sell our InfiniBand products.

We face intense competition and may not be able to compete effectively, which could reduce our market share, net revenues and profit margin.

The markets in which we operate are extremely competitive and are characterized by rapid technological change, continuously evolving customer requirements and fluctuating average selling prices. We may not be able to compete successfully against current or potential competitors.

Some of our customers are also IC and switch suppliers and already have in-house expertise and internal development capabilities similar to ours. Licensing our technology and supporting such customers entails the transfer of intellectual property rights that may enable such customers to develop their own products and solutions to replace those we are currently providing to them. Consequently, these customers may become competitors to us. Further, each new design by a customer presents a competitive situation. In the past, we have lost design wins to divisions within our customers and this may occur again in the future. We cannot predict whether these customers will continue to compete with us, whether they will continue to be our customers or whether they will continue to buy products from us at the same volumes. Competition could increase pressure on us to lower our prices and could negatively affect our profit margins.

Many of our current and potential competitors have longer operating histories, significantly greater resources, greater economies of scale, stronger name recognition and larger customer bases than we have. This may allow them to respond more quickly to new or emerging technologies or changes in customer requirements. In addition, these competitors may have greater

credibility with our existing and potential customers. If we do not compete successfully, our market share, revenues and profit margin may decline, and, as a result, our business may be adversely affected.

There has been a trend toward industry consolidation in our markets for several years, as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, financial condition and results of operations.

We have limited visibility into customer and end-user demand for our products and generally have short inventory cycles, which introduce uncertainty into our revenue and production forecasts and business planning and could negatively impact our financial results.

Our sales are made on the basis of purchase orders rather than long-term purchase commitments. In addition, our customers may defer purchase orders. We place orders with the manufacturers of our products according to our estimates of customer demand. This process requires us to make multiple demand forecast assumptions with respect to both our customers' and end users' demands. It is more difficult for us to accurately forecast end-user demand because we do not sell our products directly to end users. In addition, the majority of our adapter card, switch system and cable businesses are conducted on a short order fulfillment basis, introducing more uncertainty into our forecasts. Because of the lead time associated with fabrication of our semiconductors, forecasts of demand for our products must be made in advance of customer orders. In addition, we base business decisions regarding our growth on our forecasts for customer demand. As we grow, anticipating customer demand may become increasingly difficult. If we overestimate customer demand, we may purchase products from our manufacturers that we may not be able to sell and may over-burden our operations. Conversely, if we underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities and could lose market share or damage our customer relationships.

In addition, the majority of our revenues are derived from customer orders received and fulfilled in the same quarterly period. If we overestimate customer demand, we could miss our quarterly revenue targets, which could have a material adverse effect on our financial results.

We depend on a small number of customers for a significant portion of our sales, and the loss of any one of these customers will adversely affect our revenues.

A small number of customers account for a significant portion of our revenues. For the three months ended June 30, 2019, sales to HPE accounted for 13.5% of our total revenues. For the three months ended June 30, 2018, sales to Dell and HPE accounted for 14.0% and 13.0% of our total revenues, respectively. Sales to our top 10 customers represented 52.7% and 56.4% of our total revenues for the three months ended June 30, 2019 and 2018, respectively. Because the majority of servers, storage, communications infrastructure equipment and embedded systems are sold by a relatively small number of vendors, we expect that we will continue to depend on a small number of customers to account for a significant percentage of our revenues for the foreseeable future. Our customers, including our most significant customers, are not obligated by long-term contracts to purchase our products and may cancel orders with limited potential penalties. If any of our large customers reduces or cancels its purchases from us for any reason, it could have an adverse effect on our revenues and results of operations.

Winning business is subject to lengthy, competitive selection processes that often require us to incur significant expense, from which we may ultimately generate no revenues.

Our business is dependent on us winning competitive bid selection processes, known as "design wins," to develop semiconductors for use in our customers' products. These selection processes are typically lengthy and can require us to incur significant design and development expenditures and to dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring such expenditures.

Furthermore, winning a product design does not guarantee sales to a customer. We may experience delays in generating revenue as a result of the lengthy development cycle typically required, or we may not realize as much revenue as anticipated. In addition, a delay or cancellation of a customer's plans could materially and adversely affect our financial results, as we may have incurred significant expense in the design process and generated little or no revenue. Customers could choose at any time to stop using our products or may fail to successfully market and sell their products, which could reduce the demand for our products and cause us to hold excess inventory, thereby materially adversely affecting our business, financial condition and results of operations.

The timing of design wins is unpredictable and implementing production for a major design win, or multiple design wins occurring at or around the same time, may strain our resources and those of our contract manufacturers. In such instances, we may be forced to dedicate significant additional resources and incur additional, unanticipated costs and expenses, which may have a material adverse effect on our results of operations.

Finally, some customers will not purchase any products from us, other than limited numbers of evaluation units, until they qualify the products and/or the manufacturing line for the products. The qualification process can take significant time and resources and we may not always be able to satisfy the qualification requirements of these customers. Delays in qualification or failure to qualify our products may cause a customer to discontinue use of our products and result in a significant loss of revenue.

If we fail to develop new products or enhance our existing products to react to rapid technological change and market demands in a timely and cost-effective manner, our business will suffer.

We must develop new products or enhance our existing products with improved technologies to meet rapidly evolving customer requirements. We are currently engaged in the development process for our next generation of products in order to meet the demands of our customers who continually require higher performance and functionality at lower costs. The development process for these advancements is lengthy and will require us to accurately anticipate technological innovations and market trends. Developing and enhancing these products can be time-consuming, costly and complex. Our ability to fund product development and enhancements partially depends on our ability to generate revenues from our existing products.

We may be unable to successfully develop additional next generation products, new products or product enhancements. There is a risk that these developments or enhancements will be late, have technical problems, fail to meet customer or market specifications or otherwise be uncompetitive with other products using alternative technologies that offer comparable performance and functionality. Our next generation products or any new products or product enhancements may not be accepted in new or existing markets. Our business, financial condition and results of operations may be adversely affected if we fail to develop and introduce new products or product enhancements in a timely manner or on a cost-effective basis.

We rely on a limited number of subcontractors to manufacture, assemble, package and production test our products, and the failure of any of these third-party subcontractors to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our growth.

While we design and market our products and conduct test development in-house, we do not manufacture, assemble, package and production test the vast majority of our products, and we must rely on third-party subcontractors to perform these services. If these subcontractors do not provide us with high-quality products, services and production and production test capacity in a timely manner, or if one or more of these subcontractors terminates its relationship with us, we may be unable to obtain satisfactory replacements to fulfill customer orders on a timely basis, our relationships with our customers could suffer, our sales could decrease and our growth could be limited. In particular, there are significant challenges associated with moving our IC production from our existing manufacturer to another manufacturer with whom we do not have a pre-existing relationship.

In addition, the consolidation of foundry subcontractors, as well as the increasing capital intensity and complexity associated with fabrication in smaller process geometries has limited the diversity of our suppliers and increased our risk of a "single point of failure." Specifically, as we move to smaller geometries, we have become increasingly reliant on IC manufacturers. The lack of diversity of suppliers could also drive increased prices and adversely affect our results of operations, including our product gross margins.

We currently do not have long-term supply contracts with any of our third-party subcontractors. Therefore, they are not obligated to perform services or supply products to us for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. None of our third-party subcontractors has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products. Our subcontractors may allocate capacity to the production of other companies' products while reducing deliveries to us on short notice. Other customers that are larger and better financed than we are or that have long-term agreements with these subcontractors may cause these subcontractors to reallocate capacity to those customers, thereby decreasing the capacity available to us.

Other significant risks associated with relying on these third-party subcontractors include:


•	reduced control over product cost, delivery schedules and product quality;


•	potential price increases;


•	inability to achieve sufficient production, increase production or test capacity and achieve acceptable yields on a timely basis;


•	increased exposure to potential misappropriation of our intellectual property;


•	shortages of materials used to manufacture products;


•	capacity shortages;


•	labor shortages or labor strikes;


•	political instability in the regions where these subcontractors are located; and


•	natural disasters impacting these subcontractors.

The average selling prices of our products have decreased in the past and may do so in the future, which could harm our financial results.

The products we develop and sell are subject to declines in average selling prices. We have had to reduce our prices in the past and we may be required to reduce prices in the future. Reductions in our average selling prices to one customer could impact our average selling prices to other customers. If we are unable to reduce our associated manufacturing costs this reduction in average selling prices would cause our gross margin to decline. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs or developing new or enhanced products with higher selling prices or gross margins.

We expect gross margin to vary over time, and our recent level of product gross margin may not be sustainable.

Our product gross margins vary from quarter to quarter, and our recent level of gross margins may not be sustainable and may be adversely affected in the future by numerous factors, including product mix shifts, product transitions, increased price competition in one or more of the markets in which we compete, increases in material or labor costs, excess product component or obsolescence charges from our contract manufacturers, warranty related issues, or the introduction of new products or entry into new markets with different pricing and cost structures.

Fluctuations in our revenues and operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline.

