a

 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

 

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended October 2, 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)

 

(510) 668-7000

(Registrant’s telephone number, including area code)

 


 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 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 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 Exchange Act).    Yes  ☐    No  ☒

 

The number of shares outstanding of the Registrant’s Common Stock was 50,148,050 as of November 1, 2016.

 



 

 
1

 

 

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED October 2, 2016

 

   

Page

 

PART I – FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

     
 

PART II – OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 6.

Exhibits

33

 

Signatures

34

 

Index to Exhibits

35

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 96,382     $ 55,070  

Accounts receivable (net of allowances of $977 and $809)

    15,693       16,130  

Accounts receivable, related party (net of allowances of $377 and $617)

    3,184       3,247  

Inventories

    23,245       20,807  

Other current assets

    2,000       1,922  

Assets held for sale

    89,745       93,911  

Total current assets

    230,249       191,087  

Property, plant and equipment, net

    4,984       20,299  

Goodwill

    31,613       31,613  

Intangible assets, net

    10,307       11,735  

Other non-current assets

    972       639  

Total assets

  $ 278,125     $ 255,373  
                 
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 7,200     $ 11,258  

Accrued compensation and related benefits

    2,839       2,984  

Deferred income and allowances on sales to distributors

    3,017       3,053  

Deferred income and allowances on sales to distributor, related party

    3,357       4,683  

Other current liabilities

    11,800       10,669  

Liabilities held for sale

    7,376       3,470  

Total current liabilities

    35,589       36,117  

Long-term lease financing obligations

    428       1,285  

Other non-current obligations

    4,094       3,422  

Total liabilities

    40,111       40,824  
                 

Commitments and contingencies (Note 14)

               
                 

Stockholders’ equity:

               

Common stock, $.0001 par value; 100,000,000 shares authorized; 50,088,632 and 48,545,311 shares outstanding

    5       5  

Additional paid-in capital

    542,724       529,207  

Accumulated deficit

    (304,715 )     (314,663 )

Total stockholders’ equity

    238,014       214,549  

Total liabilities and stockholders’ equity

  $ 278,125     $ 255,373  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
3

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Sales:

                               

Net sales

  $ 20,400     $ 14,050     $ 40,036     $ 30,856  

Net sales, related party

    7,201       8,705       14,701       20,082  

Total net sales

    27,601       22,755       54,737       50,938  
                                 

Cost of sales:

                               

Cost of sales

    11,008       10,430     $ 21,419     $ 20,206  

Cost of sales, related party

    2,581       3,906       5,350       8,822  

Amortization of purchased intangible assets

    594       626       1,188       1,239  

Restructuring charges and exit costs

    225       740       225       740  

Proceeds from legal settlement

    -       (1,500 )     -       (1,500 )

Total cost of sales

    14,408       14,202       28,182       29,507  

Gross profit

    13,193       8,553       26,555       21,431  
                                 

Operating expenses:

                               

Research and development

    4,945       5,844       9,876       12,273  

Selling, general and administrative

    7,752       7,163       14,316       14,909  

Merger and acquisition costs

    415       -       1,270       544  

Restructuring charges and exit costs, net

    -       977       923       2,207  

Impairment of design tools

    -       -       1,519       -  

Gain on sale of land and building under sale-leaseback arrangement

    -       -       (9,300 )     -  

Total operating expenses, net

    13,112       13,984       18,604       29,933  

Income (loss) from operations

    81       (5,431 )     7,951       (8,502 )
                                 

Other income and (expense), net:

                               

Interest income and other, net

    85       (26 )     87       (48 )

Interest expense

    (29 )     (45 )     (67 )     (93 )

Total other expense, net

    56       (71 )     20       (141 )
                                 

Income (loss) before income taxes

    137       (5,502 )     7,971       (8,643 )

Provision for (benefit from) income taxes

    54       (3,412 )     345       (4,199 )

Net income (loss) from continuing operations

    83       (2,090 )     7,626       (4,444 )

Net income (loss) from discontinued operations (See Note 3)

    925       (2,107 )     2,322       (2,263 )

Net income (loss) and comprehensive income (loss)

  $ 1,008     $ (4,197 )   $ 9,948     $ (6,707 )
                                 

Net income (loss) per share from continuing operations:

                               

Basic

  $ -     $ (0.04 )   $ 0.15     $ (0.09 )

