UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 27, 2016

 

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 No. 0-14225

 

  


EXAR CORPORATION

(Exact Name of Registrant as specified in its charter)

 

Delaware

 

94-1741481

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

48720 Kato Road, Fremont, CA 94538

 

(Address of principal executive offices, Zip Code)

 

Registrant’s telephone number, including area code: (510) 668-7000

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.0001 Par Value

 

New York Stock Exchange, Inc.

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

  


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.    Yes      No  

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes      No  

 

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer    
   

Non-accelerated filer      (Do not check if a smaller reporting company)

Smaller reporting company    

 

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

 

The aggregate market value of the outstanding voting stock held by non-affiliates of the Registrant as of September 27, 2015 was approximately $131.1 million based upon the last price reported in the NYSE-Composite transactions as of the last business day of the Registrant’s most recently completed second fiscal quarter.

 

The number of shares outstanding of the Registrant’s Common Stock was 48,620,468 as of May 25, 2016.

 

DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Registrant’s 2016 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2016 fiscal year are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

 



  

 
1

 

   

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

ANNUAL REPORT ON FORM 10-K

 

FOR FISCAL YEAR ENDED MARCH 27, 2016

  

 

  

 

Page

 

  

PART I

 

Item 1.

  

Business

3

Item 1A.

  

Risk Factors

12

Item 1B.

  

Unresolved Staff Comments

25

Item 2.

  

Properties

25

Item 3.

  

Legal Proceedings

26

Item 4.

  

Mine Safety Disclosures

26

       
 

  

PART II

 

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

27

   

Equity Securities

 

Item 6.

  

Selected Financial Data

29

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

  

Financial Statements and Supplementary Data

48

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

90

Item 9A.

  

Controls and Procedures

90

Item 9B.

  

Other Information

91

       
 

  

PART III

 

Item 10.

  

Directors, Executive Officers and Corporate Governance

92

Item 11.

  

Executive Compensation

92

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

92

   

Matters

 

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

92

Item 14.

  

Principal Accounting Fees and Services

92

       
 

  

PART IV

 

Item 15.

  

Exhibits, Financial Statement Schedules

93

       

Signatures

   

94

 

 
2

 

 

 

PART I

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Annual Report”) 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. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “would,” “could,” “expect,” “suggest,” “possible,” “potential,” “target,” “commit,” “continue,” “believe,” “anticipate,” “intend,” “project,” “projected,” “positioned,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements made in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary” and elsewhere regarding: (1) our future strategies and target market; (2) our future revenues, gross profits and margins; (3) our future research and development (“R&D”) efforts and related expenses; (4) our future selling, general and administrative expenses (“SG&A”); (5) our cash and cash equivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months; (6) our ability to continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities; (7) the possibility of future acquisitions and investments; (8) our ability to accurately estimate our assumptions used in valuing stock-based compensation; (9) our ability to estimate and reconcile distributors’ reported inventories to their activities; (10) our ability to estimate future cash flows associated with long-lived assets; and (11) the volatile global economic and financial market conditions. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ materially from those stated herein include, but are not limited to, the factors contained under the captions Part I, Item 1—“Business,” Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We disclaim any obligation to revise or update information in any forward-looking statement, except as required by law.

 

 ITEM 1.

BUSINESS

 

Overview 

 

Exar Corporation (“Exar,” “us,” “our” or “we”) designs, develops and markets high performance analog mixed-signal integrated circuits (“ICs”) and advanced sub-system solutions for the Industrial and Embedded Systems, High-End Consumer and Infrastructure markets. Our comprehensive knowledge of end-user markets along with the underlying analog, mixed signal and digital technology has enabled us to provide innovative solutions designed to meet the needs of the evolving connected world. Applying both analog and digital technologies, our products are deployed in a wide array of applications such as industrial, instrumentation and medical equipment, networking and telecommunication systems, servers, enterprise storage systems, flat panel displays, LED lighting solutions, set top boxes and digital video recorders. We provide customers with a breadth of component products and sub-system solutions based on advanced silicon integration. Exar’s product portfolio includes Connectivity, Power Management, High Performance Analog, Communications, Processors, Flat Panel Display and LED lighting.

 

We market our products worldwide with sales offices and personnel located throughout the Americas, Europe, and Asia. Our products are also sold through channel partners, including distributors and manufacturers’ representatives. These channel partners are assisted and managed by our regional sales teams. In addition to our regional sales teams, we also employ a worldwide team of field application engineers (“FAE”) to work directly with our customers.

 

Exar was incorporated in California in 1971 and was reincorporated in Delaware in 1991. Our common stock trades on The New York Stock Exchange (“NYSE”) under the symbol “EXAR”. See the information in Part II, Item 8—Financial Statements and Supplementary Data” for information on our financial position as of March 27, 2016 and March 29, 2015 and results of operations and cash flows for fiscal years ended March 27, 2016, March 29, 2015 and March 30, 2014.

 

Core Competencies and Key Initiatives

 

Analog and Mixed-Signal Design ExpertiseWe have over 40 years of proven technical competency in developing analog and mixed-signal ICs. As a result, we have developed a deep understanding of the subtleties of analog and mixed-signal design and a comprehensive library of analog core blocks. We leverage this expertise across our broad range of products and in our new product development efforts. From programmable power management chips to advanced telecommunications products, our solutions share a heavy concentration of analog and mixed-signal content to achieve high performance, power efficient solutions for our customers.

 

Signal Path Solutions Our focus on signal path includes a wide selection of high performance or high precision amplifiers, data converters and reference circuitries. We design and develop amplifiers and data converters that support the diverse signal path and conditioning needs of networking, industrial control and embedded applications.

 

 
3

 

 

Markets

 

We sell our products into three primary markets: Industrial and Embedded Systems, High-End Consumer and Infrastructure.

 

Industrial and Embedded Systems The Industrial and Embedded Systems Market is a broad market made up of tens of thousands of customers serving fields such as manufacturing, medical, energy, and automotive. Our devices perform numerous industrial control and embedded applications such as facilitating and optimizing the interface across and between systems and networks, power management, signal conditioning, and data conversion. Our patent protected proprietary AC Step driver solutions support a wide range of LED lighting products.

 

High-End Consumer The High-End Consumer Market is a large market made up of various consumer products such as flat panel displays (e.g. televisions, monitors, personal computers, laptops, tablets, cellular phones, phablets), LED light bulbs, and set-top boxes. With our solutions, flat panel display customers have the flexibility of selecting a wide variety of display analog products to meet the system requirements of power efficiency, bill of materials (“BOM”) cost, and form factors such as narrow bezel design. This portion of the market is more concentrated, with a limited number of large customers and the supply chain that supports them.

 

Infrastructure The Infrastructure Market is also a broad market made up of industries such as telecommunications and networking and data storage. We provide solutions for data and telecommunication systems, servers and routers, enterprise storage systems, and other applications.

 

Products 

 

Our products are organized into six primary product lines, which allow product definition based on market opportunities and trends. We define our product lines as Connectivity, Power Management, High Performance Analog, Processors, Flat Panel Display and LED lighting.

 

Connectivity  

 

The demand for connectivity is projected to grow significantly during the next decade as the Internet evolves to support machine-to-machine connectivity within the Internet of Things ecosystem. The need to connect billions of devices at home, in the office and in factories through the Internet is driving the requirement for smart connectivity solutions. Our connectivity product strategy is to continue to enhance our portfolio with higher speed, lower power and enhanced functionality devices that meet the growing demands of our customers. Growth drivers in our connectivity product business include increased integration and value through the introduction of differentiated bridging products for popular and growing bus interfaces such as Universal Serial Bus (“USB”), Ethernet, Peripheral Interconnect Express (“PCIe”), as well as innovative new Universal Asynchronous Receiver/Transmitters (“UARTs”) and serial transceiver devices.

 

Our focus on connectivity is a key initiative that drives product strategy and serves as a foundation for our customer engagements. We have added system architecture expertise and extended our product portfolio to offer new silicon products. Our connectivity solutions serve data and telecommunications, networking and storage, industrial control and embedded applications. Our devices facilitate and optimize the interface between systems and across networks with Serial Transceivers, Multi-Protocol Interface products, UARTs and interface Bridges.

 

Typical applications include point-of-sale, process control, and factory automation, as well as servers, embedded systems, routers, network management equipment, remote access servers, wireless base-stations and repeaters.

 

Our UARTs product portfolio ranges from cost-effective industry-standard devices to high performance multi-channel UARTs with a broad range of first in, first out depths and industry leading performance and features. We support popular central processing unit (“CPU”) bus interfaces such as 8-bit Industry Standard Architecture, 8-bit VLIO, 2-wire Inter-Integrate Circuit, 4-wire Serial Peripheral Interface, Peripheral Component Interconnect, PCIe and USB. We have also added USB to Ethernet bridging solutions which also include UARTs for serial connectivity.

 

Our serial transceiver solutions consist of Recommended Standard (“RS”)-232, RS-485, RS-422 and multiprotocol devices that ensure reliable connectivity between computing devices. Our RS-232, RS-485 and RS-422 transceivers comply with international standards in delivering multi-channel digital signals between two systems. Our proprietary multiprotocol transceivers enable network equipment to communicate with a large population of peripherals that use a diverse set of serial protocol standards without the added burden of multiple add-on boards and cables.

 

 
4

 

 

Power Management

 

The market for power management components is a large and diverse semiconductor segment covering a wide range of requirements. We have developed solutions for DC/DC voltage conversion and supervision. Our products are designed to support the needs of various infrastructure and industrial and embedded system applications.

 

Our focus on power management includes traditional linear and switching power management solutions as well as an innovative approach to software programmable power management with the universal Power Management IC (“PMI”) family. We have also introduced a family of programmable power module solutions that provide programmable power conversion with integrated inductors for the smallest profile solutions on the market.

 

We provide analog control of DC voltages and deliver regulated power to electronic systems such as data and telecommunication systems, servers and routers, enterprise storage systems, industrial control and process automation equipment, set top boxes, digital video recorders and portable electronic devices. Our Universal PMIC solutions based off our leading programmable power technology provide system designers the ability to reconfigure the power management sub-system through a software interface. This proprietary approach enables customers to reduce product development cycles from many months to several weeks and provides a flexible and configurable solution for control of critical attributes of the power management system.

 

Our patented programmable power technology combines digital control and monitoring with our high performance analog circuitry, enabling the system architect to design products that significantly reduce wasted energy and are quickly reconfigurable.

 

Our Power Module devices provide customers the ability to design small power supplies with high efficiency. These solutions leverage our programmable power technology or our patented constant-on-time analog control architecture.

 

Power management product development requires close customer interaction, advanced design skills and world-class process and package development capability and design tools. As a fabless semiconductor manufacturer, we have access to a broad range of wafer fabrication facilities and process technologies. This access to leading process technology and our ongoing investment in analog and mixed-signal design automation tools enables us to compete with the world’s leading manufacturers of analog power management products.

 

High Performance Analog

 

The demand for signal amplification, conditioning and conversion is a required part of any system given that the real world is analog, connecting sight, touch and sound. With our acquisition of Cadeka Microcircuits LLC (“Cadeka”), we have over 250 products that range from amplifiers to data converters with emphasis on either high precision or high speed. Our portfolio of products includes instrumentation, low noise, high speed and hybrid amplifiers, as well as high speed analog-to-digital converters (“ADCs”) and digital-to-analog converters. As a performance leader, we offer some of the industry’s lowest noise and distortion amplifiers and lowest power consumption high speed ADCs. Our amplifier and data converter products are designed to meet the needs of various industrial, medical, and video applications.

 

Communications

 

We provide high performance communications products for the transmission of digital data through global service provider networks. Conforming to international standards for copper, fiber optic and wireless protocols, our broad portfolio of Pseudo-synchronous Digital Hiearchy (“PDH”), Synchronous Optical NETwork (“SONET”) and Synchronous Digital Hierarchy (“SDH”) products enable the delivery of highly reliable, value added communication services. Our portfolio of SONET/SDH products process data at speeds from 155Mbps to 400Gbps for the efficient transport of digital data over fiber optic networks. Products include mixed signal clock and data recovery circuits. Transceivers, protocol framers and service mappers. Our high density, high integration products offer significant flexibility in line card design while providing cost, are and power savings over alternative solutions.

 

Processors

 

We provide highly integrated semiconductors, board level products, and system solutions that enable OEMs to develop high performance computing, storage and networking equipment with low power consumption.

 

 
5

 

 

Our video processor solutions offering is focused on the fast-growing surveillance industry. We offer chip- and board-level solutions for a wide variety of surveillance products including IP Cameras, DVRs, Hybrid NVRs and video streamers

 

Flat Panel Display

 

Our display analog products are designed to meet the emerging application requirements of UHD (4K2K resolution) LCD and OLED TV panels, as well as Tablets and Phablets. We continue to maintain a leadership position in TV programmable-Gamma (P-Gamma) IC for display color control, and have further extended our leadership of P-Gamma IC into monitor applications. Our advanced multi-channel programmable PMICs offer excellent product features, power efficiency, reduced BOM cost, and small form factors for narrow bezel Tablets and Phablets.