Our quarterly and annual revenues and operating results are difficult to predict and have fluctuated in the past, and may fluctuate in the future, from quarter to quarter and year to year. It is possible that our operating results in some quarters and years will be below market expectations. This would likely cause the market price of our ordinary shares to decline. Our quarterly and annual operating results are affected by a number of factors, many of which are outside of our control, including:


•	unpredictable volume and timing of customer orders, which are not fixed by contract but vary on a purchase order basis;


•	the loss of one or more of our customers, or a significant reduction or postponement of orders from our customers;


•	our customers' sales outlooks, purchasing patterns and inventory levels based on end-user demands and general economic conditions;


•	seasonal buying trends;


•	the timing of new product announcements or introductions by us or by our competitors;


•	our ability to successfully develop, introduce and sell new or enhanced products in a timely manner;


•	changes in the relative sales mix of our products;


•	decreases in the overall average selling prices of our products;


•	changes in the cost of our finished goods; and


•	the availability, pricing and timeliness of delivery of other components used in our customers' products.

We base our planned operating expenses in part on our expectations of future revenues, and a significant portion of our expenses is relatively fixed in the short-term. We have limited visibility into customer demand from which to predict future sales of our products. As a result, it may be difficult for us to forecast our future revenues and budget our operating expenses accordingly. Our operating results would be adversely affected to the extent customer orders are cancelled or rescheduled. If revenues for a particular quarter are lower than we expect, we may not be able to proportionately reduce our operating expenses.

We rely on our ecosystem partners to enhance and drive demand for our product offerings. Our inability to continue to develop or maintain such relationships in the future or our partners' inability to timely deliver technology or product offerings to the market may harm our revenues and ability to remain competitive.

We have developed relationships with third parties, which we refer to as ecosystem partners. Such partners provide their technology products, operating systems, tool support, reference designs and other elements necessary for the sale of our products into our markets. In addition, introduction of new products into the market by these partners may increase demand for our products. If we are unable to continue to develop or maintain these relationships, or if our ecosystem partners delay or fail to timely deliver their technology or products or other elements to the market, our revenues may be adversely impacted and we might not be able to enhance our customers' ability to commercialize their products in a timely manner and our ability to remain competitive may be harmed.

We rely primarily upon trade secret, patent, trademark, design and copyright laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenues could suffer.

We seek to protect our proprietary manufacturing specifications, documentation and other written materials primarily under trade secret, patent, trademark, design and copyright laws. We also typically require employees and consultants with access to our proprietary information to execute confidentiality agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. In addition, our proprietary rights may not be adequately protected because:


•	people may not be deterred from misappropriating our technologies despite the existence of laws or contracts prohibiting it;


•	policing unauthorized use of our intellectual property may be difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use; and


•	the laws of other countries in which we market our products, such as some countries in the Asia/Pacific region, may offer little or no protection for our proprietary technologies.

Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so. Any inability to adequately protect our proprietary rights could harm our ability to compete, generate revenues and grow our business.

We may not obtain sufficient patent protection on the technology embodied in our products, which could harm our competitive position and increase our expenses.

Our success and ability to compete in the future may depend to a significant degree upon obtaining sufficient patent protection for our proprietary technology. Patents that we currently own do not cover all of the products that we presently sell as we have patent applications pending with respect to certain products, while we have not been able to obtain, or choose not to seek, patent protection for other products. Our patent applications may not result in issued patents, and even if they result in issued patents, the patents may not have claims of the scope we seek. Furthermore, any issued patents may be challenged, invalidated or declared unenforceable. Whether or not these patents are issued, the applications may become publicly available and the proprietary information disclosed in the applications will become available to others. The lives of acquired patents may also be of a shorter term depending upon their acquisition dates and the issue dates. The term of any issued patent in the United States and Israel is typically 20 years from its filing date, and if our applications are pending for a long time period, we may have a correspondingly shorter term for any patent that may be issued. Our present and future patents may provide only limited protection for our technology and may not be sufficient to provide competitive advantages to us. For example, competitors could be successful in challenging any issued patents or, alternatively, could develop similar or more advantageous technologies on their own or design around our patents. Also, patent protection in certain foreign countries may not be available or may be limited in scope and any patents obtained may not be as readily enforceable as in the United States and Israel, making it difficult for us to effectively protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to obtain and enforce our intellectual property rights in some countries may harm our business, financial condition and results of operations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later on turn out to be important. In such cases, our lack of intellectual property rights may have a material adverse impact on our business, financial condition and results of operations.

If we fail to carefully manage the use of "open source" software in our products, we may be required to license key portions of our products on a royalty-free basis or expose key parts of source code.

Some portion of our software may be derived from "open source" software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to create and distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event that we inadvertently use open source software without the correct license form or a copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.

Intellectual property litigation, which is common in our industry, could be costly, harm our reputation, limit our ability to sell our products and divert the attention of management and technical personnel.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, we receive notices from competitors and other third parties that claim we have infringed upon, misappropriated or misused other parties' proprietary rights. We may also be required to indemnify some customers and strategic partners under our agreements if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party's proprietary rights. We have received requests from certain customers and strategic partners to include increasingly broad indemnification provisions in our agreements with them. Additionally, our products may contain technology provided to us by other parties such as contractors, suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes upon the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages.

Questions of infringement in the markets we serve involve highly technical and subjective analysis. We are not involved in intellectual property litigation today, but litigation may be necessary in the future to enforce any patents we may receive and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any such future litigation. Litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert the efforts and attention of our management and technical personnel from normal business operations. In addition, adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, and require us to seek licenses from third parties or prevent us from licensing our technology or selling our products, any of which could seriously harm our business.

In the normal course of business, we enter into agreements with terms and conditions that require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates intellectual property rights, as well as against certain claims relating to property damage, personal injury or acts or omissions relating to supplied products or technologies, or acts or omissions made by us or our agents or representatives. In addition, we are obligated pursuant to indemnification undertakings with our officers and directors to indemnify them to the fullest extent permitted by law and to indemnify venture capital funds that were affiliated with or represented by such officers or directors. If we receive demands for indemnification under these agreements and terms and conditions, they will likely be very expensive to settle or defend, and we may incur substantial legal fees in connection with any indemnity demands. Our indemnification obligations under these agreements and terms and conditions may be unlimited in duration and amount, and could have an adverse effect on our business, financial condition and results of operations.

We depend on key and highly skilled personnel to operate our business, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed.

Our business is particularly dependent on the interdisciplinary expertise of our personnel, and we believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, finance and sales and marketing personnel. The loss of any key employees or the inability to attract or retain qualified personnel could delay the development and introduction of, and harm our ability to sell our products and harm the market's perception of us. Competition for qualified engineers in the markets in which we operate is intense and accordingly, we may not be able to retain or hire all of the engineers required to meet our ongoing and future business needs. If we are unable to attract and retain the highly skilled professionals we need, we may have to forego projects for lack of resources or be unable to staff projects optimally. We believe that our future success is highly dependent on the contributions of our president and CEO and other senior executives. We do

not have long-term employment contracts with our president and CEO or any other key personnel, and their knowledge of our business and industry would be extremely difficult to replace.

In an effort to retain key employees, we may modify our compensation policies by, for example, increasing cash compensation to certain employees and/or modifying existing share options. These modifications of our compensation policies and the requirement to expense the fair value of share options, restricted share units, and performance share units awarded to employees and officers may increase our operating expenses and result in the dilution of the holders of our ordinary shares. We cannot be certain that these and any other changes in our compensation policies will or would improve our ability to attract, retain and motivate employees. Our inability to attract and retain additional key employees and the increase in share-based compensation expense could each have an adverse effect on our business, financial condition and results of operations.

We may pursue acquisitions of other companies or new or complementary products, technologies and businesses, which could harm our operating results, may disrupt our business and could result in unanticipated accounting charges.

Our growth depends upon market growth, our ability to enhance our existing products, and our ability to introduce new products on a timely basis. Consistent with the terms of the Merger Agreement, we intend to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies, and personnel.

Acquisitions create additional material risk factors for our business that could cause our results to differ materially and adversely from our expected or projected results. Such risk factors include:


•	difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired companies, particularly companies with large and widespread operations and/or complex products;


•	the diversion of management's attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;


•	possible disruption to the continued expansion of our product lines;


•	potential changes in our customer base and changes to the total available market for our products;


•	reduced demand for our products;


•	potential difficulties in completing projects associated with in-process research and development intangibles;


•	the use of a substantial portion of our cash resources and incurrence of significant amounts of debt;


•	significantly increase our interest expense, leverage and debt service requirements as a result of incurring debt;


•	the impact of any such acquisition on our financial results;


•	internal controls may become more complex and may require significantly more resources to ensure they remain effective;


•	negative customer reaction to any such acquisition; and


•	assuming the liabilities of the acquired company.

Acquisitions present a number of other potential risks and challenges that could disrupt our business operations. For example, we may not be able to successfully negotiate or finance the acquisition on favorable terms. If an acquired company also has inventory that we assume, we will be required to write up the carrying value of that inventory to its fair value. When that inventory is sold, the gross margins for those products are reduced and our gross margins for that period are negatively affected. Furthermore, the purchase price of any acquired businesses may exceed the current fair values of the net tangible assets of such acquired businesses. As a result, we would be required to record material amounts of goodwill, acquired in-process research and development and other intangible assets, which could result in significant impairment and acquired in-process research and development charges and amortization expense in future periods. These charges, in addition to the results of operations of such acquired businesses and potential restructuring costs associated with an acquisition, could have a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operating or financial results. Furthermore, potential acquisitions, whether or not consummated, will divert our management's attention and may require considerable cash outlays at the expense of our existing operations. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability.

We have made and may in the future pursue investments in other companies, which could harm our operating results.