Diluted

  $ -     $ (0.04 )   $ 0.15     $ (0.09 )
                                 

Net income per share from discontinued operations:

                               

Basic

  $ 0.02     $ (0.04 )   $ 0.05     $ (0.05 )

Diluted

  $ 0.02     $ (0.04 )   $ 0.05     $ (0.05 )

Net income (loss) per share:

                               

Basic

  $ 0.02     $ (0.08 )   $ 0.20     $ (0.14 )

Diluted

  $ 0.02     $ (0.08 )   $ 0.20     $ (0.14 )

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

                               

Basic

    49,614       48,121       49,129       48,024  

Effect of options and awards

    820       -       532       -  

Diluted

    50,434       48,121       49,661       48,024  

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

                               

Basic

    49,614       48,121       49,129       48,024  

Effect of options and awards

    820       -       532       -  

Diluted

    50,434       48,121       49,661       48,024  

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

                               

Basic

    49,614       48,121       49,129       48,024  

Effect of options and awards

    820       -       532       -  

Diluted

    50,434       48,121       49,661       48,024  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
4

 

  

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)

(Unaudited)

 

   

Six Months Ended

 
   

October 2,

   

September 27,

 
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income (loss)

  $ 9,948     $ (6,707 )

Income (loss) from discontinued operations

    2,322       (2,263 )

Income (loss) from continuing operations

    7,626       (4,444 )

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:

               

Depreciation and amortization

    3,282       4,475  

Gain on sale of land and building under sale-leaseback arrangement

    (9,300 )     -  

Amortization of deferred gain on sale-leaseback arrangement

    (598 )     -  

Stock-based compensation expense

    3,497       2,999  

Impairment of design tools

    1,519       -  

Restructuring charges and exit costs

    1,148       850  

Changes in operating assets and liabilities:

               

Accounts receivable

    500       (1,677 )

Inventories

    (2,438 )     726  

Prepaid expenses, other current assets and other assets

    652       6,420  

Accounts payable

    1,231       2,721  

Accrued compensation and related benefits

    (145 )     (1,064 )

Deferred income

    (1,362 )     (2,759 )

Other current and non-current liabilities

    (1,703 )     (5,931 )

Net cash (used in) provided by operating activities - continuing operations

    3,909       2,316  

Net cash provided by (used in) operating activities - discontinued operations

    5,771       (2,293 )

Net cash provided by operating activities

    9,680       23  
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment and intellectual property, net

    (393 )     (567 )

Sale of land and building under sale-leaseback arrangement

    24,051       -  

Net cash provided by (used in) investing activities - continuing operations

    23,658       (567 )

Net cash provided by investing activities - discontinued operations

    -       -  

Net cash provided by (used in) investing activities

    23,658       (567 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    9,081       1,269  

Purchase of stock for withholding taxes on vested restricted stock

    (226 )     (1,201 )

Cash settlement of equity award

    -       (354 )

Payments of lease financing obligations

    (881 )     (919 )

Net cash provided by (used in) financing activities - continuing operations

    7,974       (1,205 )

Net cash provided by financing activities - discontinued operations

    -       -  

Net cash provided by (used in) financing activities

    7,974       (1,205 )

Net increase (decrease) in cash and cash equivalents

    41,312       (1,749 )

Cash and cash equivalents at the beginning of the period

    55,070       55,233  

Cash and cash equivalents at the end of the period

  $ 96,382     $ 53,484  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
5

 

 

EXAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.

ORGANIZATION AND BASIS OF PRESENTATION

 

Description of Business— Exar Corporation (“Exar,” “us,” “our” or “we”) was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar designs, develops and markets analog mixed-signal solutions serving the Industrial, Infrastructure, Automotive, and Audio/Video markets. Our comprehensive knowledge of end-user markets along our experience in analog and mixed signal technology has enabled us to provide innovative solutions designed to meet the needs of the evolving connected world. Applying both analog and mixed signal technologies, our products are deployed in a wide array of applications such as industrial, instrumentation and medical equipment, networking and telecommunication systems, servers, LED lighting solutions, 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, Mixed-signal, Power Management, High Performance Analog, Processors and LED lighting.

 

Basis of Presentation and Use of Management Estimates— The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 27, 2016 as filed with the SEC. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, that we believe are necessary for a fair statement of Exar’s financial position as of October 2, 2016 and our results of operations for the three months and six months ended October 2, 2016 and September 27, 2015, respectively. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.