 

LED Lighting

 

Our patented low voltage AC Step drivers are finding increased acceptance in lighting applications that are expected to grow rapidly in the next decade. Our proprietary solution also addresses a key customer requirement by providing low BOM cost, increased power efficiency and reduced form factor as the AC Step drivers do not require AC-DC conversion circuitry typically used to drive LED lighting.

 

Strategy

 

Our goal is to be a leading provider of high performance analog mixed-signal integrated circuits and advanced sub-system solutions for Industrial and Embedded Systems, High-End Consumer, and Infrastructure markets. To achieve our long-term business objectives, we employ the following strategies:

 

Leverage Analog and Mixed-Signal Design Expertise to Provide Integrated System-Level SolutionsUtilizing our analog and mixed-signal design expertise, we integrate mixed-signal physical interface devices for a broad range of silicon solutions. This capability continues to be the backbone of our integration strategy and enables us to offer optimized solutions to the markets we serve. Our customers depend on analog and mixed-signal integration for power reduction, size optimization and signal integrity.

 

Expand Product PortfolioWe have developed a strong presence in the data and telecommunications, networking and storage, industrial control and automation markets where we have industry leading customers and proven technological capabilities. Our design expertise has enabled us to offer a diverse portfolio of both industry standard and proprietary products serving a range of connectivity, power management, signal path needs and high definition display electronics. Our extensive product portfolio provides the framework for customers to work with many of our products on a single board design. Our ability to serve the various needs of a customer’s system enables us to meet procurement and support demands by providing a single point of contact for applications support and supply chain management while reducing its number of vendors.

 

Grow Market Share with System SolutionsWe create systems solutions by coupling system expertise, software and advanced silicon integration to provide an optimized solution that is designed to be technically compelling and cost effective, resulting in distinctive device and system products like XRP9711 power modules.

 

Strengthen and Expand Strategic OEM Relationships To promote the early adoption of our solutions, we actively seek collaborative relationships with strategic OEMs during product development. We believe that OEMs recognize the value of our early involvement because designing their system products in parallel with our development can accelerate time-to-market for their end products. Collaborative relationships also help us to obtain early design wins and to increase the likelihood of market acceptance of our new products, while giving us the advantage of being the incumbent device provider on future generations of our customers’ platforms.

 

Use Standard Complementary Metal Oxide Semiconductor (“CMOS”) and Bipolar CMOS-DMOS (“BCD”) Process Technologies to Provide Compelling Price/Performance SolutionsWe design our products to be manufactured using standard CMOS, Bipolar and BCD processes. We believe that these processes are proven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS, Bipolar and BCD processes. In certain specialized cases, we may use other process technologies to take advantage of their performance characteristics.

 

Employ Fabless Semiconductor ModelWe have long-standing relationships with third-party wafer foundries and assembly and test subcontractors to manufacture our ICs. Our fabless approach allows us to avoid substantial capital spending, obtain competitive pricing, minimize the negative effects of industry cycles, reduce time-to-market, reduce technology and product risks, and facilitate the migration of our products to new CMOS, Bipolar and BCD process technologies. By employing the fabless model, we can focus on our core competencies in product design, development and support, as well as on sales and marketing.

 

 
6

 

 

Broaden Sales Coverage with Channel PartnersWe have strong relationships with our distributors, catalog firms and sales representatives throughout the world, from which we derive a significant portion of our total revenue. Through our partners, we have access to large market segments that we cannot directly support. Through these relationships, we extend our expertise and product exposure by enabling our partners to discover new demands for our solutions as well as aid us in defining our next generation solutions.

 

Sales and Customers 

 

We sell our products globally through both direct and indirect channels. In the United States we have our own direct sales force and are also represented by 21 independent sales representatives, three independent non-exclusive distributors, and three catalog distributors. We currently have domestic presences in Florida, North Carolina, Massachusetts, Minnesota, Maine, Oregon, New Jersey, Colorado, Delaware, Texas and California.

 

Internationally, we are represented in Canada, Europe and Asia by our wholly-owned foreign subsidiaries and international support offices in Canada, China, Germany, Italy, Hong Kong, South Korea, Taiwan and the United Kingdom. In addition to these offices, approximately 49 independent sales representatives and other independent, non-exclusive distributors represent us internationally. The percentage of our net sales represented by certain geographies is as follows:

  

   

Fiscal Years Ended

 
   

March 27,

   

March 29,

   

March 30,

 
   

2016

   

2015

   

2014

 

China

    47 %     38 %     35 %

United States

    12 %     14 %     29 %

Taiwan

    10 %     11 %     3 %

Korea

    6 %     10 %     3 %

Singapore

    9 %     9 %     11 %

Germany

    8 %     7 %     9 %

Rest of world

    8 %     11 %     10 %

Total net sales

    100 %     100 %     100 %

 

We expect international sales to continue to be a significant portion of our net sales in the future. All of our sales to foreign customers are denominated in U.S. dollars. For a detailed description of our sales by geographic regions, see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations, Net Sales by Geography” and Part II, Item 8—“Notes to Consolidated Financial Statement, Note 19—Segment and Geographic Information.” For a discussion of the risk factors associated with our foreign sales, see Part I, Item 1A—“Risk Factors—‘Our engagement with foreign customers could cause fluctuations in our operating results, which could materially and adversely impact our business, financial condition and results of operations’.

 

We sell our products to OEMs or their designated subcontract manufacturers and distributors (affiliated and unaffiliated) who buy our products and resell to their customers throughout the world. The following distributors and customers accounted for 10% or more of our net sales in the fiscal years indicated below:

  

   

Fiscal Years Ended

 
   

March 27,

   

March 29,

   

March 30,

 
   

2016

   

2015

   

2014

 

Distributor A +

    24 %     22 %     27 %
Customer D     11 %     *       *  

Distributor B

    *       *       21 %

Distributor C

    *       *       21 %

 

—————

*     Net sales for this distributor for this period were less than 10% of our net sales.

+     Related party

 

No other distributor or customer accounted for 10% or more of our net sales in fiscal years 2016, 2015 or 2014.

 

 
7

 

 

The following distributors and customer accounted for 10% or more of our net accounts receivable as of the dates indicated below:

  

   

March 27,

   

March 29,

 
   

2016

   

2015

 

Customer D

    16 %     10 %

Distributor E

    12 %     12 %

Distributor A+

    10 %     *  

Distributor B

    *       11 %

Distributor D

    *       10 %

_______________

*     Net accounts receivable for this distributor for this period were less than 10% of our net accounts receivables.

+     Related Party

 

No other distributor or customer accounted for 10% or more of our net accounts receivable as of March 27, 2016 or March 29, 2015.

 

Manufacturing 

 

We outsource all of our fabrication and assembly, as well as the majority of our testing operations. This fabless manufacturing model allows us to focus on product design, development and support as well as on sales and marketing.

 

Our products are manufactured using standard CMOS, bipolar, bipolar CMOS (“BiCMOS”) and BCD process technologies. We use wafer foundries located in the United States, Europe, and Asia to manufacture our semiconductor wafers.

 

Most of our semiconductor wafers are shipped directly from our foundry partners to our subcontractors in Asia for wafer test and assembly where the wafers are cut into individual dies and packaged. Independent contractors in China, Indonesia, Malaysia and Taiwan perform most of our assembly work. Final test and quality assurance are performed at our subcontractors’ facilities in Asia or at a subcontractor in California. All of our primary manufacturing partners are certified to ISO 9001:2008.

 

Research and Development

 

We believe that ongoing innovation and introduction of new products in our targeted and adjacent markets is essential to delivering growth. Our ability to compete depends on our ability to offer technologically innovative products on a timely basis. As performance demands and the complexity of ICs have increased, the design and development process has become a multi-disciplinary effort requiring diverse competencies.

 

Our research and development efforts will continue to focus on developing high performance analog and mixed-signal solutions addressing the requirements of communications and storage systems OEMs and the high-current, high-voltage, ultra-low voltage, high precision or high speed requirements of interface, power management and signal path OEMs as well as requirements for highly integrated cost effective solutions for high performance consumer OEMs.

 

We make investments in advanced design tools, design automation and high performance intellectual property libraries while taking advantage of readily available specialty intellectual property through licensing or purchases. We also augment our skill sets and intellectual property, by incorporating talent through acquisition. We continue to pursue the development of design methodologies that are optimized for reducing design cycle time and increasing the likelihood of first-time success. In addition to the United States, we have a substantive research and development presence in Taiwan. We invested an aggregate of $31.4 million, $37.2 million and $27.0 million in research and development in fiscal years 2016, 2015 and 2014, respectively. For further explanation of our research and development expenses, please see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Competition

 

The semiconductor industry is intensely competitive and is characterized by rapid technological change and a history of price reductions as design improvements and production efficiencies are achieved in successive generations of products. Although the market for analog and mixed-signal ICs is generally characterized by longer product life cycles and less dramatic price reductions than the market for digital ICs, we face substantial competition in each market in which we participate.

 

 
8

 

 

We believe that the principal competitive factors in the market segments in which we operate are:

 

 

 

time-to-market;

 

 

 

product innovation;

 

 

 

product performance, quality, reliability, cost and features;

 

 

 

customer requirements, support, services and engagements;

 

 

 

price;

 

 

 

rapid technological change;

 

 

 

number of design wins released to production;

 

 

 

lowering total system cost; and

 

 

 

compliance with and support of industry standards.

 

We compete with many other companies and many of our current and potential competitors may have certain advantages over us such as:

 

 

 

longer presence in key markets;

 

 

 

greater brand recognition;

 

 

 

more secure supply chain;

 

 

 

access to larger customer bases;

 

 

 

broader product offerings;

 

 

 

deeper engagement with customers;

 

 

 

stronger financial position and liquidity; and

 

 

 

significantly greater sales, marketing, development, and other resources.

 

Competitors in our Industrial and Embedded Systems and Infrastructure markets include companies such as Analog Devices, Inc., Integrated Device Technology, Inc., Intersil Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc., Monolithic Power Systems, NXP B.V., Silicon Labs, Texas Instruments Incorporated, Microchip Technology Inc., Ambarella, Inc., HiSilicon Technologies Co., Ltd., Cavium Networks and Intel. Competitors in High-End Consumer products include companies such as Texas Instruments Incorporated, Intersil Corporation, Richtek Technology Corporation, Chipone, Silergy, and Novatek Microelectronics Corporation and Global Mixed-mode Technology, Inc. See Part I, Item 1A—“Risk Factors—‘If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross margins and lost market share’.”

 

Backlog 

 

Our sales are made pursuant to either purchase orders for current delivery of standard items or agreements covering purchases over a period of time, which are frequently subject to revisions and, to a lesser extent, cancellations with little or no penalties. Lead times for the release of purchase orders depend on the scheduling practices of the individual customer, and our rate of bookings varies from month-to-month. Certain distributors’ agreements allow for stock rotations, scrap allowances and volume discounts. Further, we defer recognition of revenue on shipments to certain distributors until the product is sold to end customers. For all of these reasons, we believe backlog as of any particular date should not be used as a predictor of future sales.

 

 
9

 

 

Intellectual Property Rights 

 

To protect our intellectual property, we rely on a combination of patents, mask work registrations, trademarks, copyrights, trade secrets, and employee and third-party nondisclosure agreements. As of March 29, 2016, we have 233 patents issued and 20 patent applications pending in the United States and approximately 52 patents issued and 29 patent applications pending in various foreign countries. Our existing patents will expire between 2016 and 2035, or sooner if we choose not to pay renewal fees. We may also enter into license agreements or other agreements to gain access to externally developed products or technologies. While our intellectual property is critically important, we do not believe that our current or future success is materially dependent upon any one patent or technology.

 

Despite our protection efforts, we may fail to adequately protect our intellectual property. Others may gain access to our trade secrets or disclose such trade secrets to third parties without our knowledge. Some or all of our pending and future patent applications may not result in issued patents that provide us with a competitive advantage. Even if issued, such patents, as well as our existing patents, may be challenged and later determined to be invalid or unenforceable. Others may develop similar or superior products without access to or without infringing upon our intellectual property, including intellectual property that is protected by trade secrets and patent rights. In addition, the laws of certain territories in which our products are or may be developed, manufactured, used or sold, including Asia, Europe, the Middle East and Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States of America.

 

We cannot be sure that our products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications or that our products do not infringe any patents or proprietary rights of third parties. Occasionally, we are informed by third parties of alleged patent infringement. In the event that any relevant claims of third-party patents are found to be valid and enforceable, we may be required to:

 

 

 

stop selling, incorporating or using our products that use the infringed intellectual property;

 

 

 

obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, although such license may not be available on commercially reasonable terms, if at all; or

 

 

 

redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible or meet customer requirements.

 

If we are required to take any of the actions described above or defend against any claims from third parties, our business, financial condition and results of operations could be harmed. See Part I, Item 1A—“Risk Factors—We may be unable to protect our intellectual property rights, which could harm our competitive position and —We could be required to pay substantial damages or could be subject to various equitable remedies if it were proven that we infringed the intellectual property rights of others.”

 

Acquisitions

 

On June 3, 2014, we acquired approximately 92% of the outstanding shares of Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. On September 15, 2014, we completed the acquisition through a second-step merger to acquire all of the remaining outstanding shares of iML. iML’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning June 4, 2014.