We have made, and could make in the future, investments in technology companies, including privately-held companies in the development stage. Many of these private equity investments are inherently risky because these businesses may never develop, and we may incur losses related to these investments. In addition, we have written down the carrying value of these investments in the past and may be required to write down the carrying value of these investments in the future to reflect other-than-temporary declines in their value, which could have a material adverse effect on our business, financial position and results of operations.

We may not be able to manage our future growth effectively, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth.

We are experiencing a period of company growth and expansion. This expansion has placed, and any future expansion will continue to place, a significant strain on our management, personnel, systems and financial resources. To successfully manage our growth, we believe we must effectively:


•	manage and enhance our relationships with customers, distributors, suppliers, end users and other third parties;


•	implement additional, and enhance existing, administrative, financial and operations systems, procedures and controls;


•	address capacity shortages;


•	manage inventory levels;


•	expand and upgrade our technological capabilities;


•	manage the challenges of having U.S., Israeli and other foreign operations; and


•	hire, train, integrate and manage additional qualified engineers for research and development activities as well as additional personnel to strengthen our sales and marketing, financial and IT functions.

Managing our growth may require substantial managerial and financial resources and may increase our operating costs even though these efforts may not be successful. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new products, satisfy customer requirements, execute our business plan or respond to competitive pressures, in which case our business, financial conditions and results of operations may be adversely affected.

We are subject to risks associated with our distributors' product inventories.

We sell many of our products to customers through distributors who maintain their own inventory of our products for sale to dealers and end customers. We allow limited price adjustments on sales to distributors. We have extended these programs to certain distributors in the United States, Asia and Europe and may extend them on a selective basis to some of our other distributors in these geographies. The allowances for distributor price adjustments are based on judgments and estimates, using historical experience rates, inventory levels in distribution, current trends and other factors, and there could be material differences between actual amounts and our estimates. Prior to January 1, 2018, we recognized revenues for sales to distributors upon sell through by the distributors, net of estimated allowances for price adjustments. Upon the adoption of the new revenue standards effective January 1, 2018, we began recognizing revenue on sales to distributors upon shipment and transfer of control (known as "sell-in" revenue recognition), net of the estimated allowances for price adjustments.

If our distributors are unable to sell an adequate amount of their inventory of our products in a given quarter to dealers and end customers or if they decide to decrease their inventories for any reason, such as adverse global economic conditions or a downturn in technology spending, our sales to these distributors and our revenues may decline. We also face the risk that our distributors may purchase, or for other reasons accumulate, inventory levels of our products in any particular quarter in excess of future anticipated sales to end customers. If such sales do not occur in the time frame anticipated by these distributors for any reason, these distributors may substantially decrease the amount of product they order from us in subsequent periods until their inventory levels realign with end-customer demand, which would harm our business and could adversely affect our revenues in such subsequent periods.

We do not always have a direct relationship with the end customers of our products sold through distributors. As a result, our products may be used in applications for which they were not necessarily designed or tested, and they may not perform as anticipated in such applications. In such event, failure of even a small number of parts could result in significant liabilities to us, damage our reputation and harm our business and results of operations.

Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition.

Certain of our customers and suppliers require us to agree to comply with the Electronic Industry Code of Conduct ("EICC") or their own codes of conduct, which may include detailed provisions on labor, human rights, health and safety, environment, corporate ethics and management systems. Certain of these provisions are not requirements under the laws of the countries in which we operate and may be burdensome to comply with on a regular basis. Moreover, new provisions may be added or material changes may be made to any these codes of conduct, and we may have to promptly implement such new provisions or changes, which may substantially further increase the cost of our business, be burdensome to implement and adversely affect our operational efficiencies and operating results. If we violate any such codes of conduct, we may lose further business with the customer or supplier and, in addition, we may be subject to fines from the customer or supplier. While we believe that we are currently in compliance with our customers and suppliers' codes of conduct, there can be no assurance that, from time to time, if any one of our customers and suppliers audits our compliance with such code of conduct, we would be found to be in full compliance. A loss of business from these customers or suppliers could have a material adverse effect on our business, financial condition and results of operations.

We may experience defects in our products, unforeseen delays, higher than expected expenses or lower than expected manufacturing yields of our products, which could result in increased customer warranty claims, delays of our product shipments and prevent us from recognizing the benefits of new technologies we develop.

Our products may contain defects and errors. Product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased warranty-related returns, including wide-scale product recalls, warranty expenses and product liability claims against us which may not be fully covered by insurance. Our products are complex and our quality control tests and procedures may fail to detect any such defects or errors. Delivery of products with defects or reliability, quality or compatibility problems may damage our reputation and our ability to retain existing customers and attract new customers. As a result, defects in our products could have an adverse effect on our business, financial condition and results of operations.

In addition, our production of existing and development of new products can involve multiple iterations and unforeseen manufacturing difficulties, resulting in reduced manufacturing yields, delays and increased expenses. The evolving nature of our products requires us to modify our manufacturing specifications, which may result in delays in manufacturing output and product deliveries. We rely on a limited number of third parties to manufacture our products. Our ability to offer new products depends on our manufacturers' ability to implement our revised product specifications, which is costly, time-consuming and complex.

We have significant intangible assets and goodwill. Consequently, the future impairment of our intangible assets and goodwill, if any, may significantly impact our profitability.

Our intangible assets and goodwill are significant. As of June 30, 2019, we had recorded $633.0 million of intangible assets, net and goodwill primarily related to our past acquisitions. Intangible assets and goodwill are subject to an impairment analysis whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Additionally, goodwill and indefinite-lived assets are subject to an impairment test at least annually. The impairment of any goodwill and other intangible assets may have a negative impact on our condensed consolidated results of operations.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations.

We are subject to income taxes in Israel, the United States and various foreign jurisdictions. Our effective income tax rate could be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities.

Our effective income tax rates are also affected by intercompany transactions for sales, services, funding and other items. Given the increased global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it has become increasingly difficult to estimate earnings within each tax jurisdiction. If actual earnings within a tax jurisdiction differ materially from our estimates or new information is discovered in the course of our tax return preparation process, we may not achieve our expected effective tax rate. Additionally, our effective tax rate may be affected by the tax effects of acquisitions, restructuring activities, newly enacted tax legislation, share-based compensation and uncertain tax positions. Finally, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities which may result in the assessment of additional income taxes. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. However, unanticipated

outcomes from these examinations could have a material adverse effect on our business, financial condition and results of operations.

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

We prepare our financial statements to conform to GAAP in the United States. These accounting principles are subject to interpretation by the FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

We must comply with a variety of existing and future laws and regulations that could impose substantial costs on us and may adversely affect our business.

We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. In addition, we are also subject to various industry requirements restricting the presence of certain substances in electronic products. Although our management systems are designed to maintain compliance, we cannot assure you that we have been or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with any of them, a range of consequences could result, including fines, import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions.

We and our customers are also subject to various import and export laws and regulations. Government export regulations apply to the encryption or other features contained in some of our products. If we fail to continue to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products or ship these products to certain customers, or we may incur penalties or fines.

We are also subject to regulations concerning the supply of certain minerals coming from the conflict zones in and around the Democratic Republic of Congo ("DRC"). The Dodd-Frank Wall Street Reform and Consumer Protection Act includes disclosure requirements regarding the use of certain minerals mined from the DRC and adjoining countries and procedures regarding a manufacturer's efforts to identify sourcing of such conflict minerals. These requirements could affect the sourcing and availability of minerals used in the manufacture of semiconductor devices.

As a result, this could limit the pool of suppliers who can provide us confirmation that the components and parts we source are considered DRC "conflict free," and we may not be able to confirm that we have obtained products or supplies that can be confirmed as DRC "conflict free" in sufficient quantities for our operations. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable to sufficiently verify the origins for the minerals used in our products.

The costs of complying with these laws could adversely affect our current or future business. In addition, future regulations may become more stringent or costly and our compliance costs and potential liabilities could increase, which may harm our current or future business.

If we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent material fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which could harm our business and the trading price of our ordinary shares.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent material fraud. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We have incurred, and expect to continue to incur significant expenses and to devote significant management resources to Section 404 compliance. Furthermore, as we grow our business or acquire businesses, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, either in our existing business or in businesses that we may acquire could harm our operating results or cause us to fail to meet our reporting obligations. In the event that our CEO, CFO or independent registered public accounting firm determine that our internal controls over financial reporting are not effective as defined under Section 404, investor perceptions of our company may be adversely affected and may cause a decline in the market price of our ordinary shares.

We may be subject to disruptions or failures in information technology systems and network infrastructures, including theft, misuse of our electronic data or cyber-attacks that could have a material adverse effect on us.

We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. We also hold large amounts of data in various data center facilities upon which our business depends. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, third-party security breaches, attempts by others that try to gain unauthorized access through the Internet to our information technology systems, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information and partner, customer and employee personal data. These attempts may be the result of industrial or other espionage, or actions by hackers seeking to harm us, our products, or our end users. Any of these events could harm our competitive position, result in a loss of customer confidence, cause us to incur significant costs to remedy any damages and ultimately materially adversely affect our business, financial condition and results of operations.

While we have implemented a number of protective measures, including firewalls, antivirus, patches, log monitors, routine back-ups, system audits, routine password modifications and disaster recovery procedures, such measures may not be adequate or implemented properly to prevent or fully address the adverse effect of such events, and in some cases we may be unaware of an incident or its magnitude and effects.