 

The financial statements include management’s estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates, and material effects on operating results and financial position may result.

 

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year’s presentation. Such reclassification had no effect on previously reported results of operations or stockholders’ equity.

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2017 and 2016 consist of 53 and 52 weeks, respectively. In fiscal year 2017, the first fiscal quarter consists of 14 weeks and the remaining three fiscal quarters consist of 13 weeks.

 

Discontinued OperationsOn June 1, 2016, we entered into an agreement to sell 100% of the issued and outstanding shares of Integrated Memory Logic Limited (“iML”), a wholly-owned subsidiary. The sale is expected to close before the end of our current fiscal year. As a result, we report the operating results of iML in the net income (loss) from discontinued operations line in the condensed consolidated statements of operations for all periods presented. In addition, the assets and liabilities associated with iML are reported as assets held for sale and liabilities held for sale, in the condensed consolidated balance sheets. Totals for discontinued operation cash flows are separately reported within operating, investing and financing activities within the condensed consolidated statements of cash flows. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect our continuing operations. See “Note 3-Discontinued Operations.

 

 

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

 

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle which may require the use of judgment and estimates. The entity may adopt ASU 2014-09 either by using a full retrospective approach for all periods presented or a modified retrospective approach. This standard is effective for annual reporting periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. We have not yet selected a transition method and are currently evaluating the effect of adoption of this standard, if any, on our consolidated financial position, results of operations or cash flows.

 

 
6

 

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 primarily provides that an entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This standard is effective for annual reporting periods beginning after December 15, 2016. We are currently evaluating the effect of adoption of this standard, if any, on our consolidated financial position, results of operations or cash flows.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is not permitted. We are currently evaluating the effect of adoption of this standard, if any, on our consolidated financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases: (Topic 842) to amend the existing accounting standards for leases. The amendments require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged from that applied under previous U.S. GAAP. We are required to adopt the amendments in the first quarter of fiscal 2019, with early adoption permitted. The amendments require a modified retrospective transition approach to recognize and measure leases at the beginning of the earliest period presented. We are currently evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09. We are currently evaluating the impact of these amendments on our financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. We are currently evaluating the impact of these amendments on our financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers, Topic 606 – Identifying Performance Obligations and Licensing, which clarifies implementation issues that will arise when implementing ASU 2014-09. The amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Before an entity can identify its performance obligation in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this Update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property or a right to access the entity’s intellectual property. The amendments in this Update are intended to improve the operability and understandability of the licensing implementation guidance. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). We are currently evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments —Credit Losses, Topic 326 - Measurement of Credit Losses on Financial Instruments, which requires credit losses on financial assets measured at their amortized cost basis to be presented at the net amount expected to be collected, not on their incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We do not expect the adoption of this guidance will have a material impact on our consolidated financial position, results of operations or cash flows.

 

 
7

 

 

NOTE 3.    DISCONTINUED OPERATIONS

 

On June 1, 2016, we entered into a definitive agreement to sell iML to Beijing E-town Chipone Technology Co., Ltd for $136 million, payable in cash, adjusted for iML’s cash and debt at closing. We have classified the iML disposal group as held-for-sale and presented the results of iML’s operations as net income (loss) from discontinued operations in the condensed consolidated statements of operations for all period presented. The assets and liabilities of iML are recorded as assets held for sale and liabilities held for sale within the condensed consolidated balance sheets, respectively. We are expecting to record a gain on the sale of iML that will be recognized when the transaction closes. The transition services associated with this transaction are expected to be immaterial.