 

We completed a significant strategic restructuring process during fiscal year 2015. This restructuring was prompted by the acquisition of iML, and an associated significant reduction in force, including reductions at our Hangzhou, China and Loveland, Colorado units. As a result of this restructuring and the resultant re-prioritization of resources, we performed an intangible assets impairment review during the second quarter of fiscal year 2015. Upon completion of this review, we recorded $12.3 million of impairment charges to acquired intangibles in fiscal 2015. Of these impairment charges, $7.5 million and $4.8 million are related to High-Performance Analog and Data Compression products, respectively.

 

On January 14, 2014, we completed the acquisition of Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market. Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning January 14, 2014.

 

On July 5, 2013 we completed the acquisition of Cadeka, a provider of high precision analog ICs for use in industrial and high reliability applications. Cadeka’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning July 5, 2013.

 

On March 22, 2013, we completed the acquisition of substantially all of the assets of Altior Inc. (“Altior”), a developer of data management solutions in Eatontown, New Jersey. Altior’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 23, 2013.

 

 
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Employees 

 

As of March 27, 2016, we employed 269 full-time employees, with 109 in research and development, 40 in operations, 77 in marketing and sales and 43 in administration. Of the 269 employees, 114 are located in our international offices. See Part I, Item 1A—“Risk Factors—‘We depend in part on the continued service of our key engineering and management personnel and our ability to identify, hire, incentivize and retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business, financial condition and results of operations could be materially and adversely impacted’. ” None of our employees are represented by a collective bargaining agreement and we have never experienced a work stoppage due to labor issues.

 

Available Information

 

We file electronically with the Securities and Exchange Commission (“SEC”) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those Reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. Those Reports and statements: (1) may be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549; (2) are available at the SEC’s Internet site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC; and (3) are available free of charge through our website (www.exar.com) as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC. Information regarding the operation of the SEC’s public reference room may be obtained by calling the SEC at 1-800-SEC-0330. Copies of such documents may be requested by contacting our Investor Relations Department at (510) 668-7201 or by sending an e-mail through the Investor Relations page on our website. Information on our website is not incorporated by reference into this Annual Report.

 

Executive Officers of the Registrant

 

Our executive officers and their ages as of May 27, 2016, are as follows:

 

Name 

Age

Position

Richard L. Leza  69 Interim Chief Executive Officer and President
Ryan A. Benton 45 Senior Vice President and Chief Financial Officer
Dimitry Goder 51 Senior Vice President, Research and Development
Hung P. Le 55 Senior Vice President, IC Engineering
Diane Hill 59 Vice President, Human Resources
Dan Wark 60 Vice President, Worldwide Operations
James Lougheed 38 Vice President, Component Products
Jessica Wu 32 Legal Counsel, Corporate Secretary

 

Richard L. Leza was appointed as the acting Chief Executive Officer and President (Interim) of the Company in October 2015. From 1982 to 1988, Mr. Leza was co-founder, Chairman and Chief Executive Officer of RMC Group, Inc., which provided management and research services for public and private technology companies. Mr. Leza was the founder, Chairman and Chief Executive Officer of AI Research Corporation, an early stage venture capital firm specializing in the areas of business-to-business software, information technology, medical devices and medical analytical software applications. Mr. Leza served in such position, which was his principal occupation and employment, from 1988 to 2007. From 1998 to 2001, Mr. Leza was the co-founder, Chairman and Chief Executive Officer of CastaLink, Inc., a provider of a web-based supply chain collaboration solution. From 1997 to 1999, Mr. Leza served as co-founder, Chairman and Chief Executive Officer of NucleoTech Corporation, an application software company focused on digital image-driven analytical DNA software solutions. Mr. Leza was a board member of the Stanford Graduate School of Business Advisory Council from 2001 to 2007 and is Emeriti Director of the New Mexico State University Foundation Board. Mr. Leza served as a director of AI Research Corporation from 1988 to 2008. Mr. Leza is now a member of the SEC Advisory Committee on Small and Emerging Companies. Mr. Leza earned an MBA from the Stanford University Graduate School of Business and a B.S. in Civil Engineering from New Mexico State University.

 

Ryan A. Benton was appointed Senior Vice President and Chief Financial Officer in December 2012. Prior to joining the Company, Mr. Benton was Chief Financial Officer of SynapSense, a private venture backed company serving the Data Center Infrastructure Management market from May 2012 to December 2012. Prior to SynapSense, from February 2007 until May 2012, Mr. Benton was Chief Financial Officer of SoloPower Inc., a manufacturer of thin-film solar cells and flexible solar modules. From November 2004 until February 2007, Mr. Benton served as a financial consultant for the United States subsidiary of ASM International NV, a semiconductor capital equipment company, where he supported acquisitions and integration process. He also served as Chief Financial Officer for PB Unlimited, an advertising specialty manufacturer, from April 2002 through November 2004. Mr. Benton served as corporate controller for eFunds, an information technology solutions company, where he was employed from September 2000 until March 2002. Mr. Benton received his B.A. from the University of Texas.

 

 
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Dimitry Goder was appointed Senior Vice President, Research and Development in October 2015. Mr. Goder joined Exar as Vice President, Research and Development after the acquisition of iML, Inc. where he served as Vice President of Engineering and Chief Technology Officer since September 2012. Prior to joining iML, Inc., Mr. Goder has held executive and management positions at elO Energy, IDT Corporation and Exar Corporation, and which combine into over 25 years of experience in engineering management in analog and mixed signal with various semiconductor companies. Mr. Goder has a master’s degree in electrical engineering from Moscow University of Oil and Gas industry.

 

Hung P. Le was appointed Senior Vice President of IC Engineering in February 2016. Mr. Le has over 33 years of experience in technology, IC design, and manufacturing roles. He most recently served as Senior Director of Operations at Integrated Device Technology (IDT) in San Jose, CA from September 2010 to January 2013. Before IDT, Mr. Le served as Vice President of Central Engineering and Product Development at Exar for three years and before that served as its Vice President of Technology. Prior to 1995, Mr. Le held various technical management positions at PMC-Sierra, Zoran and Trilogy Corporation. He began his career as a semiconductor device physicist at Texas instruments of Dallas, TX, after receiving his BSEE and MSEE from Massachusetts Institute of Technology in Boston, MA in 1982. During the course of his career, Mr. Le has received ten U.S. patent awards in the field of process technology, semiconductor devices and circuits.

 

Diane Hill was appointed Vice President, Human Resources in April 2010. With over 30 years of human resources experience, including 20 years in the semiconductor industry, Ms. Hill is responsible for developing and implementing all global and regional human resources policies and programs for us. Since joining us in September 2000, Ms. Hill has held various senior Human Resources positions prior to her current role, including Division Vice President, Director and Senior Manager. Previously, Ms. Hill held various management positions at Daisy Systems Corporation, a manufacturer of computer hardware and EDA, from October 1987 to April 1990 and Teledyne MEC, a subsidiary of Teledyne Technologies, Inc., from August 1979 to October 1987. Ms. Hill holds a BA in Psychology from the University of California at Santa Barbara.

 

Dan Wark was appointed Vice President, Worldwide Operations in December 2014 after serving as our Division Vice President of Supply Chain Management since April 2012. Mr. Wark’s experience in manufacturing spans over 35 years. During the 12 years immediately prior to joining us, he held the position of Vice President of Operations for both Amalfi Semiconductor Inc. and Volterra Semiconductor Corporation. His career also includes various management positions at Pericom Semiconductor Corporation, Linear Technology Corporation, National Semiconductor Corporation and Avantek. Mr. Wark is currently Chairman of the GSA Supply Chain Committee and holds a bachelor’s degree in Business Administration from San Jose State University.

 

James Lougheed was appointed senior vice president for sales and marketing in February 2016. Mr. Lougheed joined Exar in April 2008 as vice president and managing director for Asia Pacific and has held the position of vice president for power management and analog mixed signal products from January 2012 to December 2014. Mr. Lougheed brings over 20 years of experience in the technology industry from end systems, component distribution and semiconductor marketing. Prior to Exar, he was Director of Marketing and Business Development at Cirrus Logic. He also held positions as Director of Marketing at Apexone Microelectronics and Senior Technical Sales Director at Future Electronics. Mr. Lougheed has a degree in electronics engineering and a master’s in business administration from the University of Southern Queensland, Australia.

 

Jessica Wu was appointed Legal Counsel in August 2014 following the acquisition of Integrated Memory Logic Limited (“iML”), where she had served as Corporate Counsel and Secretary since 2011. She was appointed as our Corporate Secretary in February 2015. Ms. Wu has experience with Taiwanese companies and helping them maintain their public status and experience in the semiconductor industry. Prior to iML, she worked at Thoits, Love, Hershberger and McLean, Kirkland & Ellis LLP, and clerked for Judge McAdams at the Sixth District Federal Court of Appeals. Ms. Wu holds a JD from Santa Clara University School of Law and a BA from University of California, Berkeley. 

 

ITEM 1A.

RISK FACTORS

 

The following factors describe risks and uncertainties that could adversely affect our business, financial condition, results of operations, and the market price of our common stock. The risks and uncertainties described below should not be considered to be a complete statement of all potential risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we do not currently consider material may also harm our business, financial condition, results of operations or the market price of our common stock. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

If we are unable to grow or secure and convert a significant portion of our design wins into revenue, our business, financial condition and results of operations would be materially and adversely impacted.

 

We continue to secure design wins for new and existing products, which are necessary for our revenue growth. However, many of our design wins may never generate revenues if end-customer projects are unsuccessful in the market place or if the end-customer terminates the project, which may occur for a variety of reasons. If design wins do generate revenue, the time lag between the design win and meaningful revenue is typically between six months to longer than 18 months. If we fail to grow and convert a significant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materially and adversely impacted.

 

 
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If we fail to develop, introduce or enhance products that meet evolving needs or which are necessitated by technological advances, or we are unable to grow revenue in our served markets, then our business, financial condition and results of operations could be materially and adversely impacted.

 

The process of developing and supporting new products is complex, expensive and uncertain, and if we fail to accurately predict, understand and execute to our customers’ changing needs and emerging technological trends, our business, financial condition and results of operations may be harmed. We may not be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins, ensure when and which design wins actually get released to production, or respond effectively to technological changes or product announcements by our competitors. In addition, we may not be successful in developing or using new technologies or may incorrectly anticipate market demand and develop products that achieve little or no market acceptance. Even if we may make significant investments to define new products according to input from our customers, we cannot guarantee that they will not choose a competitor’s products, develop an internal solution or cancel their projects. Our pursuit of technological advances may also require substantial time and expense and may ultimately prove unsuccessful. Our ability to compete will also depend in part on our ability to identify and ensure compliance with continually evolving industry standards and new technologies. Failure in any of these areas may materially and adversely harm our business, financial condition and results of operations.

 

Our growth and are ability to grow revenue in our current markets depend in large part on our continued development and timely release of new products for our core markets. We must: (1) anticipate customer and market requirements and changes in technology and industry standards; (2) properly define, develop and introduce new products on a timely basis; (3) gain access to and use technologies in a cost-effective manner; (4) have suppliers produce quality products consistent with our requirements; (5) continue to expand and retain our technical and design expertise; (6) introduce and cost-effectively deliver new products in line with our customer product introduction requirements; (7) differentiate our products from our competitors’ offerings; and (8) gain customer acceptance of our products. In addition, we must continue to have our products designed into our customers’ future products and maintain close working relationships with key customers to define and develop new products that meet their evolving needs. Moreover, we must respond in a rapid and cost-effective manner to shifts in market demands to increased functional integration and other changes. Migration from older products to newer products may result in earnings volatility as revenues from older products decline and revenues from newer products begin to grow. If we fail to develop or enhance our products to meet our clients’ needs or we are unable to grow revenue in our served markets, our business, financial condition and results of operations could be materially and adversely impacted.

 

If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross margins and lost market share.

 

We compete in markets that are intensely competitive, and which are subject to both rapid technological change, continued price erosion and changing business terms with regard to risk allocation. We have experienced increased competition at the design stage, where customers evaluate alternative solutions based on a number of factors, including price, performance, product features, technologies, and availability of long-term product supply and/or roadmap guarantee. Additionally, we have experienced, in some cases, severe pressure on pricing from competitors or on-going cost reduction expectations from customers. Such circumstances may make some of our products unattractive due to price or performance measures and result in the loss of our design opportunities or a decrease in our revenue and margins.

 

Our competitors include many large domestic and foreign companies that may have substantially greater financial, market share, technical and management resources, name recognition and leverage than we have. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to promote the sale of their products. Also, competition from new companies, including those from emerging economy countries, with significantly lower costs could affect our selling price and gross margins. In addition, if competitors in Asia continue to reduce prices on commodity products, it would adversely affect our ability to compete effectively in that region. Specifically, we have licensed rights to a supplier in China to market our commodity connectivity products, which could reduce our sales in the future should they become a meaningful competitor. Loss of competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced gross margins and loss of market share, any of which would adversely affect our operating results and financial condition.