In addition, our third-party subcontractors, including our foundries, test and assembly houses and distributors, have access to certain portions of our sensitive data. In the event that these subcontractors do not properly safeguard our data that they hold, security breaches and loss of our data could result. Any such loss of data by our third-party service providers, or theft, unauthorized use or publication of our trade secrets and other confidential business information as a result of such cyber threats, could adversely affect our competitive position and reduce marketplace acceptance of our products; the value of our investment in research and development and marketing could be reduced; and third parties may assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data, or system reliability. Any such event could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events.

Our operations take place across the globe, including in areas such as the San Francisco Bay Area and Asia Pacific nations that are known for seismic activity. A significant natural disaster, such as an earthquake, fire or flood or tsunami, in any location in which our operations or the operations of our customers or suppliers take place could have a material adverse impact on our business, financial condition and results of operations. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our business, financial condition and results of operations would be adversely affected.

Risks Related to Operations in Israel and Other Foreign Countries

Regional instability in Israel may adversely affect business conditions and may disrupt our operations and negatively affect our revenues and profitability.

We have engineering facilities, corporate and sales support operations located in Israel. A significant number of our employees and a material amount of assets are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest. These conflicts negatively affected business conditions in Israel. In addition, Israel and companies doing business with Israel have, in the past, been the subject of an economic boycott. In addition, there has been recent civil unrest in the Middle East and surrounding areas, including Egypt, Jordan, Iraq, Syria and Libya. Any future armed conflicts or political instability in the region may negatively affect business conditions and adversely affect our results of operations. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in the agreements.

The security and political conditions may have an impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital. Our Israeli operations are within range of Hezbollah or Hamas missiles and we or our immediate surroundings may sustain damages in a missile attack, which could adversely affect our operations.

In addition, our business insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us as a result of such events could have a material adverse effect on our business, financial condition and results of operations.

Our operations may be negatively affected by the obligations of our personnel to perform military service.

Generally, all non-exempt male adult citizens and permanent residents of Israel under the age of 45 (or older, for citizens with certain occupations), including some of our employees, are obligated to perform military reserve duty for Israel annually, and are subject to being called to active duty at any time under emergency circumstances. In the event of severe unrest or other conflict, individuals could be required to serve in the military for extended periods of time. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists, and some of our employees, including those in key positions, have been called upon in connection with armed conflicts. It is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence for a significant period of one or more of our officers, directors or key employees due to military service. Any such disruption could adversely affect our operations.

Our operations may be affected by labor unrest in Israel.

In the past, there have been several general strikes and work stoppages in Israel affecting all banks, airports and ports. These strikes had an adverse effect on the Israeli economy and on business, including our ability to deliver products to our customers and to receive raw materials from our suppliers in a timely manner. From time to time, the Israeli trade unions threaten strikes or work stoppages, which, if carried out, may have a material adverse effect on the Israeli economy and our business.

We are susceptible to additional risks from our international operations.

We derived 62.3% of our revenues in both the six months ended June 30, 2019 and 2018 from sales outside of the United States. As a result, we face additional risks from doing business internationally, including:


•	reduced protection of intellectual property rights in some countries;


•	difficulties in staffing and managing foreign operations;


•	longer sales and payment cycles;


•	greater difficulties in collecting accounts receivable;


•	adverse economic conditions;


•	seasonal reductions in business activity;


•	potentially adverse tax consequences;


•	laws and business practices favoring local competition;


•	costs and difficulties of customizing products for foreign countries;


•	compliance with a wide variety of complex foreign laws and treaties;


•	compliance with the United States' Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions;


•	compliance with export control and regulations;


•	licenses, tariffs, other trade barriers, transit restrictions and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets, including the tariffs recently enacted and proposed by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of which remain uncertain;


•	restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments;


•	foreign currency exchange risks;


•	fluctuations in freight rates and transportation disruptions;


•	political and economic instability;


•	variance and unexpected changes in local laws and regulations;


•	natural disasters and public health emergencies; and


•	trade and travel restrictions.

We sell our products into many countries and we also source many components and materials for our products from various countries. Such global resourcing enables us to minimize or mitigate the impact of tariffs and other regulatory taxes or duties. Nonetheless, the recently imposed U.S. tariffs and other trade restrictions could have a negative impact on our business, financial condition or results of operations. Further, an increase in tariffs or the imposition of additional tariffs or other trade restrictions and the potential escalation of a trade war and retaliatory measures could adversely affect our business, financial condition or results of operations.

A significant legal risk associated with conducting business internationally is compliance with various and differing anti-corruption and anti-bribery laws and regulations of the countries in which we do business, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in China. In addition, the anti-corruption laws in various countries are constantly evolving and may, in some cases, conflict with each other. Our Code of Ethics and Business Conduct and other policies prohibit us and our employees from offering or giving anything of value to a government official for the purpose of obtaining or retaining business and from engaging in unethical business practices, including kick-backs to or from purely private parties. However, there can be no assurance that all of our employees or agents will refrain from acting in violation of such laws and our related anti-corruption policies and procedures. Any violations of these anti-corruption or trade control laws, or even allegations of such violations, can lead to an investigation, which could disrupt our operations, involve significant management distraction, and lead to significant costs and expenses, including legal fees. If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, and other consequences that may have a material adverse effect on our business, financial condition and results of operations. In addition, our reputation, sales activities or stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery, or trade control laws and regulations.

Our principal research and development facilities are located in Israel, and our directors, executive officers and other key employees are located primarily in Israel and the United States. In addition, we engage sales representatives in various countries throughout the world to market and sell our products in those countries and surrounding regions. If we encounter any of the above risks in our international operations, we could experience slower than expected revenue growth and our business could be harmed.

The results of the United Kingdom's referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

The United Kingdom ("U.K.") held a referendum in June 2016 in which a majority of voters approved an exit from the European Union ("Brexit"). In March 2017, the U.K. began the process to exit the European Union. Negotiations are in progress to determine the future terms of the U.K.'s relationship with the European Union, including, among other things, the terms of trade between the U.K. and the European Union. The effects of Brexit will depend on any agreements the U.K. may reach to retain access to European Union markets either during a transitional period or more permanently. In addition, the exit of the U.K from the European Union could lead to legal and regulatory uncertainty and potentially divergent treaties, laws and regulations as the U.K. determines which European Union treaties, laws and regulations to replace or replicate, including those governing manufacturing, labor, environmental, data protection/privacy, competition and other matters applicable to the semiconductor industry. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our ordinary shares.

Provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our shares.

The Israeli Companies Law, 1999 (the "Companies Law") generally requires that a merger be approved by the board of directors and by the general meeting of the shareholders. Upon the request of any creditor of a merging company, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations. In addition, a merger may not be completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each of the merging companies.

Also, in certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would hold 25% or more of the voting rights in the company (unless there is already a 25% or greater shareholder of the company) or more than 45% of the voting rights in the company (unless there is already a shareholder that holds more than 45% of the voting rights in the company). If, as a result of an acquisition, the acquirer would hold more than 90% of a company's shares or voting rights, the acquisition must be made by means of a tender offer for all of the shares.

In addition, the Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including rights that may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares would require an amendment to our articles of association, which requires the prior approval of the holders of a majority of our shares at a general meeting.

These provisions could delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders.

Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekels ("NIS") may negatively affect our earnings.

We derive all of our revenues in U.S. dollars. The U.S. dollar is our functional and reporting currency in all of our foreign locations. However, a significant portion of our liabilities, as well as our operating expenses, consisting principally of salaries and related personnel costs and facilities expenses, are denominated in NIS. This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the NIS. To the extent that the value of the NIS increases against the U.S. dollar, our expenses on a U.S. dollar cost basis will increase. We cannot predict any future trends in the rate of appreciation of the NIS against the U.S. dollar. If the U.S. dollar cost of our salaries and related personnel costs and facilities expenses in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to hedge against currency fluctuations in the future. Further, because all of our international revenues are denominated in U.S. dollars, a strengthening of the dollar versus other currencies could make our products less competitive in foreign markets and the collection of our receivables more difficult. To help manage this risk we have been engaged in foreign currency hedging activities, comprised of currency derivative instruments and natural hedges.

Our cost in Israel in U.S. dollar terms will also increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.

According to the Israeli Law for Encouragement of Capital Investments, 1959 ("the Encouragement Law"), the Company's operations in Israel were granted "Approved Enterprise" status by the Investment Center in the Israeli Ministry of Economy and Industry and "Beneficiary Enterprise" status by the Israeli Income Tax Authority. The Company is eligible for tax benefits under the Encouragement Law with respect to its income derived from its Approved and Beneficiary Enterprises. The availability of these tax benefits is subject to certain requirements, including, among other things, making specified investments in fixed assets and equipment, financing a percentage of those investments with our capital contributions, complying with our marketing program which was submitted to the Investment Center, filing of certain reports with the Investment Center, export requirements, limiting manufacturing outside of Israel and complying with Israeli intellectual property laws. If we do not meet these requirements in the future, these tax benefits may be cancelled and we could be required to refund any tax benefits that we have already received plus interest and penalties thereon. The tax benefits that our current "Approved Enterprise" and "Beneficiary Enterprise" program receives may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs.