 

Summarized financial results are presented as net income (loss) from discontinued operations for the three months and six months ended October 2, 2016 and September 27, 2015, respectively as follows:

 

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Net sales

  $ 12,786     $ 11,986     $ 26,308     $ 24,225  
                                 

Cost of sales:

                               

Cost of sales

    7,370       6,017       15,072       11,842  

Amortization of purchased intangible assets

    -       1,867       1,245       3,722  

Total cost of sales

    7,370       7,884       16,317       15,564  

Gross profit

    5,416       4,102       9,991       8,661  

Operating expenses:

                               

Research and development

    2,975       1,654       4,660       3,535  

Selling, general and administrative

    1,407       2,268       2,804       4,214  

Total operating expenses, net

    4,382       3,922       7,464       7,749  
                                 

Interest income and other, net

    (76 )     (3 )     (79 )     (7 )
                                 

Income before income taxes

    1,110       183       2,606       919  

Provision for income taxes

    185       2,290       284       3,182  

Net income (loss) from discontinued operations

  $ 925     $ (2,107 )   $ 2,322     $ (2,263 )

 

 

 
8

 

  

As of October 2, 2016 and March 27, 2016, the aggregate components of assets and liabilities classified as held for sale and included in current assets and current liabilities consisted of the following:

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Accounts receivable, net

  $ 11,956     $ 13,427  

Inventories

    7,094       7,944  

Deferred income taxes and other assets

    182       248  

Property, plant and equipment, net

    115       88  

Goodwill

    13,258       13,258  

Identifiable intangible assets, net

    57,140       58,946  

Total assets

  $ 89,745     $ 93,911  
                 

Accounts payable

  $ 4,747     $ 2,024  

Accrued liabilities

    2,625       1,422  

Deferred income taxes and other liabilities

    4       24  

Total liabilities

  $ 7,376     $ 3,470  

 

 

NOTE 4.

BALANCE SHEET DETAILS

 

Our inventories consisted of the following as of the dates indicated (in thousands):

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Raw materials

  $ 1,007     $ 1,012  

Work-in-progress

    9,721       9,780  

Finished goods

    12,517       10,015  

Total inventories

  $ 23,245     $ 20,807  

 

 

Our property, plant and equipment consisted of the following as of the dates indicated below (in thousands):

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Land

  $ -     $ 6,660  

Building

    -       16,365  

Machinery and equipment

    37,840       37,813  

Software and licenses

    22,173       22,045  

Leasehold improvement

    833       755  

Property, plant and equipment, total

    60,846       83,638  

Accumulated depreciation, amortization and impairment

    (55,862 )     (63,339 )

Total property, plant and equipment, net

  $ 4,984     $ 20,299  

 

 
9

 

 

 

The decrease in land and building relates to the sale-leaseback of our Fremont office building. The accumulated depreciation and amortization for the six months ended October 2, 2016 includes a $1.5 million write down for impaired design tools. See “Note 13 - Lease Financing Obligation.   

 

Our other current liabilities consisted of the following as of the dates indicated (in thousands):

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Short-term lease financing obligations

  $ 3,760     $ 3,784  

Deferred gain on sale of land and building under sale-leaseback arrangement

    1,594       -  

Accrual for stock awards in connection with Cadeka acquisition

    1,200       1,200  

Purchase consideration holdback

    1,006       1,006  

Accrued legal and professional services

    765       1,247  

Accrued sales and marketing expenses

    625       699  

Accrued manufacturing expenses, royalties and licenses

    241       486  

Accrued restructuring charges and exit costs

    585       494  

Other current liabilities

    2,024       1,753  

Total other current liabilities

  $ 11,800     $ 10,669  

  

 

 

Our other non-current obligations consisted of the following as of the dates indicated (in thousands):

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Long-term taxes payable

  $ 3,608     $ 3,339  

Long term deferred gain of land and building under sale-leaseback arrangement

    399       -  

Deferred tax liability

    87       83  

Total other non-current obligations

  $ 4,094     $ 3,422  

 

The deferred gain included in other current liabilities and non-current obligations relates to deferred gain associated with our sale-leaseback, net of amortization. See “Note 13. Lease Financing Obligations.

 

 

NOTE 5.

FAIR VALUE

 

 Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

 
10

 

 

We had no assets or liabilities utilizing Level 3 inputs as of October 2, 2016 or March 27, 2016.

 

There were no transfers between Level 1 and Level 2 during the six months ended October 2, 2016.

 

As of October 2, 2016, all of our investments, consisting of money market funds with a fair value of $46.4 million, were classified as Level 1 investments.

 

In June 2016, we donated the 93,000 common shares of CounterPath received in the first quarter of fiscal year 2015 resulting from the dissolution of Skypoint Telecom Fund II (US), LP, in which we were a limited partner, and wrote off the related $50,000 carrying value.