 

Furthermore, many of our existing and potential customers internally develop solutions which attempt to perform all or a portion of the functions performed by our products. To remain competitive, we continue to evaluate our manufacturing operations for opportunities for additional cost savings and technological improvements, in addition to successfully implementing new process technologies and achieving volume production of new products at acceptable yields. If we are unable to compete effectively with existing or new competitors, we may experience fewer customer orders, reduced revenues, reduced gross margins and lost market share, all of which could materially and adversely affect our business, financial condition and results of operations.

 

 
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We derive a substantial portion of our revenues from distributors, especially from our two primary distributors, Future Electronics Inc. (“Future”), a related party, and Arrow Electronics, Inc. (“Arrow”). Our revenues would likely decline significantly if our primary distributors elected not to or we were unable to effectively promote or sell our products or if they elected to cancel, reduce or defer purchases of our products.

 

Future and Arrow have historically accounted for a significant portion of our revenues and they are our two primary distributors worldwide. We anticipate that sales of our products to these distributors will continue to account for a significant portion of our revenues. The loss of either Future or Arrow as a distributor, for any reason, or a significant reduction in orders from either of them would materially and adversely affect our business, financial condition and results of operations.

 

Sales to Future, Arrow and WT Microelectronics, and certain other distributors are made under agreements that provide protection against price reduction for their inventory of our products. As such, we could be exposed to significant liability if the inventory value of the products held by these distributors declined dramatically. In addition, if they were to defer or cancel orders, our revenues would decline and this would materially and adversely impact our business, financial condition and results of operations.

 

If our distributors or sales representatives stop selling or fail to successfully promote our products, our business, financial condition and results of operations could be materially and adversely impacted.

 

We sell many of our products through sales representatives and distributors, many of which sell directly to OEMs, contract manufacturers and end customers. If some or all of our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business, financial condition and results of operations could be materially and adversely impacted. Moreover, we depend on the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital.

 

Our non-exclusive distributors and sales representatives may carry our competitors’ products, which could adversely impact or limit sales of our products. Additionally, they could reduce or discontinue sales of our products or may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. Our agreements with distributors contain limited provisions for return of our products, including stock rotations whereby distributors may return a percentage of their purchases from us based upon a percentage of their most recent three or six months of shipments. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return some portion of their prior purchases. The loss of business from any of our significant distributors or the delay of significant orders from any of them, even if only temporary, could materially and adversely impact our business, financial conditions and results of operations. As such, we believe that our success will continue to depend on these distributors and sales representative and their ability to effectively sell and promote our products.

 

We may be exposed to additional credit risk as a result of concentrated customer revenue.

 

From time to time one of our customers has contributed more than 10% of our quarterly net sales. A number of our customers are OEMs, or the manufacturing subcontractors of OEMs, which might result in an increase in concentrated credit risk with respect to our trade receivables and therefore, if a large customer were to be unable or unwilling to pay, it could materially and adversely impact our business, financial condition and results of operations.

 

The complexity of our products may lead to errors and defects, which could subject us to significant costs or damages and adversely affect market acceptance of our products.

 

Although we, our customers and our suppliers rigorously test our products, they may contain undetected errors, performance weaknesses or errors or defects when first introduced, or as new versions are released when manufacturing or process changes are made. If any of our products contain design or production defects, reliability issues or quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to continue to design in or buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these errors or defects could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition and results of operations.

 

If errors or defects are discovered after commencement of commercial production, we may be required to make significant expenditures of capital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from our other business development efforts. We could also incur significant costs to repair or replace defective products or may agree to be liable for certain damages incurred. These costs or damages could have a material adverse effect on our business, financial condition and results of operations.

 

 
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Because some of our integrated circuit and board level products have lengthy sales cycles, we may experience substantial delays between incurring expenses related to product development and the revenue derived from these products.

 

A portion of our revenue is derived from selling integrated circuits and board level products to end customer equipment vendors. Due to their product development cycle, we have typically experienced at least an eighteen-month time lapse between our initial contact with a customer and realizing volume shipments. In such instances, we first work with customers to achieve a design win, which may take six months or longer. Our customers then complete their design, test and evaluation process and begin to ramp-up production, a period which typically lasts an additional six months. The customers of equipment manufacturers may also require a period of time for testing and evaluation, which may cause further delays. As a result, a significant period of time may elapse between our research and development efforts and realization of revenue, if any, from volume purchasing of our products by our customers. Due to the length of the end customer equipment vendors’ product development cycle, the risks of project cancellation by our customers, price erosion or volume reduction are common aspects of such engagements.

 

If we are unable to accurately forecast demand for our products, we may be unable to efficiently manage our inventory.

 

Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on customer forecasts, internal evaluation of customer demand and current backlog, which can fluctuate substantially. Due to a number of factors such as customer changes in delivery schedules and quantities actually purchased, cancellation of orders, distributor returns or price reductions, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Other factors such as purchase order cancellations or delays, product returns and price reductions may also affect our backlog. We may not be able to meet our expected revenue levels or results of operations if there is a reduction in our order backlog for any particular period and we are unable to replace those anticipated sales during the same period.

 

Our forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, new part introductions by our competitors, loss of previous design wins, adverse changes in our scheduled product order mix and demand for our customers’ products or models. As a consequence of these factors and other inaccuracies inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some of our products and shortages of others. Such shortages can adversely impact customer relations and surpluses can result in larger-than-desired inventory levels, either of which can materially and adversely impact our business, financial condition and results of operations. For example, where we have hub agreements with certain vendors, the inability of our partners to provide accurate and timely information regarding inventory and related shipments of the inventory may impact our ability to maintain the proper amount of inventory at the hubs, forecast usage of the inventory and record accurate revenue recognition. If we are unable to accurately forecast demand for our products or efficiently manage our inventory, it could materially and adversely impact our business, financial conditions and the results of operations.

 

We have made, and in the future may make, acquisitions, divestitures, and other transactions, which may involve a number of risks. If we are unable to address these risks successfully, such acquisition, divestitures and other transactions could have a material adverse effect on our business, financial condition and results of operations.

 

We have undertaken a number of strategic acquisitions, have made strategic investments in the past, and may make further strategic acquisitions and investments from time to time in the future. The risks involved with these acquisitions and investments include:

 

 

the possibility that we may not receive a favorable return on our investment or incur losses from our investment or the original investment may become impaired;

 

 

revenues or synergies could fall below projections or fail to materialize as assumed;

 

 

the possibility of litigation arising from or in connection with these acquisitions;

 

 

our assumption of known or unknown liabilities or other unanticipated events or circumstances;

 

 

difficulties in integrating and managing various functional areas such as sales, engineering, marketing and operations;

 

 

when we decide to divest assets, we may have difficulty selling on acceptable terms in a timely manner, we could fail to get regulatory approvals, the agreed-upon terms could be renegotiated due to changes in business or market conditions, and the divestitures could result in the loss of key personnel or technology. These circumstances could also delay the achievement of our strategic objectives or cause us to incur added expense;

 

 

difficulties in incorporating or leveraging acquired technologies and intellectual property rights in new products;

 

 
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failure to retain and maintain relationships with existing customers, distributors, channel partners and other parties;

 

 

the diversion of management’s attention from day-to-day operations of the business and the failure to retain and integrate key personnel;

 

 

failure to coordinate research and development activities to enhance and develop new product and services in a timely manner that optimize the assets and resources of the combined company;

 

 

difficulties in creating uniform standards, controls (including internal control over financial reporting), procedures, policies and information systems;

 

 

reduction in liquidity and interest income on lower cash balances;

 

 

recording of goodwill and intangible assets that will be subject to periodic impairment testing and potential impairment charges against our future earnings;

 

 

incurring amortization expenses related to certain intangible assets; and/or

 

 

incurring large and immediate write-offs of assets.

 

Strategic equity investments also involve risks associated with third parties managing the funds and the risk of poor strategic choices or execution of strategic or operating plans. We may not address these risks successfully without substantial expense, delay or other operational or financial problems, or at all. Any delays or other such operations or financial problems could materially and adversely impact our business, financial condition and results of operations.

 

Our business may be materially and adversely impacted if we fail to effectively utilize and incorporate acquired technologies.

 

We have acquired and may in the future acquire intellectual property in order to expand our serviceable markets, accelerate our time to market, and to gain market share for new and existing products. Acquisitions of intellectual property may involve risks, including valuation of innovative capabilities, successful technical integration into new products, loss of key technical personnel, compliance with contractual obligations, market acceptance of new product features or capabilities, and achievement of planned return on investment. Successful technical integration in particular requires a variety of capabilities that we may not currently have, such as available technical staff with sufficient time to devote to integration, the requisite skills to understand the acquired technology and the necessary support tools to effectively utilize the technology. The timely and efficient integration of acquired technology may be adversely impacted by inherent design deficiencies or application requirements. The potential failure of or delay in product introduction utilizing acquired intellectual property could lead to an impairment of capitalized intellectual property acquisition costs, which could materially and adversely impact our business, financial condition and results of operations.

 

We have recorded material write-downs of the acquired technologies in fiscal year 2016, 2015 and 2014 associated with restructurings and annual impairment reviews. See Note 9 – “Goodwill and Intangible Assets”.

 

We may be unable to protect our intellectual property rights, which could harm our competitive position.

 

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we may be unable to protect our proprietary information, which could harm our competitive position in various ways. Moreover, our intellectual property rights may not be recognized or if recognized, may not be commercially feasible to enforce. Even if we are successful in protecting our proprietary information, our competitors may independently develop technology that is substantially similar or superior to our technology.

 

More specifically, our pending patent applications or any future applications may not be approved, and any issued patents may not provide us with competitive advantages or may be challenged by third parties. If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.

 

 
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We could be required to pay substantial damages or could be subject to various equitable remedies if it were proven that we infringed the intellectual property rights of others.

 

As a general matter, semiconductor companies may from time to time become involved with ongoing litigation regarding patents and other intellectual property rights. If a third party were to prove that our technology infringed its intellectual property rights, we could be required to pay substantial damages for past infringement and could be required to pay license fees or royalties on future sales of our products. If we were required to pay such license fees whenever we sold our products, such fees could exceed our revenue. Such intellectual property litigation could also require us to stop selling, incorporating or using our products that use the infringed intellectual property or redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible. We may also be unable to obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property or the license may not be available on commercially reasonable terms, if at all.

 

The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive and could require a significant portion of management’s time. For example, in April 2015, Phenix, LLC (“Phenix”) filed a complaint against us and iML for patent infringement. The parties have entered into a settlement agreement as of March 21, 2016. See Part II, Item 8.

 

In some situations, rather than litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include the payment of damages and our agreement to license technology in exchange for a license fee and ongoing royalties. These fees could be substantial. Similarly, if we were required to pay license fees to third parties based on a successful infringement claim brought against us, such fees could exceed our revenue. If we were required to pay damages or otherwise became subject to equitable remedies, our business, financial condition and results of operations would suffer.

 

We depend on third-party subcontractors to manufacture our products. Any disruption in or loss of our subcontractors’ capacity to manufacture and test our products could subjects us to delayed product delivery or increased costs, which could materially and adversely impact our business, financial condition and results of operations.

 

We do not own or operate a semiconductor fabrication facility or a foundry and we depend on third-party subcontractors to manufacture our products. We utilize wafer foundries for processing our wafers and assembly and test subcontractors for manufacture and test our integrated circuit products and board assembly subcontractors to manufacture our board-level products. Our foundries produce semiconductors for many other companies (many of which have greater volume requirements than us), and therefore, we may not have access on a timely basis to sufficient capacity or certain process technologies and we have from time to time, experienced extended lead times on some products. In addition, we rely on our foundries’ continued financial health and ability to continue to invest in smaller geometry manufacturing processes and additional wafer processing capacity.

 

Our foundries and test and assembly subcontractors manufacture our products on a purchase order basis. We provide our foundries with rolling forecasts of our production requirements; however, the ability of our foundries to provide wafers is limited by the foundries’ available capacity. Our third-party foundries may not allocate sufficient capacity to satisfy our requirements. In addition, we may not continue to do business with our foundries on terms as favorable as our current terms. Furthermore, any reduction or discontinuance, either on a permanent or temporary basis, of any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products, lost sales opportunities, and increased costs. Any delays or shortages would likely materially and adversely impact our business, financial condition and results of operations. In particular, the products produced from the wafers manufactured by our suppliers in China currently constitute a significant part of our total revenue, and so any delay, reduction or elimination of our ability to obtain wafers from any of these suppliers could materially and adversely impact our business, financial condition and results of operations.

 

Our reliance on our wafer foundries, assembly and test subcontractors and board assembly subcontractors involves the following risks, among others:

 

 

 

a manufacturing disruption or reduction or elimination of any existing source(s) of semiconductor manufacturing materials or processes, which might include the potential temporary or permanent closure, product and /or process discontinuation, change of ownership, change in business conditions or relationships, change of management or consolidation by one of our foundries;

 

 

 

inability to obtain, develop or ensure the continuation of technologies needed to manufacture our products;

 

 

 

extended time required to identify, qualify and transfer to alternative manufacturing sources for existing or new products or the possible inability to obtain an adequate alternative;

 

 

 

failure of our foundries or subcontractors to obtain raw materials and equipment;

 

 

 

long-term financial and operating stability of the foundries or their suppliers or subcontractors and their ability to invest in new capabilities and expand capacity to meet increasing demand, to remain solvent or to obtain financing in tight credit markets;

 

 

 

continuing measures taken by our suppliers such as reductions in force, pay reductions, forced time off or shut down of production for extended periods of time to reduce and/or control operating expenses in response to weakened customer demand; and

  

 

 

subcontractors’ inability to transition to smaller package types or new package compositions.