On December 29, 2016, the Israeli government legislated new regulations regarding the "Preferred Technological Enterprise" regime, under which a company that complies with the terms may be entitled to certain tax benefits. The Company expects that its operation in Israel will comply with the terms of the Preferred Technological Enterprise regime. Therefore, the Company may utilize the tax benefits under this regime after the end of the benefit period of its Approved and Beneficiary Enterprise statuses (i.e., from fiscal year 2022 onwards). The tax rates under the new regime will be higher than those under our current regime. See Note 12, "Income taxes" for more details.

If we elect to distribute dividends or buy back our shares using exempt income derived from "Approved/Beneficiary Enterprise" income, we will be subject to tax on the gross amount distributed or used in a buyback. The tax rate will be the rate at which the income would have been subject to tax had it not been exempt. This rate is generally between 10% and the

corporate tax rate in Israel, depending on the percentage of our shares held by foreign shareholders. The dividend recipient or the shareholder from whom we buy back the shares is subject to withholding tax at the source at the reduced rate applicable to dividends or buybacks from Approved Enterprises, which is 15% if we distribute dividends or buy back shares during the tax exemption period (subject to the applicable double tax treaty) or within 12 years after the period. This 12-year limitation does not apply to foreign investment companies. The Encouragement Law has defined certain actions that are deemed as dividend distributions and would trigger the recapture of tax benefits.

The Israeli government grants that we received require us to meet various conditions and restrict our ability to manufacture and engineer products and transfer know-how outside of Israel and require us to satisfy specified conditions.

We have received grants from the Israeli Innovation Authority, formerly known as the Office of the Chief Scientist of Israel's Ministry of Economy and Industry (the "IIA"), for the financing of a portion of our research and development expenditures in Israel. When know-how is developed using or in connection with IIA grants, we are subject to restrictions on transfer of the know-how, including outside of Israel. Transfer of know-how outside of Israel requires pre-approval by the IIA which may at its sole discretion grant such approval and impose certain conditions, and is subject to the payment to IIA of a transfer fee or license fees, calculated according to the formulas provided in the Israeli Law for Encouragement of Research, Development and Technological Innovation in Industry, 1984 (the "R&D Law") which takes into account, inter alia, the consideration for such know-how paid to us in the transaction in which the technology is transferred. In general, transfer fees are no less than the funding received plus interest less the royalties already paid for the transferred know-how and are not higher than six times the amount of the grants received by the company. In addition, any decrease of the percentage of manufacturing performed in Israel, as originally declared in the application to the IIA, requires us to obtain the approval of the IIA and may result in increased amounts to be paid to the IIA as well as in increased royalty rate. Transfer of know-how to another Israeli entity requires the approval of IIA as well as full or partial assumption of the liabilities to IIA by the other entity. These restrictions may impair our ability to enter into agreements for those products or technologies without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of technology developed with IIA funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. If we fail to comply with the conditions imposed by the IIA, we may be required to refund any payments previously received, together with interest and penalties as well as tax benefits. Also, failure to meet the restrictions concerning transfer of know-how outside of Israel may trigger criminal liability. The restrictions regarding the use and transfer of know-how (including for the purpose of manufacturing) apply also to any IIA programs that are under a royalty payments agreement and to non-royalty-bearing programs.

It may be difficult to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities law claims in Israel.

We are incorporated in Israel. Three of our executive officers and two of our directors, one of whom is also an executive officer, are non-residents of the United States and are located in Israel, and a significant amount of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of the above persons in Israel.

In addition, it may be difficult for a shareholder to enforce civil liabilities under U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved in an Israeli court as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.

Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.

We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our amended and restated articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters.

Risks Related to Our Ordinary Shares

The price of our ordinary shares may continue to be volatile, and the value of an investment in our ordinary shares may decline.

Factors that could cause volatility in the market price of our ordinary shares include, but are not limited to:


•	quarterly variations in our results of operations or those of our competitors;


•	announcements by us, our competitors, our customers or rumors from sources other than our company related to acquisitions, new products, significant contracts, commercial relationships, capital commitments or changes in the competitive landscape;


•	our ability to develop and market new and enhanced products on a timely basis;


•	disruption to our operations;


•	geopolitical instability;


•	the emergence of new sales channels in which we are unable to compete effectively;


•	any major change in our board of directors or management;


•	changes in financial estimates, including our ability to meet our future revenue and operating profit or loss projections;


•	changes in governmental regulations or in the status of our regulatory approvals;


•	general economic conditions and slow or negative growth of related markets;


•	anticompetitive practices of our competitors;


•	commencement of, or our involvement in, litigation;


•	whether our operating results meet our guidance or the expectations of investors or securities analysts;


•	continuing international conflicts and acts of terrorism; and


•	changes in accounting rules.

We may need to raise additional capital, which might not be available or which, if available, may be on terms that are not favorable to us.

We may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities to raise additional funds, the ownership percentage of our shareholders would be diluted, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our ordinary shares. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt may also have certain rights, preferences or privileges senior to those of existing holders of our ordinary shares. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could harm our business, financial condition and results of operations.

If we sell our ordinary shares in future financings, holders of ordinary shares could experience immediate dilution and, as a result, the market price of our ordinary shares may decline.

We may from time to time issue additional ordinary shares at a discount from the current trading price of our ordinary shares. As a result, holders of our ordinary shares would experience immediate dilution upon the purchase of any ordinary shares sold at such discount. In addition, as opportunities present themselves, we may enter into equity or debt financings or similar arrangements in the future, including the issuance of convertible debt securities, preferred shares or ordinary shares. If we issue ordinary shares or securities convertible into ordinary shares, holders of our ordinary shares could experience dilution.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our ordinary shares or if our operating results do not meet their expectations, the market price of our ordinary shares could decline.

The trading market for our ordinary shares could be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the price of our ordinary shares or trading volume in our ordinary shares to decline. Moreover, if one or more of the analysts who cover our company downgrades our ordinary shares or if our operating results do not meet their expectations, the market price of our ordinary shares could decline.

Provisions of our articles of association could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our shareholders, and could make it more difficult for shareholders to change management.

Provisions of our amended and restated articles of association may discourage, delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our shareholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:


•	no cumulative voting;


•	a requirement for the approval of the shareholders of at least a majority of the voting power of the Company for any merger involving the Company;


•	a requirement for the approval of at least 75% of the voting power represented at the general meeting of the shareholders for the removal of any director from office, and election of any director instead of the director so removed; and


•	an advance notice requirement for shareholder proposals and nominations.

Furthermore, Israeli tax law treats some acquisitions, particularly share-for-share swaps between an Israeli company and a foreign company, less favorably than U.S. tax law. Under certain circumstances and subject to receiving a ruling from the Israeli Income Tax Authority, Israeli tax law generally provides that a shareholder who exchanges our shares for shares that are listed for trading on a securities exchange in a foreign corporation is treated as if the shareholder has sold the shares. In such a case, the shareholder will generally be subject to Israeli taxation on any capital gains from the sale of shares (after two years, with respect to one half of the shares, and after four years, with respect to the balance of the shares, in each case unless the shareholder sells such shares at an earlier date), unless a relevant tax treaty between Israel and the country of the shareholder's residence exempts the shareholder from Israeli tax, resulting in taxation before disposition of the investment in the foreign corporation. For a further discussion of Israeli laws relating to mergers and acquisitions, please see "Risk Factors - Risks Related to Operations in Israel and Other Foreign Countries - Provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our shares." These provisions in our amended and restated articles of association and other provisions of Israeli law could limit the price that investors are willing to pay in the future for our ordinary shares.

We have never paid cash dividends on our share capital, and, while the Board regularly reviews our cash position and uses for cash, we do not anticipate paying any cash dividends in the foreseeable future.

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be your sole source of gain for the foreseeable future.

We may incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

Changes in the laws and regulations affecting public companies, including Israeli laws, rules adopted by the SEC, the Nasdaq Stock Market, the FASB and the Public Company Accounting Oversight Board, may result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 — MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 — OTHER INFORMATION

Not applicable.

ITEM 6 — EXHIBITS



2.1	(1)		*	Agreement and Plan of Merger, dated as of March 10, 2019, by and between NVIDIA Corporation, NVIDIA International Holdings, Inc., Teal Barvaz Ltd. and Mellanox Technologies, Ltd.
3.1	(2)			Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 24, 2018).
10.1		†	**	Amended and Restated Executive Severance Benefits Agreement, dated July 22, 2019, between Eyal Waldman and the Company
31.1		†		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		†		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		†		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		†		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		†		XBRL Instance Document
101.SCH		†		XBRL Taxonomy Extension Schema Document
101.CAL		†		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		†		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		†		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		†		XBRL Taxonomy Extension Definition Linkbase Document

_______________________________________________________________________________


(1)	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (SEC File No. 001-33299) filed on March 11, 2019.


(2)	Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (SEC File No. 001-33299) filed on August 3, 2018.

† Filed herewith.


*	The schedules to the Agreement and Plan of Merger have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request.


**	Indicates management contract or compensatory plan, contract or arrangement.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date:	August 1, 2019	Mellanox Technologies, Ltd.


		/s/ Doug Ahrens
		Doug Ahrens
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

Exhibit 10.1

AMENDED AND RESTATED EXECUTIVE SEVERANCE BENEFITS AGREEMENT

This AMENDED AND RESTATED EXECUTIVE SEVERANCE BENEFITS AGREEMENT (the “Agreement”) is entered into effective as of this 20th day of June, 2019 (the “Effective Date”), between EYAL WALDMAN (“Executive”) and MELLANOX TECHNOLOGIES, LTD. (the “Company”). This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events and supersedes in its entirety that certain Amended and Restated Executive Severance Benefits Agreement entered into by and between Executive and the Company dated as of December 19, 2008 (the “Prior Agreement”). Certain capitalized terms used in this Agreement are defined in Article 5.