 

Our cash and cash equivalents as of the dates indicated below were as follows (in thousands):

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Cash and cash equivalents

               

Cash in financial institutions

  $ 49,982     $ 55,066  

Money market funds

    46,400       4  

Total cash and cash equivalents

  $ 96,382     $ 55,070  

 

 

Realized gains (losses) on the sale of marketable securities are determined by the specific identification method and are reflected in interest income and other, net within the condensed consolidated statements of operations. During the three months and six months ended October 2, 2016 and September 27, 2015, there were no net realized gains (losses) on the sale of marketable securities.

 

NOTE 6.

GOODWILL AND INTANGIBLE ASSETS

 

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 when 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. Estimations and assumptions regarding the number of reporting units, future performances, results of our operations and comparability of our market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one single operating segment and one chief operating decision maker, our Chief Executive Officer (“CEO”), we assess goodwill for impairment at the enterprise level.

 

 
11

 

 

As of July 3, 2016, we performed a goodwill impairment analysis from continuing operations and concluded that it was not impaired as the fair value of the continuing operations exceeded the carrying value of the continuing business. Upon entering into a definitive agreement to sell iML, $13.3 million of goodwill was reclassified to assets held for sale based on the respective fair values of the disposal group and continuing operations. See “Note 3-Discontinued Operations”.

 

Intangible Assets

 

Our purchased intangible assets for continued operations as of the dates indicated below were as follows (in thousands):

 

   

October 2, 2016

   

March 27, 2016

 
   

Carrying

Amount

   

Accumulated

Amortization

   

Net

Carrying

Amount

   

Weighted

Average

Life

   

Carrying

Amount

   

Accumulated

Amortization

   

Net

Carrying

Amount

   

Weighted

Average

Life

 

Amortized intangible assets:

                                                               

Existing technology

  $ 53,878     $ (44,695 )   $ 9,183       4.1     $ 53,878     $ (43,502 )   $ 10,376       4.6  

Customer relationships

    5,225       (4,101 )     1,124       3.2       5,225       (3,890 )     1,335       3.6  

Distributor relationships

    1,264       (1,264 )     -       -       1,264       (1,261 )     3       -  

Patents/Core technology

    3,459       (3,459 )     -       -       3,459       (3,459 )     -       -  

Trade names

    210       (210 )     -       -       210       (189 )     21       -  

Total

  $ 64,036     $ (53,729 )   $ 10,307             $ 64,036     $ (52,301 )   $ 11,735          

 

 

 

As of the second quarter of fiscal year 2017, $57.1 million of net intangible assets were reclassified to assets held for sale. See “Note 3-Discontinued Operations”.

 

Long-lived assets are amortized on a straight-line basis over their respective estimated useful lives. Existing technology is amortized over two to nine years. Customer relationships are amortized over five to seven years. Distributor relationships are amortized over seven years. Patents/core technology is amortized over six years. Trade names are amortized over three to six years. We evaluate the remaining useful life of our long-lived assets that are being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the long-lived asset is amortized prospectively over the remaining useful life.

 

Long-lived assets are evaluated 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 which is derived using a discounted cash flow model. 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.

 

During the three and six months ended October 2, 2016 and September 27, 2015, there were no indicators or events that required us to perform an intangible assets impairment review for intangibles from our continuing operations. 

 

 
12

 

 

The aggregate amortization expenses for our purchased intangible assets for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Amortization expense

  $ 705     $ 754     $ 1,428     $ 1,515  

 

 

 

 The total future amortization expenses for our purchased intangible assets are summarized below (in thousands):

 

 

Amortization Expense (by fiscal year)

 

2017 (6 months remaining)

  $ 1,410  

2018

    2,802  

2019

    2,488  

2020

    1,989  

2021

    1,325  

2022 and thereafter

    293  

Total future amortization

  $ 10,307  

 

 

 

NOTE 7.

LONG-TERM INVESTMENTS

 

In July 2001, Exar became a Limited Partner in the Skypoint Telecom Fund II (US), LP. (“Skypoint Fund”), a venture capital fund focused on investments in communications infrastructure companies. We account for this non-marketable equity investment under the cost method in the other non-current assets in the consolidated balance sheet. The partnership was dissolved and the fund distributed stock of investee companies to Exar during first quarter of fiscal year 2015.

 

We periodically review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.