 

 
17

 

 

Other additional risks associated with subcontractors include:

 

 

 

subcontractors imposing higher minimum order quantities for substrates;

 

 

 

potential increase in assembly and test costs;

 

 

 

our board level product volume may not be attractive to preferred manufacturing partners, which could result in higher pricing, extended lead times or having to qualify an alternative vendor;

 

 

 

difficulties in selecting, qualifying and integrating new subcontractors;

 

 

 

inventory and delivery management issues relating to hub arrangements;

 

 

 

entry into “take-or-pay” agreements subjecting us to high fixed costs; and/or

 

 

 

limited warranties from our subcontractors for products assembled and tested for us.

 

Our costs may increase substantially if our third-party manufacturing subcontractors do not achieve satisfactory product yields or quality.

 

Our manufacturing process is extremely complicated and small changes in design, specifications or materials can result in material decreases in product yields or even the suspension of production. From time to time, our third-party foundries or the foundries of our suppliers that we contract to manufacture our products may experience defects and reduced yields related to errors or problems in their manufacturing processes or the interrelationship of their processes with our designs. In some cases, our third-party foundries may not be able to detect these defects early in the manufacturing process or determine the cause of such defects in a timely manner.

 

Generally, in pricing our products, we assume that manufacturing yields will continue to improve, even as the complexity of our products increases. Once our products are initially qualified with our third-party foundries, minimum acceptable yields are established. We are responsible for the costs of the units if the actual yield is above the minimum. If actual yields are below the minimum we are not required to purchase the units. Typically, minimum acceptable yields for our new products are generally lower at first and gradually improve as we achieve full production. Unacceptably low product yields or other product manufacturing problems could substantially increase overall production time and costs and adversely impact our operating results. Product yield losses will increase our costs and reduce our gross margin. In addition to significantly harming our results of operations and cash flow, poor yields may delay shipment of our products and harm our reputation and our relationships with existing and potential customers, which could materially and adversely affect our business, financial condition and results of operations.

 

A breach of our security systems may have a material adverse effect on our business.

 

Our information systems are designed to maintain and protect our customers’, suppliers’ and employees’ confidential and business intelligence data as well as our proprietary information and technology. We may experience cyber-attacks and other security breaches, and as a result, unauthorized parties may obtain access to our information systems. Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims or harm our or our business partner’s competitive position. Any significant system or network disruption, including but not limited to, new system implementations, computer viruses or worms, security breaches or unexpected energy blackouts could have a material adverse impact on our operations, sales and operating results. Maintaining the security integrity of our enterprise network is paramount for us, our customers and our suppliers. We have implemented measures to manage, monitor and detect our risks related to such disruptions, but despite precautionary efforts such disruptions could still occur and negatively impact our operations and financial results. In addition, we may incur additional costs to remedy any damages caused by these disruptions or security breaches.

 

 

 
18

 

 

Our engagement with foreign customers could cause fluctuations in our operating results, which could materially and adversely impact our business, financial condition and results of operations.

 

International sales have accounted for, and will likely continue to account for a significant portion of our revenues. Such engagement with foreign customers subjects us to unique risks, which could cause fluctuations in our operating results, including, among others:

 

 

 

changes in or compliance with regulatory requirements;

 

 

 

tariffs, embargoes, directives and other trade barriers which impact our or our customers’ business operations;

 

 

 

timing and availability of export or import licenses;

 

 

 

disruption of services due to political, civil, labor or economic instability;

 

 

 

difficulties in accounts receivable collections;

 

 

 

difficulties in staffing and managing foreign subsidiary and branch operations;

 

 

 

difficulties in managing sales channel partners;

 

 

 

difficulties in obtaining governmental approvals for our products;

 

 

 

limited intellectual property protection in certain countries;

 

 

 

foreign currency exchange fluctuations;

 

 

 

the burden of complying with foreign laws and treaties;

 

 

 

contractual or indemnity issues that are materially different from our standard sales terms; and/or

 

 

 

potentially adverse tax consequences.

 

In addition, because sales of our products have been denominated primarily in U.S. dollars, increases in the value of the U.S. dollar as compared with local currencies could make our products more expensive to customers in the local currency of a particular country resulting in pricing pressures on our products. Increased international activity in the future may result in foreign currency denominated sales. Furthermore, because some of our customers’ purchase orders and agreements are governed by foreign laws, we may be limited in our ability, or it may be too costly for us, to enforce our rights under these agreements and to collect damages, if awarded.

 

Our business depends on customers, suppliers and operations in Asia, and as a result we are subject to regulatory, operational, financial and political risks, which could adversely affect our financial results. 

 

The percentage of our revenue attributable to sales to customers in Asia was 77% in 2016 and 73% in 2015.  We derived 38% and 47% of our revenue from sales to customers in China in 2015 and 2016, respectively.  We expect that revenue from customers in Asia will continue to account for a large percentage of our revenue.

 

We rely on a network of sales people, distributors, manufacturers and subcontractors to sell our products internationally.  Accordingly, we are subject to several risks and challenges, any of which could harm our business and financial results. These risks and challenges include:

 

 

difficulties and costs of staffing and managing international operations across different geographic areas and cultures;

 

 

compliance with a wide variety of domestic and foreign laws and regulations, including those relating to the import or export of semiconductor products;

 

 

legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;

 

 

foreign currency exchange fluctuations relating to our international operating activities;

 

 

our ability to receive timely payment and collect our accounts receivable;

 

 

 
19

 

 

 

political, legal and economic instability, foreign conflicts and the impact of regional and global infectious illnesses in the countries in which we and our customers, suppliers, manufacturers and subcontractors are located;

 

 

legal uncertainties regarding protection for intellectual property rights in some countries; and

 

 

fluctuations in freight rates and transportation disruptions.

 

As a result of the above factors, among others, our continued involvement in Asia subjects us to added regulatory, operational, financial and political risks, which could adversely affect our business, operating results and financial condition.

 

Global capital, credit market, employment, and general economic and political conditions, and resulting declines in consumer confidence and spending, could have a material adverse effect on our business, operating results and financial condition.

 

Because our customers, suppliers and other business partners are in many countries around the world, we must monitor general global conditions for impact on our business. Economies throughout global regions continue to be volatile and, in many countries, inconsistent with trends in the U.S. or other stable economies. We cannot predict the timing, severity or duration of any economic slowdown or pace of recovery or the impact of any such events on our vendors, customers or us. If the economy or markets in which we operate deteriorate from current levels, many related factors could have a material adverse effect on our business, operating results, and financial condition, including the following:

 

 

 

slower spending by our target markets and economic fluctuations may result in reduced demand for our products, reduced orders for our products, order cancellations, lower revenues, increased inventories, and lower gross margins;

 

 

 

we may be unable to find suitable investments that are safe or liquid, or that provide a reasonable return resulting in lower interest income or longer investment horizons, and disruptions to capital markets or the banking system may also impair the value of investments or bank deposits we currently consider safe or liquid;

 

 

 

continued volatility in the markets and prices for commodities, such as gold, and raw materials we use in our products and in our supply chain, could have a material adverse effect on our costs, gross margins, and profitability;

 

 

 

if distributors of our products experience declining revenues, experience difficulty obtaining financing in the capital and credit markets to purchase our products or experience severe financial difficulty, it could result in insolvency, reduced orders for our products, order cancellations, inability to timely meet payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expenses associated with collection efforts and increased bad debt expenses;

 

 

 

if contract manufacturers or foundries of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delays or non-delivery of shipments of our products;

 

 

 

potential shutdowns on a temporary or permanent basis or over capacity constraints by our third-party foundry, assembly and test subcontractors could result in longer lead-times, higher buffer inventory levels and degraded on-time delivery performance; and/or

 

 

 

the current macroeconomic environment also limits our visibility into future purchases by our customers and renewals of existing agreements, which may necessitate changes to our business model.

 

Because a significant portion of our total assets were, and may again be with future potential acquisitions, represented by goodwill and other intangible assets, which are subject to mandatory annual impairment evaluations, we could be required to write-off some or all of our goodwill and other intangible assets, which could materially and adversely impact our business, financial condition and results of operations.

 

A significant portion of the purchase price for any business combination may be allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of consummation. As required by U.S. generally accepted accounting principles, the excess purchase price, if any, over the fair value of these assets less liabilities typically would be allocated to goodwill. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual analysis of our goodwill at the reporting unit level in the fourth quarter of our fiscal year.

 

 
20

 

 

The assessment of goodwill and other intangible assets impairment is a subjective process. Estimations and assumptions regarding the number of reporting units, future performance, results of our operations and comparability of our market capitalization and net book value will be used. Changes in estimates and assumptions could impact fair value resulting in an impairment, which could materially and adversely impact our business, financial condition and results of operations.

 

Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies.

 

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties, assumptions and changes in rulemaking by regulatory bodies; and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates and judgments could materially and adversely impact our business, financial condition and results of operations.

 

Our revenue reporting is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. For example, sell-through revenue relies on accurate and timely sell-through information from our distributors.. Distributors provide us periodic data regarding the product, price, quantity and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgment to reconcile distributors’ reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income, which could have an adverse effect on our business, financial condition and results of operations.

 

We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of stock-based compensation represent our estimates, but these estimates involve inherent uncertainties and the application of management judgments, which include the expected term of the stock-based awards, stock price volatility and forfeiture rates. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

 

On an on-going basis, we use estimates and judgment to evaluate valuation of inventories, income taxes, intangible assets, goodwill, long-lived assets and contingent consideration liabilities in preparing our consolidated financial statements. Actual results could differ from these estimates and material effects on operating results and financial position may result.

 

We depend in part on the continued service of our key engineering and executive management personnel and our ability to identify, hire, incentivize and retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business, financial condition and results of operations could be materially and adversely impacted.

 

Our future success depends on the continued service of our key design, engineering, technical, sales, marketing and executive personnel and our ability to identify, hire, motivate and retain such qualified personnel, as well as effectively and quickly replace key personnel with qualified successors with competitive incentive compensation packages. The failure to recruit and retain, as necessary, key design engineers and technical, sales, marketing and executive personnel could materially and adversely impact our business, financial condition and results of operations.

 

Competition for skilled employees having specialized technical capabilities and industry-specific expertise is intense and continues to be a considerable risk inherent in the markets in which we compete. At times, competition for such employees has been particularly notable in California and the PRC. Further, the PRC historically has different managing principles from Western style management and financial reporting concepts and practices, as well as different banking, computer and other control systems, making the successful identification and employment of qualified personnel particularly important, and hiring and retaining a sufficient number of such qualified employees may be difficult. As a result of these factors, we may experience difficulty in establishing and maintaining management, legal and financial controls, collecting financial data, books of account and records and instituting business practices that meet Western standards and regulations, which could materially and adversely impact our business, financial condition and results of operations.

 

 
21

 

 

Volatility or lack of positive performance in our stock price and the ability or willingness to offer meaningful competitive equity compensation and incentive plans or in amounts consistent with market practices may also adversely affect our ability to retain and incentivize key employees. For example, stock-based awards are critical to our ability to recruit, retain and motivate highly skilled talent. If we are unable to offer competitive employment packages, including equity awards, our ability to attract highly skilled employees could be harmed or competitors may recruit our employees, as is common in the high tech sector. If we are unable to successfully attract and retain key employees, we could face disruptions in operations, loss of existing customers, loss of key information, expertise or know-how, unanticipated additional recruiting and training costs, and potentially higher compensation costs.

 

Based upon most recent filings available as of March 27, 2016, affiliates of Future, Alonim Investments Inc. and two of its affiliates (collectively “Alonim”), beneficially own approximately 16% of our common stock. This substantial ownership position provides the opportunity for Alonim to significantly influence matters requiring stockholder approval, which may or may not be in our best interests or the interest of our other stockholders. In addition, Alonim is an affiliate of Future and an executive officer of Future is on our board of directors, which could lead to actual or perceived influence from Future.

 

Alonim owns a significant percentage of our outstanding shares. Due to such ownership, Alonim has not in the past, but may in the future, exert strong influence over actions requiring the approval of our stockholders, including the election of directors, many types of change of control transactions and amendments to our charter documents. Further, if one of these stockholders were to sell or even propose to sell a large number of their shares, the market price of our common stock could decline significantly.

 

Although we have no reason to believe it to be the case, the interests of these significant stockholders could conflict with our best interests or the interests of the other stockholders. For example, the significant ownership percentages of these three stockholders could have the effect of delaying or preventing a change of control or otherwise discouraging a potential acquirer from obtaining control of us, regardless of whether the change of control is supported by us and our other stockholders. Conversely, by virtue of their percentage ownership of our stock, Alonim could facilitate a takeover transaction that our board of directors and/or other stockholders did not approve.