The Company and Executive hereby agree as follows:

ARTICLE 1.
SCOPE OF AND CONSIDERATION FOR THIS AGREEMENT

1.1 Position and Duties. Executive is currently employed by the Company as the President and Chief Executive Officer of the Company. Executive reports directly to the Board.

1.2 Restrictions. During Executive’s employment by the Company, Executive agrees to the best of Executive’s ability and experience that Executive will at all times loyally and conscientiously perform all of the duties and obligations required of and from Executive as President and Chief Executive Officer. During the term of Executive’s employment, Executive further agrees that Executive will devote all of Executive’s business time and attention to the business of the Company, the Company shall be entitled to all of the benefits and profits arising from or incident to all such work, services and advice, Executive shall not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Board, and Executive shall not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this Agreement shall prevent Executive from accepting speaking or presentation engagements in exchange for honoraria or from service on boards of charitable organizations or otherwise participating in civic, charitable or fraternal organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange.

1.3 Employee Proprietary Information and Inventions Agreement. Executive acknowledges that Executive has previously executed and delivered to an officer of the Company the Company’s Employee Proprietary Information and Inventions Agreement and a Confirmatory Assignment (together, the “Confidentiality Agreement”) and that the Confidentiality Agreement remains in full force and effect.

1.4 Benefits Upon Covered Termination. The Company and Executive wish to set forth the benefits which Executive shall be entitled to receive in the event of a Covered Termination.

1.5 Consideration. The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive’s past services to the Company, Executive’s continued employment with the Company and full compliance with the provisions of this Agreement, and Executive’s execution of a release in accordance with Section 4.1 hereof.

1.6 Prior Agreement. This Agreement shall supersede any other agreement relating to severance benefits in the event of Executive’s severance from employment, including without limitation, the Prior Agreement.

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ARTICLE 2.

SEVERANCE BENEFITS

2.1 Covered Termination Severance Benefits. A Covered Termination of Executive’s employment entitles Executive to receive the benefits set forth in this Section 2.1, subject to Section 4.1 and 6.13.

(a) Additional Severance Payment. Subject to Executive’s continued compliance with this Agreement, including without limitation, Executive’s obligations and undertakings pursuant to Section 1.3 and 3 thereof, the Company shall pay to Executive, in addition to any rights and entitlements under law or agreement, an amount equal to two times the sum of Executive’s Base Salary and Target Bonus. The severance contemplated by this Section 2.1(a) (the “Cash Severance”), which shall be subject to all required tax and other applicable withholdings, shall be payable in equal monthly installments during the period commencing on the date of termination and ending twenty-four (24) months thereafter (the “Severance Period”). Notwithstanding the foregoing, but subject to Section 6.13(b), all or a portion of the Cash Severance shall be paid in a lump sum on the sixtieth (60^th) day following the date of Executive’s Separation from Service (as defined below) solely to the extent (and in such amount, which for the avoidance of doubt, shall be the maximum amount) that such lump sum payment would not result in any additional excise tax or tax penalties under Section 409A of the Code.

(b) Equity Award Acceleration. The vesting and/or exercisability of one-hundred percent (100%) of the unvested shares subject to Executive’s Equity Awards shall be automatically accelerated immediately effective as of the date of the Covered Termination, subject to the terms of the award agreement pursuant to which any performance share units were granted.

2.2 Other Terminations. If Executive’s employment is terminated by the Company for Cause, by Executive other than pursuant to a Constructive Termination or as a result of Executive’s death or disability, the Company shall not have any other or further obligations to Executive under this Agreement (including any financial obligations) except that Executive shall be entitled to receive (a) Executive’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, and (b) all other amounts or benefits to which Executive is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices or applicable law. In addition, subject to the provisions of the Company’s equity compensation plans and the terms of Executive’s Equity Awards, if Executive’s employment is terminated by the Company for Cause, by Executive other than pursuant to a Constructive Termination or as a result of Executive’s death or disability, all vesting of Executive’s unvested Equity Awards previously granted to Executive by the Company shall cease and none of such unvested Equity Awards shall be exercisable following the date of such termination. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies that may be available to the Company under the circumstances, whether at law or in equity.

2.3 Mitigation. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by any retirement benefits received by Executive after the date of a Covered Termination.

2.4 Exclusive Remedy. Except as otherwise expressly required by law or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination.

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ARTICLE 3.

RESTRICTIVE COVENANTS

3.1 Non-Solicitation. In further consideration of the duties and obligations of the Company to Executive hereunder, Executive acknowledges that during the course of Executive’s employment with the Company, Executive has or will become familiar with the Company’s trade secrets and with other confidential information concerning the Company and that Executive’s services shall be of special, unique and extraordinary value to the Company; and, therefore, Executive agrees that, during the one-year period commencing on the date of termination of Executive’s employment for any reason (the “Restricted Period”), Executive shall not, directly or indirectly, through another person or entity, (i) induce, solicit, encourage or attempt to induce, solicit or encourage any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof; or (ii) induce, solicit or encourage or attempt to induce, solicit or encourage any customer, supplier, licensee, licensor, franchisee or other business relation of the Company and any of its affiliates to cease doing business with the Company and any of its affiliates, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation of the Company and any of its affiliates.

3.2 Modification of Covenants. If, at the time of enforcement of any of the covenants contained in Section 3.1 hereof, a court of competent jurisdiction shall hold that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law.

ARTICLE 4.

LIMITATIONS AND CONDITIONS ON BENEFITS

4.1 Release Prior to Payment of Benefits. Upon a Covered Termination, and prior to the payment of any benefits under this Agreement on account of such Covered Termination, Executive shall execute and deliver to the Company an effective general release (the “Release”) in the form attached hereto and incorporated herein as Exhibit A or Exhibit B, as applicable, subject to any changes the Company deems necessary or appropriate to reflect applicable law. Such Release shall specifically relate to all of Executive’s rights and claims in existence at the time of such execution and shall confirm Executive’s obligations under the Confidentiality Agreement. It is understood that, as specified in the applicable Release, Executive has a specified number of calendar days to consider whether to execute such Release, and Executive may revoke such Release within seven (7) calendar days after execution. In the event Executive does not execute and deliver such Release within the applicable period, or if Executive revokes such Release within the subsequent seven (7) day period, no benefits shall be payable under this Agreement.

4.2 Termination of Benefits. Benefits under this Agreement shall terminate immediately if Executive, at any time, violates any proprietary information or confidentiality obligation to the Company or any other restrictive covenant, including, without limitation, the Confidentiality Agreement and any non-solicitation obligation to the Company pursuant to Section 3.1 above or otherwise.

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ARTICLE 5.

DEFINITIONS

For purposes of the Agreement, the following terms are defined as follows:

5.1 “Base Salary” means Executive’s annual salary (that is the base salary and where applicable together with the Overtime Payment, with no fringe benefits whatsoever) as in effect during the last regularly scheduled payroll period immediately preceding a Covered Termination but excluding any reduction of base salary giving rise to Constructive Termination hereunder.

5.2 “Board” means the Board of Directors of the Company.

5.3 “Cause” means that, in the reasonable determination of the Board, Executive:

(a) has committed an act of fraud or embezzlement or has intentionally committed some other illegal act that has a material adverse impact on the Company or any successor or parent or subsidiary thereof;

(b) has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or any subsidiary or affiliate of the Company;

(c) has made any unauthorized use or disclosure of confidential information or trade secrets of the Company or any successor or parent or subsidiary thereof that has a material adverse impact on any such entity;

(d) has committed any other intentional misconduct that has a material adverse impact on the Company or any successor or parent or subsidiary thereof; or

(e) has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the Board, provided such direction is not materially inconsistent with Executive’s customary duties and responsibilities.

5.4 “Change of Control” means and includes each of the following:

(a) A transaction or series of transactions (other than an offering of Shares to the general public through a registration statement filed under the laws of any applicable jurisdiction) whereby any person or related group of persons (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a person that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership of securities of the Company possessing more than 50% of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or

(b) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in Subsections (a) or (c) hereof) whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

US-DOCS\101036725.3

(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or shares of another entity, in each case other than a transaction:

(i) Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “Successor Entity”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(ii) After which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Subsection (c)(ii) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(d) The Company’s shareholders approve a liquidation or dissolution of the Company.

The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change of Control has occurred pursuant to the above definition, and the date of the occurrence of such Change of Control and any incidental matters relating thereto.

5.5 “Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time and the Treasury Regulations thereunder.

5.6 “Company” means Mellanox Technologies, Ltd., company organized under the laws of the State of Israel, or, following a Change of Control, the surviving entity resulting from such transaction.

5.7 “Constructive Termination” means that Executive voluntarily terminates Executive’s employment with the Company after any of the following are undertaken without Executive’s express written consent:

(a) the removal of or a material reduction in the nature or scope of Executive’s responsibilities, or the assignment to Executive of duties that are materially inconsistent with Executive’s position;

(b) a change in Executive’s direct reporting relationship so that Executive no longer reports directly to the Board;

(c) a material reduction in Executive’s base salary or target annual bonus, unless the base salaries or target annual bonus, as applicable, of all other executives are similarly reduced; or

(d) a relocation of Executive’s place of employment that increases Executive’s one-way commute by more than thirty (30) miles from such Executive’s place of employment as of immediately prior to such relocation. The termination of Executive’s employment as a result of Executive’s death or disability shall not be deemed to be a Constructive Termination.