 

As of the date indicated below, our long-term investments balance, which is included in the other non-current assets line item on the condensed consolidated balance sheets, consisted of the following (in thousands):

 

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Beginning balance

  $ 389     $ 394  

Donation of Counterpath shares

    (50 )     -  

Impairment charges

    -       (5 )

Ending balance

  $ 339     $ 389  

 

 

In June 2016, we donated the common shares of Counterpath and recorded the corresponding reduction in long term investment balances. At October 2, 2016 the ending balance consists of an investment in a privately held company.

 

 

NOTE 8.

RELATED PARTY TRANSACTIONS

 

Alonim Investments Inc.

 

Alonim Investments Inc. (“Alonim”) through its wholly-owned affiliate, Rodfre Holdings LLC, owns approximately 7.6 million shares, or approximately 16%, of our outstanding common stock as of October 2, 2016. As such, Alonim is our largest stockholder. Future Electronics Inc. (“Future”) is also an affiliate of Alonim and our largest distributor. One of our directors is an executive officer of Future. Our related party transactions primarily involved sales to Future.

 

 
13

 

 

Related party net sales as a percentage of our total net sales for the periods indicated below were as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Future and affiliates of Alonim

    26 %     38 %     27 %     39 %

 

 

Related party receivables as a percentage of our net accounts receivables were as follows as of the dates indicated below:

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Future and affiliates of Alonim

    17 %     17 %

 

 

Related party expenses for marketing promotional materials reimbursed were not significant for the three months and six months ended October 2, 2016 and September 27, 2015, respectively.

 

FusionOps, Inc.

 

The former CEO of FusionOps, Inc. is a member of the board of directors for Exar Corporation. For the three and six months ended September 27, 2015, we paid $28,200 and $81,400, respectively to FusionOps, Inc. to build an application for internal data analysis. Through July 2016 in fiscal year 2017, we paid $82,200 to FusionOps, Inc. We recorded these amounts as expense in the period in which such costs were incurred. Our board member resigned from FusionOps, Inc. in July 2016.

 

Interim President and Chief Executive Officer (“Interim CEO”)

 

Richard Leza served as our interim CEO through May 31, 2016 when the Board of Directors appointed him as Executive Chairman and Technology Advisor. For the six months ended October 2, 2016 we paid $0.1 million and issued 8,000 fully vested restricted stock units with a grant date fair value of $52,600 for his services provided. On June 30, 2016, Mr. Leza resigned as our Executive Chairman and Technology Advisor.

 

 

 

NOTE 9.

COMMON STOCK REPURCHASES

 

From time to time with our board of directors’ approval, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs and to increase our return on our invested capital.

 

On August 28, 2007, we announced the approval of a share repurchase plan and authorized the repurchase of up to $100.0 million of our common stock.

 

On July 9, 2013, we announced the approval of a share repurchase program under which we were authorized to repurchase an additional $50.0 million of our common stock. The repurchase program does not have a termination date, and may be modified, extended or terminated at any time. We intend to retire all shares repurchased under the stock repurchase plan. The purchase price for the repurchased shares of Exar is reflected as a reduction of common stock and additional paid-in capital. Since inception of the repurchase plan to October 2, 2016, we have repurchased a total of 11.1 million shares for an aggregate purchase price of $105.2 million.

 

We did not repurchase any common stock during the three or six months ended October 2, 2016 or September 27, 2015.

 

 
14

 

 

NOTE 10.

RESTRUCTURING CHARGES AND EXIT COSTS

 

Restructuring expenses result from the execution of management approved restructuring plans that were generally developed to improve our cost structure and/or operations, sometimes in conjunction with our acquisition integration strategies. Restructuring expenses consist of employee severance costs and may also include contract termination costs to improve our cost structure prospectively.

 

During the three and six months ended October 2, 2016, we incurred $0.2 million and $1.1 million of restructuring charges and exit costs, respectively. The charges consisted primarily of reduction of our workforce and the impairment of certain fixed assets and licensed technologies. We recorded $0.2 million of the restructuring charges and exit costs as cost of goods sold and $0.9 million as operating expense, respectively. During the three and six months ended September 27, 2015, we incurred $1.7 million and $2.9 million of restructuring charges and costs, respectively. The restructuring charges and exit costs are included in cost of sales and operating expenses.