 

Further, Future, our largest distributor, is an affiliate of Alonim, and Pierre Guilbault, executive vice president and chief financial officer of Future, is a member of our board of directors. These relationships could also result in actual or perceived attempts to influence management or take actions beneficial to Future, which may or may not be beneficial to us or in our best interests. Future could attempt to obtain terms and conditions more favorable than those we would typically provide to other distributors because of its relationship with us. Any such actual or perceived preferential treatment could materially and adversely affect our business, financial condition and results of operations.

 

Fluctuations in our revenues and operating results could cause the market price of our common stock to decline.

 

Our revenues and operating results are difficult to predict, even in the near term. In the past our historical operating results have fluctuated significantly, and may continue to fluctuate in the future, as a result of a variety of factors, many of which are outside of our control. As a result, comparing our revenues and operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. We may not be able to accurately predict our future revenues or results of operations. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are relatively fixed in the short-term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that quarter. It is possible that our operating results in some periods may be below expectations. This would likely cause the market price of our common stock to decline. If we do not achieve future quarterly revenues in the revenue range for operating break-even, we will continue to incur operating losses which will continue to decrease our cash and our business may be harmed. If we continue to incur operating losses, we may be required to further restructure the business, including further cost and expense reductions. In addition to the other risk factors listed in this section, our operating results are affected by a number of factors, including:

 

 

 

our sales volume;

 

 

 

fluctuations in demand for our products and services, including seasonal variations;

 

 

 

average selling prices and the potential for increased discounting of products by us or our competitors;

 

 

 

the timing of revenue recognition in any given period as a result of revenue recognition guidance under accounting principles generally accepted in the U.S.;

 

 

 

our ability to forecast demand and manage lead times for the manufacturing of our products;

 

 

 

shortages in the availability of components used in our products, including components whose manufacturing lead times have increased significantly or may increase in the future;

 

 
22

 

 

 

 

our ability to control costs, including our operating expenses and the costs of the components we purchase;

 

 

 

our ability to develop and maintain relationships with our channel partners and to increase their sales;

 

 

 

our ability to develop and introduce new products and product enhancements that achieve market acceptance;

       

 

 

any significant changes in the competitive dynamics of our markets, including new entrants, or further consolidation;

 

 

 

reductions in customers’ budgets for information technology purchases and delays in their purchasing cycles;

 

 

 

changes in the regulatory environment pertaining to the sale of our products;

  

 

 

claims of intellectual property infringement against us and any resulting temporary or permanent injunction prohibiting us from selling our products or the requirement to pay settlements, damages or expenses associated with any such claims, together with the costs incurred in defending such claims;

 

 

 

other claims made against us and the requirement to pay settlements, damages or expenses associated with any such claims, together with the costs incurred in defending such claims; and,

 

 

 

general economic conditions in our domestic and international markets.

 

As a result of the above factors, our operating results in one or more future periods may fail to meet or exceed our expectations and the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.

 

Our stock price is volatile.

 

The market price of our common stock has fluctuated significantly at times. In the future, the market price of our common stock could be subject to significant fluctuations due to, among other reasons:

 

 

 

our anticipated or actual operating results;

 

 

 

announcements or introductions of new products by us or our competitors;

 

 

 

technological innovations by us or our competitors;

 

 

 

investor perception of the semiconductor sector;

 

 

 

loss of or changes to key executives;

 

 

 

product delays or setbacks by us, our customers or our competitors;

 

 

 

potential supply and sales channel disruptions;

 

 

 

concentration of sales among a small number of customers;

 

 

 

conditions in our customers’ markets and the semiconductor markets;

 

 

 

the commencement and/or results of litigation;

 

 

 

changes in estimates of our performance by securities analysts;

 

 

 

decreases in the value of our investments or long-lived assets, thereby requiring an asset impairment charge against earnings;

 

 

 

repurchasing shares of our common stock;

 

 

 

announcements of merger or acquisition transactions; and/or

 

 

 

general global economic and capital market conditions.

 

In the past, securities and class action litigation has been brought against companies following periods of volatility in the market prices of their securities. We may be the target of one or more of these class action suits, which could result in significant costs and divert management’s attention, thereby materially and adversely impacting our business, financial condition and results of operations.

 

 
23

 

 

In addition, at times the stock market has experienced extreme price, volume and value fluctuations that affect the market prices of the stock of many high technology companies, including semiconductor companies that are unrelated or disproportionate to the operating performance of those companies. Any such fluctuations may harm the market price of our common stock.

 

Earthquakes and other natural disasters, may damage our facilities or those of our suppliers and customers.

 

The occurrence of natural disasters in certain regions, such as the natural disasters in Asia, could adversely impact our manufacturing and supply chain, our ability to deliver products on a timely basis (or at all) to our customers and the cost of or demand for our products. Our corporate headquarters in Fremont, California is located near major earthquake faults that have experienced seismic activity and is approximately 170 miles from a nuclear power plant. In addition, some of our other offices, customers and suppliers are in locations, which may be subject to similar natural disasters. In the event of a major earthquake or other natural disaster near our offices, our operations could be disrupted. Similarly, a major earthquake or other natural disaster, such as recent earthquakes in Japan or flooding in Thailand, affecting one or more of our major customers or suppliers could adversely impact the operations of those affected, which could disrupt the supply or sales of our products and harm our business, financial condition and results of operations.

 

The final determination of our income tax liability may be materially different from our income tax provision, which could have an adverse effect on our results of operations.

 

Our future effective tax rates may be adversely affected by a number of factors including:

 

 

 

the jurisdictions in which profits are determined to be earned and taxed;

 

 

 

the resolution of issues arising from tax audits with various tax authorities;

 

 

 

changes in the valuation of our deferred tax assets and liabilities;

 

 

 

adjustments to estimated taxes upon finalization of various tax returns;

 

 

 

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;

 

 

 

changes in available tax credits;

 

 

 

changes in stock-based compensation expense;

 

 

 

changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles; and/or

 

 

 

the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

 

Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the U.S. Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our business, financial condition and results of operations could be materially and adversely impacted if these assessments or any other assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor.

 

We have acquired significant NOL carryforwards as a result of our acquisitions. The utilization of acquired NOL carryforwards is subject to the IRS’s complex limitation rules that carry significant burdens of proof. Limitations include certain levels of a change in ownership. As a publicly traded company, such change in ownership may be out of our control. Our eventual ability to utilize our estimated NOL carryforwards is subject to IRS scrutiny and our future results may not benefit as a result of potential unfavorable IRS rulings.

 

If we fail to maintain an effective system of internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

 

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The NYSE. From time to time, new accounting pronouncements and guidance are issued.  We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place a significant burden on our personnel, systems and resources.  For example, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

 
24

 

 

Our current controls and any new controls that we develop may become inadequate because of changes in conditions, and our degree of compliance with our policies or procedures may deteriorate. While we have conducted employee training and implemented various controls and procedures, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

 

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources and provide significant management oversight and employee training, all of which may involve substantial accounting-related costs. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Our acquisitions of Stretch and Cadeka have required additional expenses and resources in training employees and bringing records up to compliance. In the event that we are not able to continue to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

 

Compliance with recent regulations regarding the use of conflict minerals could adversely impact the supply and cost of certain metals used in manufacturing our products.

 

In August 2012, the U.S. Securities and Exchange Commission (“SEC”) issued final rules for compliance with Section 1502 of the Dodd-Frank Act, and outlined what U.S. publicly-traded companies have to disclose regarding their use of conflict minerals in their products. According to the rule, companies that utilize any of the 3TG (tin, tantalum, tungsten and gold) and other listed minerals in their products need to conduct a reasonable country of origin inquiry to determine if the minerals are coming from the conflict zones in and around the Democratic Republic of Congo. We filed our first report on June 2, 2014. The implementation of these recent regulations may limit the sourcing and availability of some metals used in the manufacture of our products and may affect our ability to obtain products in sufficient quantities or at competitive prices. Our customers, including our OEM customers, may require that our products contain only conflict free 3TG, and our revenues and margins may be harmed if we are unable to meet this requirement at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting this requirement. Additionally, we may suffer reputational harm with our customers and other stakeholders if our products are not conflict free or if we are unable to sufficiently verify the origins of the 3TG contained in our products through the due diligence procedures that we implement. We could incur significant costs to the extent that we are required to make changes to products, processes or sources of supply due to the foregoing requirements or pressures.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

Our executive offices and our marketing and sales, research and development, test and engineering operations are located in Fremont, California in two adjacent buildings that we own, which consist of approximately 151,000 square feet. Additionally, we own approximately 4.5 acres of partially developed property adjacent to our headquarters. The buildings were sold in May 2016. See Note 21 – Subsequent Event.

 

We also lease smaller facilities in Canada, China, South Korea, Malaysia, Taiwan and the United States, which are occupied by administrative offices, sales offices, design centers and FAEs.

 

Based upon our estimates of future hiring and planned expansion including future acquisitions we believe that our current facilities will be adequate to meet our requirements at least through the next fiscal year.

 

 
25

 

 

ITEM 3.

LEGAL PROCEEDINGS

 

Information required by this item is set forth in Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 17—Legal Proceedings ” of this Annual Report.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 
26

 

   

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 

 

Market Information

 

The following table set forth the range of high and low sales prices of our common stock for the periods indicated, as reported by

NYSE:

 

   

Common Stock

 
   

Price

 
   

High

   

Low

 

Fiscal year 2016

               

Fourth quarter ended March 27, 2016

  $ 6.40     $ 4.82  

Third quarter ended December 27, 2015

    6.99       5.23  

Second quarter ended September 27, 2015

    10.23       5.45  

First quarter ended June 28, 2015

    11.14       8.96  
                 

Fiscal year 2015

               

Fourth quarter ended March 29, 2015

  $ 11.03     $ 8.79  

Third quarter ended December 28, 2014

    10.42       8.25  

Second quarter ended September 28, 2014

    11.55       8.72  

First quarter ended June 29, 2014

    12.31       9.70  

 

The closing sales price for our common stock on May 25, 2016 was $6.52 per share. As of May 25, 2016, the approximate number of record holders of our common stock was 269 (not including beneficial owners of stock held in street name).

 

Dividend Policy

 

We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be, subject to applicable law, at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

 

 
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Stock Price Performance (1)

 

The following table and graph shows a five-year comparison of cumulative total stockholder returns for Exar, The NASDAQ Composite Index (prior to July 29, 2013), The NASDAQ Electronic Components Index (SIC code 3670-3679) (prior to July 29, 2013), the NYSE Composite Index (from July 29, 2013 onwards following the listing of our common stock on the NYSE) and the NYSE Electronic Components Index (from July 29, 2014 onwards following the listing of our common stock on the NYSE). The table and graph assumed the investment of $100 in our common stock and these indices at market close on March 28, 2010 and that all dividends, if any, were reinvested. The performance shown is not necessarily indicative of future performance.

 

 

 

   

Cumulative total return as of

 
   

March 27,

   

April 1,

   

March 31,

   

March 30,

   

March 29,

   

March 27,

 
   

2011

   

2012

   

2013

   

2014

   

2015

   

2016

 

Exar Corporation Stock

  $ 100.00     $ 138.16     $ 172.70     $ 192.60     $ 169.41     $ 86.51  

NASDAQ/NYSE Composite Index

    100.00       113.53       122.09       160.58       186.82       186.52  

NASDAQ/NYSE Electronic Components Index

    100.00       104.17       97.18       132.90       160.28       157.39  

 

(1)

This graph and data are not “soliciting material,” are not deemed “filed” with the SEC and are not to be incorporated by reference in any filing of Exar Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, unless specifically and expressly incorporated by reference, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

  

Purchases of Equity Securities by the Issuer

 

During fiscal year 2016, there were no stock repurchase activities.

 

 
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ITEM 6.

SELECTED FINANCIAL DATA

 

The following selected consolidated financial data for the five-year period ended March 27, 2016 should be read in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Items 7 and 8 of this Form 10-K. Our consolidated statements of operations data for each of the years in the three-year period ended March 27, 2016, and the balance sheet data as of March 27, 2016 and March 29, 2015 are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K. The statement of operations data for the years ended March 31, 2013 and April 1, 2012 and balance sheet data as of March 30, 2014, March 31, 2013 and April 1, 2012 have been derived from our audited consolidated financial statements in such prior year’s respective Form 10-K (in the tables below all amounts are in thousands, except per share data).