Notwithstanding the foregoing, a resignation shall not constitute a “Constructive Termination” unless the event or condition giving rise to such resignation continues more than thirty (30) days following Executive’s written

US-DOCS\101036725.3

notice of such condition provided to the Company within ninety (90) days of the first occurrence of such event or condition and such resignation is effective within thirty (30) days following the end of such notice period.

5.8 “Covered Termination” means an Involuntary Termination Without Cause or a Constructive Termination, in each case, which occurs within 12 months following a Change of Control.

5.9 “Equity Awards” means all options to purchase ordinary shares, awards of restricted ordinary shares and such other awards granted pursuant to the Company’s option and other equity incentive award plans or agreements.

5.10 “Involuntary Termination Without Cause” means Executive’s dismissal or discharge by the Company other than for Cause. The termination of Executive’s employment as a result of Executive’s death or disability shall not be deemed to be an Involuntary Termination Without Cause.

5.11 “Target Bonus” means Executive’s target annual bonus for the year in which a Covered Termination occurs or, in the event a target annual bonus has not been established for Executive for such year, the average of the three most recent annual bonuses paid to Executive as of the date of the Covered Termination.

ARTICLE 6.

GENERAL PROVISIONS

6.1 Employment Status. This Agreement does not constitute a contract of employment or impose upon Executive any obligation to remain as an employee, or impose on the Company any obligation (a) to retain Executive as an employee, (b) to change the status of Executive as an at-will employee (subject to applicable law), or (c) to change the Company’s policies regarding termination of employment.

6.2 Notices. Any notices provided hereunder must be in writing, and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail to the Company at its primary office location and to Executive at Executive’s address as listed in the Company’s payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at the address as listed in the Company’s payroll records.

6.3 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein.

6.4 Waiver. If either party should waive any breach of any provisions of this Agreement, such party shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement.

6.5 Complete Agreement. Without derogating from any rights and entitlements under law or any agreement relating to such statutory rights and entitlements, this Agreement, including Exhibit A and Exhibit B, constitutes the entire agreement between Executive and the Company and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter, wholly superseding all written and oral agreements with respect to severance benefits to Executive in the event of employment termination, including

US-DOCS\101036725.3

without limitation, the Prior Agreement. It is entered into without reliance on any promise or representation other than those expressly contained herein. Notwithstanding anything herein to the contrary, this Agreement shall not supersede any indemnification agreement between Executive and the Company.

6.6 Amendment or Termination of Agreement. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this Agreement must be signed by an executive officer of the Company after such change or termination has been approved by the Board.

6.7 Counterparts. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement.

6.8 Headings. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.

6.9 Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, and the Company, and any surviving entity resulting from a Change of Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company, and their respective successors, assigns, heirs, executors and administrators, without regard to whether or not such person actively assumes any rights or duties hereunder; provided, however, that Executive may not assign any duties hereunder and may not assign any rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably.

6.10 Choice of Law. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Israel, without regard to its conflict of laws rules. Any legal proceeding arising out of, or relating to this Agreement will be instituted in a court in Israel, and the Executive and the Company hereby consent to the personal and exclusive jurisdiction of such court(s) and hereby waive any objection(s) that they may have to personal jurisdiction, the laying of venue of any such proceeding and any claim or defense of inconvenient forum.

6.11 Non-Publication. The parties mutually agree not to disclose publicly the terms of this Agreement except to the extent that disclosure is mandated by applicable law or regulation or to their respective advisors (e.g., attorneys, accountants).

6.12 Construction of Agreement. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control.

6.13 Code Section 409A.

(a) Notwithstanding any provision to the contrary in this Agreement, no amount that is deemed deferred compensation subject to Section 409A of the Code shall be payable pursuant to Section 2 unless Executive’s termination of employment constitutes a separation from service within the meaning of Treasury Regulation Section 1.409A-1h (a “Separation from Service”) and, except as provided under Section 6.13(b) below, any such amount shall not be paid, or in the case of installments, commence to be paid, until the sixtieth (60^th) day following Executive’s Separation from Service. Any installment payments that would have been made to Executive during the sixty (60) day period immediately following Executive’s Separation from Service but for the preceding sentence shall be paid to Executive on the sixtieth (60^th) day following Executive’s Separation from Service and the remaining payments shall be made as provided in this Agreement, subject to the last sentence of Section 2.1(a).

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(b) Notwithstanding any provision to the contrary in this Agreement, if Executive is deemed at the time of Executive’s separation from service to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code, to the extent delayed commencement of any portion of the benefits to which Executive is entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, such portion of Executive’s benefits shall not be provided to Executive prior to the earlier of (x) the expiration of the six (6)-month period measured from the date of Executive’s Separation from Service or (y) the date of Executive’s death. Upon the first business day following the expiration of the applicable Code Section 409A(a)(2)(B)(i) period, all payments deferred pursuant to this Section 6.13(b) shall be paid in a lump sum to Executive, and any remaining payments due under this Agreement shall be paid as otherwise provided herein.

(c) To the extent that any reimbursements payable pursuant to this Agreement are subject to the provisions of Section 409A of the Code, any such reimbursements payable to Executive pursuant to this Agreement shall be paid to Executive no later than December 31 of the year following the year in which the expense was incurred, the amount of expenses reimbursed in one year shall not affect the amount eligible for reimbursement in any subsequent year, and Executive’s right to reimbursement under this Agreement will not be subject to liquidation or exchange for another benefit.

(d) Executive’s right to receive any installment payments under this Agreement shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment as permitted under Treasury Regulation Section 1.409A-2(b)(2)(iii).

(e) The parties acknowledge and agree that, to the extent applicable, this Agreement shall be interpreted in accordance with, and the parties agree to use their best efforts to achieve timely compliance with, Section 409A of the Code, including, without limitation, any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of this Agreement to the contrary, in the event that the Company determines that any amounts payable hereunder would otherwise be taxable to Executive under Section 409A, the Company may adopt such limited amendments to this Agreement and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Company reasonably determines are necessary or appropriate to comply with the requirements of Section 409A of the Code and thereby avoid the application of penalty taxes under such Section.

(SIGNATURE PAGE FOLLOWS)

US-DOCS\101036725.3

IN WITNESS WHEREOF, the parties have executed this Agreement on the Effective Date written above.



Mellanox Technologies, Ltd.	Eyal Waldman
By: /s/ Alinka Flaminia	/s/ E. Waldman
Name: Alinka Flaminia
Title: SVP, General Counsel, Corporate Secretary

Exhibit A: Form of Release (Individual Termination) [not for execution]
Exhibit B: Form of Release (Group Termination) [not for execution]

[Signature Page To Executive Severance Benefits Agreement]

US-DOCS\101036725.3

EXHIBIT A

RELEASE

(INDIVIDUAL TERMINATION)

Certain capitalized terms used in this Release are defined in the Amended and Restated Executive Severance Benefits Agreement (the “Agreement”), which I have executed and of which this Release is a part.

I hereby confirm my obligations under the Company’s Employee Proprietary Information and Inventions Agreement.

I also hereby confirm that of the date hereof, I have received all amounts and/or entitlements to which I am due as a result of or in connection with my employment with the Company and its termination including, without limitation, with respect to salary, wages, back wages, contributions of all kind (including to Managers’ Insurance Policy or Pension Fund (*) and Education Fund (**), severance pay, Additional Severance Payment, annual vacation, redemption of annual vacation, overtime pay, travel allowance, car, recreation pay (^***), sick pay, commissions, incentives, bonuses, options, stock, warranties, benefit plans or programs, notice period or payment in lieu of notice, deferred compensation payments, expenses, benefits, and reimbursement of any kind and any other payment or benefits or rights whatsoever in connection with or arising out of my employment with the Company or termination of my employment or that otherwise might be owed to me by the Company.

In accordance with the termination of my employment at the Company I am entitled to all sums as described in the List of Final Payments, attached to this letter, and the release letters. I accept the payments and the rights described in the List of Final Payments as full, complete and unconditional payment, settlement and satisfaction of any and all obligations of the Company arising out of my employment or the termination of my employment, or that otherwise might be owed to me by the Company.

Upon completion by the Company of the payments and provision of the release letters, all as listed in the attached “List of Final Payments” in connection with my employment with the Company and/or the termination of such employment, neither myself, nor anyone on my behalf, has or will have any claim, demand and/or cause of action, including with respect to my dismissal and/or entitlement to severance pay, whether or not now known, suspected or claimed, which I have ever had, now have, or may claim to have against the Company and/or its affiliates (whether directly or indirectly) pursuant to any applicable law and/or agreement or otherwise against Company and/or its parent company, and/or its affiliates and/or anyone on its behalf, including directors officers, employees, agents, partners, investors, predecessors, successors, heirs, assigns, directors, employees or shareholders or any of their representatives of successors or affiliated corporations or organizations, whether previously or hereinafter affiliated in any manner. Without derogating in any way from the above, I acknowledge that this Release is a “Settlement and Acknowledgement of Discharge” as defined in Section 29 of the Severance Pay Law, 5723 — 1963.

I acknowledge that all of the payments referred to hereunder (including in the Agreement and in the List of Final Payments) are gross amounts and shall be subject to the withholding of applicable taxes and deductions required by any applicable law.