 

   

As of and For the Years Ended

 
   

March 27,

   

March 29,

   

March 30,

   

March 31,

   

April 1,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 

Consolidated statements of operations data:

                                       

Net sales

  $ 149,378     $ 162,050     $ 125,322     $ 122,026     $ 130,566  

Gross profit

    59,558       49,926       50,654       55,687       55,924  

Loss from operations

    (16,533 )     (43,063 )     (3,701 )     (583 )     (30,593 )

Net income (loss)

    (16,026 )     (45,007 )     5,801       2,882       (28,056 )

Net income (loss) attributable to Exar Corporation

    (16,026 )     (44,970 )     5,801       2,882       (28,056 )
                                         

Net income (loss) per share to common stockholders:

                                       

Basic

  $ (0.33 )   $ (0.95 )   $ 0.12     $ 0.06     $ (0.63 )

Diluted

  $ (0.33 )   $ (0.95 )   $ 0.12     $ 0.06     $ (0.63 )
                                         

Shares used in computation of net income (loss) per share:

                                       

Basic

    48,240       47,253       47,291       45,809       44,796  

Diluted

    48,240       47,253       48,823       46,476       44,796  
                                         

Consolidated balance sheets data:

                                       

Cash, cash equivalents and short-term investments

  $ 55,070     $ 55,233     $ 167,034     $ 205,305     $ 196,382  

Working capital

    82,641       67,406       175,751       203,732       190,878  

Total assets

    255,373       283,100       302,217       293,168       271,652  

Long-term obligations

    4,707       9,462       6,696       12,546       9,986  

Accumulated deficit

    (314,663 )     (298,637 )     (253,667 )     (259,468 )     (262,350 )

Stockholders’ equity

    214,549       222,832       253,375       240,454       223,292  

   

On June 3, 2014, January 14, 2014, July 5, 2013 and March 22, 2013 we acquired the businesses of iML, Stretch, Cadeka, and Altior, respectively. Accordingly, the results of operations of iML, Stretch, Cadeka and Altior have been included in our consolidated financial statements since June 4, 2014, January 14, 2014, July 5, 2013 and March 23, 2013, respectively. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 3—Business Combinations.”

 

 
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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” above and elsewhere in this Annual Report on Form 10-K 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. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “would,” “could,” “expect,” “suggest, “possible,” “potential,” “target,” “commit,” “continue,” “believe,” “anticipate,” “intend,” “project,” “projected,” “positioned,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements made in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fourth Quarter of Fiscal Year 2016 Executive Summary” and elsewhere regarding: (1) our future strategies and target market; (2) our future revenues, gross profits and margins; (3) our future research and development (“R&D”) efforts and related expenses; (4) our future selling, general and administrative expenses (“SG&A”); (5) our cash and cash equivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months; (6) our ability to continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities; (7) the possibility of future acquisitions and investments; (8) our ability to accurately estimate our assumptions used in valuing stock-based compensation; (9) our ability to estimate and reconcile distributors’ reported inventories to their activities; (10) our ability to estimate future cash flows associated with long-lived assets; and (11) the volatile global economic and financial market conditions. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including, among others, those identified above under Part I, Item 1A—“Risk Factors.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We disclaim any obligation to revise or update information in any forward-looking statement, except as required by law.

 

Company Overview

 

Exar Corporation (“Exar,” “us,” “our” or “we”) designs, develops and markets high performance analog mixed-signal integrated circuits (“ICs”) and advanced sub-system solutions for the Industrial and Embedded Systems, High-End Consumer and Infrastructure markets. Our comprehensive knowledge of end-user markets along with the underlying analog, mixed signal and digital technology has enabled us to provide innovative solutions designed to meet the needs of the evolving connected world. Applying both analog and digital technologies, our products are deployed in a wide array of applications such as industrial, instrumentation and medical equipment, networking and telecommunication systems, servers, enterprise storage systems, flat panel displays, LED lighting solutions, set top boxes and digital video recorders. We provide customers with a breadth of component products and sub-system solutions based on advanced silicon integration. Exar’s product portfolio includes Connectivity, Power Management, High Performance Analog, Communications, Processors, Flat Panel Display and LED lighting.

 

We market our products worldwide with sales offices and personnel located throughout the Americas, Europe, and Asia. Our products are sold in the United States through a number of manufacturers’ representatives and distributors. Internationally, our products are sold primarily through various regional and country specific distributors, as well as some manufacturers’ representatives. Globally, these channel partners are assisted and managed by our regional sales teams. In addition to our regional sales teams, we also employ a worldwide team of field application engineers (“FAEs”) to work directly with our customers.

 

Our international sales are denominated in U.S. dollars. Our international related operating expenses expose us to fluctuations in currency exchange rates because our foreign operating expenses are denominated in foreign currencies while our sales are denominated in U.S. dollars. Our operating results are subject to fluctuations as a result of several factors that could materially and adversely affect our future profitability as described in “Part I, Item 1A. Risk Factors—Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control.”

 

Fourth Quarter of Fiscal Year 2016 Executive Summary

 

Net sales decreased slightly by $0.7 million, or 2%, from $37.4 million in the third quarter of fiscal year 2016 to $36.8 million in the fourth quarter of fiscal year 2016. This decrease was attributable to seasonally soft demand in Asia associated with Chinese New Year, along with what was an anticipated reduction in channel inventory. The decrease was offset by increased sales of legacy telecommunications products. Net loss decreased $5.0 million, or 69%, from $7.1 million in the third quarter of fiscal year 2016 to $2.2 million in the fourth quarter of fiscal year 2016. The decrease was primarily attributed to a $1.8 million impairment charge of intangible assets from the abandonment of two IPR&D projects recorded in the third quarter of 2016, $0.7 million reduction in legal settlement expense and $2.0 million reduction in restructuring charges. Loss per share decreased $0.11 from $0.15 in the third quarter of fiscal year 2016 to $0.04 in the fourth quarter of fiscal year 2016. We believe we are effectively managing our operating expenses while continuing to invest an appropriate amount in research and development projects for future products while investing in the expansion of our sales force.

 

 
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Acquisitions

 

On June 3, 2014, we acquired approximately 92% of the outstanding shares of Integrated Memory Logic Limited (“iML”), a leading provider of analog mixed-signal solutions for the flat panel display market. On September 15, 2014, we completed the acquisition through a second-step merger to acquire all of the remaining outstanding shares of iML. iML’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning June 4, 2014.

 

On January 14, 2014, we completed the acquisition of Stretch, Inc. (“Stretch”), a provider of software configurable processors supporting the video surveillance market. Stretch’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning January 14, 2014.

 

On July 5, 2013, we completed the acquisition of substantially all of the assets of Cadeka Technologies (Cayman) Holding Ltd., a privately held company organized under the laws of the Cayman Islands and all the outstanding stock of the subsidiaries of Cadeka Technologies (Cayman) Holding Ltd., including the equity of its wholly owned subsidiary Cadeka Microcircuits, LLC, a Colorado limited liability company (“Cadeka”). With locations in Loveland, Colorado, Shenzhen and Wuxi, China, Cadeka designs, develops and markets high precision analog integrated circuits for use in industrial and high reliability applications. Cadeka’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning July 5, 2013.

 

On March 22, 2013, we completed the acquisition of substantially all of the assets of Altior Inc. (“Altior”), a developer of data management solutions in Eatontown, New Jersey. Altior’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning March 23, 2013.

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2016, 2015 and 2014 each consisted of 52 weeks. Fiscal years ended March 27, 2016 March 29, 2015, and March 30, 2014 are also referred to as “2016,” “2015,” and “2014,” respectively, unless otherwise indicated.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements and accompanying disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The U.S. Securities and Exchange Commission has defined a company’s critical accounting policies as policies that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue recognition; (2) valuation of inventories; (3) capitalized mask set tools; (4) income taxes; (5) stock-based compensation; (6) goodwill; (7) long-lived assets; (8) valuation of business combinations; (9) litigation and contingencies; and (10) contingent considerations; each of which is addressed below. We also have other key accounting policies that involve the use of estimates, judgments and assumptions that are significant to understanding our results. For additional information, see Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 2—Accounting Policies.” Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be inaccurate.

 

Revenue Recognition

 

We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance for revenue recognition. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

 

We derive revenue principally from the sale of our products to distributors and to original equipment manufacturers (“OEMs”) or their contract manufacturers. Our delivery terms are primarily free on board shipping point, at which time title and all risks of ownership are transferred to the customer.

 

To date, software revenue has been an immaterial portion of our net sales.

 

 
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Non-distributors

 

For non-distributors, revenue is recognized when title to the product is transferred to the customer, which occurs upon shipment or delivery, depending upon the terms of the customer order, provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, collection of the resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. Provisions for returns and allowances for non-distributor customers are provided at the time product sales are recognized. Allowances for sales returns and other reserves are recorded based on historical experience or specific identification of an event necessitating an allowance.

 

Our history of actual returns from our non-distributors has not been material and, therefore, the allowance for sales returns for non-distributor customers is not significant.

 

Distributors

 

Agreements with our primary distributors permit the return of 3% to 6% of their purchases during the preceding quarter for purposes of stock rotation. For one of these distributors, a scrap allowance of 1% of the preceding quarter’s purchases is permitted. We also provide discounts to certain distributors based on volume of product they sell or purchase for a period not to exceed one year.

 

We recognize revenue from each of our distributors using either the sell-in basis or sell-through basis, each as described below. Once adopted, the basis for revenue recognition for a distributor is maintained unless there is a change in circumstances or contractual terms indicating the basis for revenue recognition for that distributor or any particular transaction is no longer appropriate.

 

 

 

Sell-in BasisIn cases where distributors purchase products without any return, stock rotation or discount rights and for such transactions, revenue is recognized upon shipment (i.e., “sell-in” basis). For similar arrangements for which we conclude we meet the same criteria as for non-distributors discussed above, but ones in which the distributors have limited rights or returns, pricing allowances and/or other concessions, we recognize revenue when we can reasonable estimate the credits for returns, pricing allowances and/or other concessions. In these cases, we record an estimated allowance, at the time of shipment, based upon historical patterns, pricing allowances and other concessions.

 
         

 

 

Sell-through BasisRevenue and the related costs of sales are deferred until the resale to the end customer if we grant more than limited rights of return, pricing allowances and/or other concessions or if we cannot reasonably estimate the level of returns and credits issuable (i.e., “sell-through” basis). Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred income and allowances on sales to distributors in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred income as sales and cost of sales.  

 
         
      The following table summarizes the deferred income balance, primarily consisting of sell-through distributors (in thousands):  

 

   

As of March 27,

   

As of March 29,

 
   

2016

   

2015

 

Deferred revenue at published list price

  $ 9,645     $ 15,029  

Deferred cost of revenue

    (1,885 )     (4,685 )

Deferred income

  $ 7,760     $ 10,344  

 

      Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data regarding the product, price, quantity and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.  

 

Valuation of Inventories

 

Our policy is to establish a provision for excess inventories, based on the nature of the specific product, that is greater than twelve months of forecasted demand unless there are other factors indicating that the inventories will be sold at a profit after such periods. Among other factors, management considers known backlog of orders, projected sales and marketing forecasts, shipment activity, inventory-on-hand at our primary distributors, past and current market conditions, anticipated demand for our products, changing lead times in the manufacturing process and other business conditions when determining if a provision for excess inventory is required. Should the assumptions used by management in estimating the provision for excess inventory differ from actual future demand or should market conditions become less favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on our gross margins. See Part I, Item 1A. “Risk Factors—‘Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control’.”

 

 
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Mask Costs

 

We incur costs for the fabrication of masks to manufacture our products. If we determine the product technological feasibility has been achieved when costs are incurred, the costs will be treated as pre-production costs and capitalized as machinery and equipment under property, plant and equipment. The amount will be amortized to cost of sales over the estimated production period of the product. If product technological feasibility has not been achieved or the mask is not expected to be utilized in production manufacturing, the related mask costs are expensed to R&D when incurred. We did not capitalize any mask costs during fiscal year 2016 or fiscal year 2015. The capitalized mask cost balances were zero and $0.3 million as of March 27, 2016 and March 29, 2015, respectively. The capitalized costs are amortized over a five year estimated life.

 

Income Taxes

 

We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assets and liabilities. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities, which arise from timing differences in the recognition of revenue and expense for tax and financial statement purposes. Such deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base, operating losses and tax credit carryforwards. Changes in tax rates affect the deferred income tax assets and liabilities and are recognized in the period in which the tax rates or benefits are enacted.

 

We must determine the probability that we will be able to utilize our deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. We measure and recognize uncertain tax positions in accordance with GAAP, whereby we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the merits of the position. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 18—Income Taxes” for more details about our deferred tax assets and liabilities.

 

Stock-Based Compensation

 

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. We use the Black-Scholes model to estimate the fair value of our options. The fair value of time-based and performance-based restricted stock units is based on the grant date share price. The fair value of market-based restricted stock units and options is estimated using a Monte Carlo simulation model. See Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to the Consolidated Financial Statements, Note 14—Stock-Based Compensation” for more details about our assumptions used in calculating the stock-based compensation expenses and equity related transactions during the fiscal year.

 

We recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest. This expense is recorded on a straight-line basis over the requisite service period of the entire awards, unless the awards are subject to performance or market conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche. For the performance-based awards, we recognize compensation expense when it becomes probable that the performance criteria specified in the plan will be achieved. For the market-based awards, compensation expense is not reversed if the market condition is not satisfied. The amount of stock-based compensation that we recognize is also based on an expected forfeiture rate. If there is a difference between the forfeiture assumptions used in determining stock-based compensation costs and the actual forfeitures which become known over time, we may change the forfeiture rate, which could have a significant impact on our results of operations.