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** [ l ]

*** [ l ]

Exhibit A-1

I acknowledge and agree that the payments and entitlements specified in and the attached “List of Final Payments" are the sole consideration to which I am entitled from the Company (subject to the contingencies set forth in such documents) and that there is no further obligation, financial or otherwise, owing to me by the Company.

I hereby confirm that I shall continue to comply with any undertakings that by their nature survive my employment with the Company. Without limiting the generality of the foregoing, I undertake to maintain the terms of this Release in strict confidence.

I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company.

Except as otherwise set forth in this Release, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys’ fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to the date I execute this Release, including, but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, with respect to salary, wages, back wages, contributions to managers insurance (*) and education fund (^**), severance pay, annual vacation, overtime pay, travel allowance, recreation pay (^***), sick pay, commissions, incentives, bonuses, options, notice period or payment in lieu of notice, deferred compensation payments, expenses, benefits, and reimbursement of any kind and any other payment or benefits or rights whatsoever in connection with my employment with the Company or termination of my employment or that otherwise might be owed to me by the Company; claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1866; Title VII of the federal Civil Rights Act of 1964, as amended; the federal Civil Rights Act of 1991; Sections 1981 through 1988 of Title 42 of the United States Code, as amended; the federal Occupational Safety and Health Act of 1970; the Consolidated Omnibus Budget Reconciliation Act of 1985; the federal Family and Medical Leave Act of 1993, except as prohibited by law; the federal Worker Adjustment and Retraining Notification Act of 1988; the federal Vocational Rehabilitation Act of 1973; the federal Equal Pay Act of 1963; the federal Fair Labor Standards Act, except as prohibited by law; the National Labor Relations Act, as amended; the federal Employee Retirement Income Security Act of 1974, as amended; the federal Americans with Disabilities Act of 1990; the Age Discrimination in Employment Act of 1967, as amended (the “ADEA”); the Sarbanes-Oxley Act of 2002; the California Fair Employment and Housing Act, as amended; the California civil rights laws; the California Equal Pay Law; tort law; contract law; statutory law; common law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from (i) the payments and benefits under Section 2 of my Agreement, (ii) to benefits described in the List of Final Payments, (iii) its

* [ l ]

** [ l ]

*** [ l ]

Exhibit A-2

obligation to indemnify me pursuant to the Company’s indemnification obligation pursuant to agreement or applicable law, (iv) to any rights or benefits that may not be waived pursuant to applicable law, including, without limitation, any right to unemployment insurance benefits, or (v) to my right to communicate directly with, cooperate with, or provide information to, any federal, state or local government regulator.

For the avoidance of doubt, nothing in this Agreement will be construed to prohibit me from filing a charge with, reporting possible violations to, or participating or cooperating with any governmental agency or entity, including but not limited to the Equal Employment Opportunity Commission, the National Labor Relations Board, the California Department of Fair Employment and Housing, the Department of Justice, the Securities and Exchange Commission, Congress, or any agency Inspector General, or making other disclosures that are protected under the whistleblower, anti-discrimination, or anti-retaliation provisions of federal, state or local law or regulation; provided, however, that I may not disclose information of the Company or any of their affiliates that is protected by the attorney-client privilege, except as otherwise required by law. I do not need the prior authorization of the Company to make any such reports or disclosures, and I am not required to notify the Company that I have made such reports or disclosures.

Furthermore, in accordance with 18 U.S.C. § 1833, notwithstanding anything to the contrary in this Agreement: (i) I shall not be in breach of this Agreement, and shall not be held criminally or civilly liable under any federal or state trade secret law (x) for the disclosure of a trade secret that is made in confidence to a federal, state, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (y) for the disclosure of a trade secret that is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal; and (ii) if I file a lawsuit for retaliation by the Company for reporting a suspected violation of law, I may disclose the trade secret to my attorney, and may use the trade secret information in the court proceeding, if I file any document containing the trade secret under seal, and does not disclose the trade secret, except pursuant to court order.

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given under the Agreement for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Release; (B) I should consult with an attorney of my choice prior to executing this Release; (C) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following the execution of this Release by the parties to revoke the Release; and (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Release is executed by me. I hereby understand that the revocation contemplated in this paragraph shall not be effective unless it is in writing and signed by me and received by the Company prior to the expiration of the revocation period. I further acknowledge that I have read this Release carefully and completely understand each of the terms of this Release. I acknowledge that the undertakings contained in this Release are irrevocable and the Company and its representatives and successors are relying upon my undertakings. I declare that I am fully aware of my rights under law and that this waiver is signed by me upon my own free will after I was given the opportunity to receive any and all explanations regarding my rights to my full satisfaction, and to check all my accounts with the Company and after I have examined all my rights against the Company. I further acknowledge that I have been afforded sufficient time to understand the terms and effects of this Release, and that the agreements and obligations herein are made voluntarily, knowingly and without duress, and that neither the Company nor its agents or representatives have made any representations inconsistent with the provisions of this Release.

EYAL WALDMAN

Exhibit A-3

Date:

Exhibit A-4

LIST OF FINAL PAYMENTS

On or subsequent to the date of termination of your employment with the Company (the “Termination Date”), the Company shall pay and/or release to you the following:

1. Last Monthly Salary:

A gross sum for Salary through Termination Date.

2. Severance Pay: (gross)

All amounts accumulated in the severance component in your managers insurance policy and/or pension fund shall be released to you should you be entitled to statutory severance pay on account of your statutory severance pay entitlement, and the Company will complete payment of the statutory severance entitlement.

3. Vacation Days:

A gross payment for _________accrued and unused vacation days - NIS____________

4. Recuperation Pay (d’mei havra’ah):

A gross payment for _____ unpaid d’mei havra’ah due as of the Termination Date - NIS __________

5. Prior Notice of Termination

A gross payment in lieu of prior notice for_______ days, including a payment for social benefits payable thereupon. [If applicable]

6. Additional Severance Payment

Subject to the terms and conditions of the Agreement - NIS ___________

7. In addition, the Company shall release the Managers Insurance Policy and/or Pension Fund (severance payment and pension) and Education Fund (Keren Hishtalmuti) maintained on your behalf by the Company.

Exhibit A-5

EXHIBIT B

RELEASE
(GROUP TERMINATION)

I hereby confirm my obligations under the Company’s Employee Proprietary Information and Inventions Agreement.

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** [ l ]

*** [ l ]

Exhibit B-1

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** [ l ]

*** [ l ]

Exhibit B-2

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given under the Agreement for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Release; (B) I should consult with an attorney of my choice prior to executing this Release; (C) I have forty-five (45) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following the execution of this Release by the parties to revoke the Release; (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Release is executed by me. I hereby understand that the revocation contemplated in this paragraph shall not be effective unless it is in writing and signed by me and received by the Company prior to the expiration of the revocation period. I further acknowledge that I have read this Release carefully and completely understand each of the terms of this Release; and, as required by ADEA, that I have received with this Release a detailed list of the job titles and ages of all employees who were terminated in this group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated. I acknowledge that the undertakings contained in this Release are irrevocable and the Company and its representatives and successors are relying upon my undertakings. I declare that I am fully aware of my rights under law and that this waiver is signed by me upon my own free will after I was given the opportunity to receive any and all explanations regarding my rights to my full satisfaction, and to check all my accounts with the Company and after I have examined all my rights against the Company. I further acknowledge that I have been afforded sufficient time to understand the terms and effects of this Release, and that the agreements and obligations herein are made voluntarily, knowingly and without duress, and that neither the Company nor its agents or representatives have made any representations inconsistent with the provisions of this Release.

EYAL WALDMAN

Exhibit B-3

Date:

Exhibit B-4

LIST OF FINAL PAYMENTS

2 On or subsequent to the date of termination of your employment with the Company (the “Termination Date”), the Company shall pay and/or release to you the following:

1. Last Monthly Salary:

A gross sum for Salary through Termination Date.

2. Severance Pay: (gross)

3. Vacation Days:

A gross payment for _________accrued and unused vacation days - NIS____________

4. Recuperation Pay (d’mei havra’ah):

A gross payment for _____ unpaid d’mei havra’ah due as of the Termination Date - NIS __________

5. Prior Notice of Termination

A gross payment in lieu of prior notice for_______ days, including a payment for social benefits payable thereupon. [If applicable]

6. Additional Severance Payment

Subject to the terms and conditions of the Agreement - NIS ___________

Exhibit B-5

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Eyal Waldman, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Mellanox Technologies, Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2019



By:	/s/ EYAL WALDMAN
	Name:	Eyal Waldman
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Doug Ahrens, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Mellanox Technologies, Ltd.;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2019



By:	/s/ Doug Ahrens
	Name:	Doug Ahrens
	Title:	Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

I, Eyal Waldman, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(i) the Quarterly Report of Mellanox Technologies, Ltd. (the “Company”) on Form 10-Q for the quarter ended June 30, 2019 (the “Form 10-Q”), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has set his hand hereto as of August 1, 2019.




By:		/s/ EYAL WALDMAN
	Name:	Eyal Waldman
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

Dated: August 1, 2019

This certification accompanies the Form 10-Q to which it relates to, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by references into any filings of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

EXHIBIT 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

I, Doug Ahrens, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has set his hand hereto as of August 1, 2019.




By:		/s/ Doug Ahrens
	Name:	Doug Ahrens
	Title:	Chief Financial Officer
		(Principal Financial Officer)

Dated: August 1, 2019