 

Litigation and Contingency

 

From time to time, we are involved in legal actions arising in the ordinary course of business. There can be no assurance these actions or other third-party assertions will be resolved without costly litigation, in a manner that does not adversely impact our financial position, results of operations, or cash flows or without requiring royalty payments in the future which may adversely impact gross margins. We record a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. In determining the probability of a loss and consequently, determining a reasonable estimate, management is required to use significant judgment. Given the uncertainties associated with any litigation, the actual outcome can be different than our estimates and could adversely affect our results of operation, financial position and cash flows.

 

 
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Goodwill 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. We estimate the future cash flows expected to be generated by the assets (or assets group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one reporting unit, we utilize an entity-wide approach to assess goodwill for impairment.

 

Long-Lived Assets

 

We review long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets (or asset group) may not be fully recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets may not be recoverable, we estimate the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in the discounted cash flow method of valuation. If our actual results or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

 

When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciation and/or amortization over the assets’ new, shorter useful lives. See “Goodwill and Other Intangible Asset Impairment” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations below for more details regarding charges associated with the shortening of useful lives of certain intangible assets.

 

Valuation of Business Combinations

 

We periodically evaluate potential strategic acquisitions to broaden our product offering and build upon our existing library of intellectual property, human capital and engineering talent, in order to expand our capabilities in the areas in which we operate or to acquire complementary businesses.

 

We account for each business combination by applying the acquisition method, which requires (1) identifying the acquiree; (2) determining the acquisition date; (3) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree at their acquisition date fair value; and (4) recognizing and measuring goodwill or a gain from a bargain purchase.

 

Assets acquired and liabilities assumed and/or incurred in a business combination that arise from contingencies are recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, we typically account for the acquired contingencies using existing guidance for a reasonable estimate.

 

To establish fair value, we measure the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximize the value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the asset is different.

 

Goodwill is measured and recorded as the amount by which the consideration transferred, generally at the acquisition date fair value, exceeds the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree. To the contrary, if the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest we have in the acquiree exceeds the consideration transferred, it is considered a bargain purchase and we would recognize the resulting gain in earnings on the acquisition date.

 

In-process research and development (“IPR&D”) assets are considered an indefinite-lived intangible asset and are not subject to amortization until its useful life is determined to be no longer indefinite. IPR&D assets must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the IPR&D asset will be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. The initial determination and subsequent evaluation for impairment of the IPR&D asset requires management to make significant judgments and estimates. Once the IPR&D projects have been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off in the period when such decision is made.

 

 
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Acquisition related costs, including finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees are accounted for as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognized in accordance with other applicable GAAP.

 

Contingent Consideration

 

 

The fair value of our contingent consideration is estimated at the date of acquisition and is re-measured each reporting period and any changes in the fair value of the contingent consideration are recognized as a gain or loss in the consolidated statements of operations. The contingent consideration is valued with level three inputs.

 

 
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Results of Operations

 

     On July 5, 2013, January 14, 2014 and June 3, 2014 we acquired Cadeka, Stretch and iML respectively. Accordingly, results of Cadeka, Stretch and iML’s operations have been included in our consolidated financial statements since respective acquisition dates.

 

The following table sets forth our financial results as a percentage of total net sales:

 

   

Fiscal Years Ended

 
   

March 27,

   

March 29,

   

March 30,

 
   

2016

   

2015

   

2014

 
                         

Sales:

                       

Net sales

    76 %     78 %     71 %

Net sales, related party

    24 %     22 %     29 %

Total net sales

    100 %     100 %     100 %

Cost of sales:

                       

Cost of sales

    43 %     44 %     38 %

Cost of sales-related party

    11 %     9 %     13 %

Amortization of purchased intangible assets and inventory step-up

    6 %     7 %     7 %

Impairment of intangible assets

          5 %     1 %

Restructuring charges and exit costs

    1 %     5 %     *

Proceeds from legal settlement

    (1 %)            

Warranty reserve

          (1 %)     1 %
                         

Total cost of sales

    60 %     69 %     60 %

Gross profit

    40 %     31 %     40 %

Operating expenses:

                       

Research and development

    21 %     23 %     21 %

Selling, general and administrative

    26 %     27 %     26 %

Merger and acquisition costs

          5 %     2 %

Restructuring charges and exit costs

    3 %     3 %     2 %

Impairment of intangibles

    1 %     3 %      

Net change in fair value of contingent consideration

          (3 %)     (8 %)
                         

Total operating expenses

    51 %     58 %     43 %

Loss from operations

    (11 %)     (27 %)     (3 %)

Interest income and other, net

    * %     * %     1 %

Interest expense

    * %     (1 %)     * %

Impairment of long term investment

          * %     * %
                         

Loss before income taxes

    (11 %)     (27 %)     (2 %)

Provision for (benefit from) income taxes

    * %     1 %     (7 %)

Net loss

    (11 %)     (28 %)     5 %

Less: Net loss attributable to non-controlling interest

          * %      
                         

Net loss attributable to Exar Corporation

    (11 %)     (28 %)     5 %

 

                                      

* Less than 1% for this period

 

 
36

 

 

The following table sets forth our financial results in dollars and the increase (decrease) over prior periods for the periods indicated (in thousands, except percentages):

  

   

Fiscal Years Ended

                 
   

March 27,

   

March 29,

                 
   

2016

   

2015

   

Change

 

Sales:

                               

Net sales

  $ 113,587     $ 125,791     $ (12,204 )     (10% )

Net sales, related party

    35,791       36,259       (468 )     (1% )

Total Net Sales

    149,378       162,050       (12,672 )     (8% )

Cost of sales:

                               

Cost of sales

    64,662       71,139       (6,477 )     (9% )

Cost of sales-related party

    15,929       14,359       1,570       11 %

Amortization of purchased intangible assets and inventory step-up

    9,884       11,740       (1,856 )     (16% )

Impairment of intangible assets

          8,367       (8,367 )     (100% )

Restructuring charges and exit costs

    845       7,597       (6,752 )     (89% )

Proceeds from legal settlement

    (1,500 )           (1,500 )     (100% )

Warranty reserve

          (1,078 )     1,078       100 %

Total cost of sales

    89,820       112,124       (22,304 )     (20% )

Gross profit

    59,558       49,926       9,632       19 %

Operating expenses:

                               

Research and development

    31,403       37,181       (5,778 )     (16% )

Selling, general and administrative

    39,235       43,758       (4,523 )     (10% )

Merger and acquisition costs

          7,348       (7,348 )     (100% )

Restructuring charges and exit costs

    3,646       4,589       (943 )     (21% )

Impairment of intangibles

    1,807       4,456       (2,649 )     (59% )

Net change in fair value of contingent considerations

          (4,343 )     4,343       (100% )

Total operating expenses

    76,091       92,989       (16,898 )     (18% )

Loss from operations

    (16,533 )     (43,063 )     26,530       (62% )

Interest income and other, net

    34       571       (537 )     (94% )

Interest expense

    (212 )     (1,082 )     870       (80% )

Impairment of long term investment

          (544 )     544       (100% )

Loss before income taxes

    (16,711 )     (44,118 )     27,407       (62% )

Provision for (benefit from) income taxes

    (685 )     889       (1,574 )     (177% )

Net loss

    (16,026 )     (45,007 )     28,981       (64% )

Less: Net loss attributable to non-controlling interest

          (37 )     37       (100% )

Net loss attributable to Exar Corporation

  $ (16,026 )   $ (44,970 )     28,944       (64% )

 

 
37

 

  

   

Fiscal Years Ended

                 
   

March 29,

   

March 30,

                 
   

2015

   

2014

   

Change

 

Sales:

                               

Net sales

  $ 125,791     $ 89,595     $ 36,196       40 %

Net sales, related party

    36,259       35,727       532       1 %

Total Net Sales

    162,050       125,322       36,728       29 %

Cost of sales:

                               

Cost of sales

    71,139       48,067       23,072       48 %

Cost of sales-related party

    14,359       15,738       (1,379 )     (9% )

Amortization of purchased intangible assets and inventory step-up

    11,740       7,600       4,140       54 %

Impairment of intangible assets

    8,367       1,636       6,731       411 %

Restructuring charges and exit costs

    7,597       187       7,410       3963 %

Warranty reserve

    (1,078 )     1,440       (2,518 )     (175% )

Total cost of sales

    112,124       74,668       37,456       50 %

Gross profit

    49,926       50,654       (728 )     (1% )

Operating expenses:

                               

Research and development

    37,181       27,048       10,133       37 %

Selling, general and administrative

    43,758       33,055       10,703       32 %

Merger and acquisition costs

    7,348       1,880       5,468       291 %

Restructuring charges and exit costs

    4589       2827       1762       62 %

Impairment of intangibles

    4,456             4,456       100 %

Net change in fair value of contingent considerations

    (4,343 )     (10,455 )     6,112       (58% )

Total operating expenses

    92,989       54,355       38,634       71 %

Loss from operations

    (43,063 )     (3,701 )     (39,362 )     1064 %

Interest income and other, net

    571       1,503       (932 )     (62% )

Interest expense

    (1,082 )     (156 )     (926 )     594 %

Impairment of long term investment

    (544 )     (323 )     (221 )     68 %

Loss before income taxes

    (44,118 )     (2,677 )     (41,441 )     1548 %

Provision for (benefit from) income taxes

    889       (8,478 )     9,367       (110% )

Net income (loss)

    (45,007 )     5,801       (50,808 )     (876% )

Less: Net loss attributable to non-controlling interest

    (37 )           (37 )     100 %

Net income (loss) attributable to Exar Corporation

    (44,970 )     5,801       (50,771 )     (875% )

 

 
38

 

 

 

Net Sales by Geography

 

Geographically, our net sales in dollars and as a percentage of total net sales were as follows for the periods presented (in thousands, except percentages):

 

    Fiscal Years Ended              
   

March 27,

   

March 29,

   

March 30,

   

2016 vs. 2015

   

2015 vs. 2014

 
   

2016

   

2015

   

2014

   

Change

   

Change

 

Net sales:

                                                               

Asia

  $ 114,290       77 %   $ 118,238       73 %   $ 71,856       57 %     -3 %     65 %

Americas

    18,719       12 %     26,262       16 %     38,197       31 %     -29 %     -31 %

EMEA

    16,369       11 %     17,550       11 %     15,269       12 %     -7 %     15 %

Total

  $ 149,378       100 %   $ 162,050       100 %   $ 125,322       100 %                

 

Fiscal Year 2016 versus Fiscal Year 2015

 

Net sales for fiscal year 2016 decreased by $12.7 million (8% decrease), as compared to fiscal year 2015.

 

By geography, Asia decreased $3.9 million or 3% to $114.3 million, Americas decreased by $7.5 million or 29% to $18.7 million, and EMEA decreased $1.2 million or 7% to $16.4 million. The $3.9 million decrease in Asia sales was primarily due to lower average sales prices of products sold in this region. The decrease in Americas was primarily attributable to lower average sales prices sold in this region and a one-time revenue reduction of $2.5 million resulting from cash consideration paid to one of our distributors to settle a dispute relating to our Data Compression product. The decrease was partially offset by sales volume increase of certain of our products and $1.0 million from the sale of certain intellectual property in the first quarter of fiscal year 2016. The decrease in EMEA sales of $1.2 million was primarily attributable to lower average sales prices which were partially offset by an increase in sales volume.

 

Fiscal Year 2015 versus Fiscal Year 2014

 

Net sales for fiscal year 2015 increased by $36.7 million or 29%, as compared to fiscal year 2014.

 

By geography, Asia increased $46.4 million or 65% to $118.2 million, Americas decreased by $11.9 million or 31% to $26.3 million, and EMEA increased $2.3 million or 15% to $17.6 million. The $46.4 million increase in Asia sales was primarily due to the higher sales volume from Flat Panel Display products acquired as part of the iML acquisition in the first quarter of fiscal year 2015, offset by other component product lines higher sales volumes but at reduced average selling prices. The decrease of $11.9 million in Americas was primarily attributable to significantly lower demand of our data compression products, offset in part by higher sales volume from our new processor products, which benefited from the acquisition of Stretch in the fourth quarter of fiscal year 2014. The increase in EMEA sales of $2.3 million was primarily attributable to higher sales volume from our new processor products.

 

Gross Profit

 

Gross profit represents net sales less cost of sales. Cost of sales includes:

 

 

the cost of purchasing finished silicon wafers manufactured by unaffiliated foundries;

 

 

the costs associated with assembly, packaging, test, quality assurance and product yield loss;

 

 

the cost of purchasing finished tested “turnkey” units;

 

 

the cost of personnel and equipment associated with manufacturing personnel;

 

 

the amortization and impairment of purchased intangible assets and acquired intellectual property;

 

 

the proceeds or payments from or for legal settlements;

 

 

the provision for warranty;

 

 

the provision for excess and obsolete inventory; and

 

 

the provision for restructuring charges and exit costs.

 

 
39

 

 

We believe that gross profit will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, product, manufacturing costs, our ability to leverage fixed operational costs, shipment volumes, competitive pricing pressure on our products, and currency fluctuations. We reduced employee-related costs through restructuring activities in the second and third quarters of fiscal year 2015 and began to realize the reduction in the underlying costs in the fourth quarter of fiscal year 2015.

 

Fiscal Year 2016 versus Fiscal Year 2015