 

Our restructuring liabilities were included in the other current liabilities and other non-current obligations lines within our condensed consolidated balance sheets. The following table summarizes the activities affecting the liabilities as of the dates indicated below (in thousands):

 

   

March 27,

2016

   

Additions/

adjustments

   

Non-cash charges

   

Payments

   

October 2, 2016

 

Lease termination costs and others

  $ 130     $ 467     $ (27 )   $ (136 )   $ 434  

Severance

    364       681       -       (894 )     151  

Total

  $ 494     $ 1,148     $ (27 )   $ (1,030 )   $ 585  

 

 

 

NOTE 11.

STOCK-BASED COMPENSATION

 

Except for the stock compensation expense section, all amounts consist of both continuing and discontinued operations.

 

Employee Stock Participation Plan (“ESPP”)

 

Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price that is equal to 95% of our common stock price on the last trading day of each three-calendar-month offering period. Our ESPP is non-compensatory.

 

The following table summarizes our ESPP transactions during the fiscal periods presented (in thousands, except per share amounts):

 

   

As of

   

Six Months Ended

 
   

October 2, 2016

   

October 2, 2016

 
                   

Weighted

 
   

Shares of

   

Shares of

   

Average

 
   

Common Stock

   

Common Stock

   

Price per Share

 

Authorized to issue

    4,500                  

Reserved for future issuance

    1,301                  

Issued

            16     $ 6.94  

 

 

Equity Incentive Plans

 

At the annual meeting of stockholders on September 18, 2014 (the “Annual Meeting”), our stockholders approved the Exar Corporation 2014 Equity Incentive Plan (“2014 Plan”). The 2014 Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, stock bonuses and other forms of awards granted or denominated in common stock or units of common stock, as well as cash bonus awards.

 

 
15

 

 

Prior to the Annual Meeting, we maintained the Exar Corporation 2006 Equity Incentive Plan (the “2006 Plan”) and the Sipex Corporation 2006 Equity Incentive Plan (the “Sipex 2006 Plan”). As of June 30, 2014, a total of 6,555,492 shares of our common stock were then subject to outstanding awards granted under the 2006 Plan and the Sipex 2006 Plan, and an additional 669,008 shares of our common stock were then available for new award grants under the 2006 Plan. As part of the stockholder approval of the 2014 Plan at the Annual Meeting, we agreed that no new awards will be granted under the 2006 Plan and the Sipex 2006 Plan, although awards made under these plans will remain subject to the terms of each such plan.

 

The maximum number of shares of our common stock that may be issued or transferred pursuant to awards under the 2014 Plan equals the sum of: (1) 5,170,000 shares, plus (2) the number of any shares subject to stock options granted under the 2006 Plan and the Sipex 2006 Plan and outstanding as of the date of the Annual Meeting which expire, or for any reason are cancelled or terminated, after the date of the Annual Meeting without being exercised, plus (3) the number of any shares subject to restricted stock and restricted stock unit awards granted under the 2006 Plan and the Sipex 2006 Plan that are outstanding and unvested as of the date of the Annual Meeting which are forfeited, terminated, cancelled, or otherwise reacquired after the date of the Annual Meeting without having become vested. Awards other than a stock option or stock appreciation right granted under the 2014 Plan are counted against authorized shares available for future issuance on a basis of two shares for each award issued. As of October 2, 2016, there were approximately 3.3 million shares available for future grants under the 2014 Plan.

 

Stock Option Activities

 

Our stock option transactions during the six months ended October 2, 2016 are summarized below:

 

   

Outstanding

Options /

Quantity

   

Weighted

Average

Exercise

Price per Share

   

Weighted

Average

Remaining

Contractual

Term

(in years)

   

Aggregate

Intrinsic

Value

(in thousands)

   

In-the-money

Options

Vested and

Exercisable

(in thousands)

 

Balance at March 27, 2016

    7,722,383     $ 7.96       4.40     $ 87       48  

Granted

    1,245,100       6.93                          

Exercised

    (1,426,533 )     6.60                          

Cancelled

    (442,205 )     9.17                          

Forfeited

    (678,756 )     7.71                          

Balance at October 2, 2016

    6,419,989       8.00       4.88       11,239       4,715  
                                         

Vested and expected to vest, October 2, 2016

    5,735,193       8.13       4.72       9,531          

Vested and exercisable, October 2, 2016

    2,921,673     $ 8.94       3.54     $ 3,126          

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stock of $9.31 and $5.26 as of October 2, 2016 and March 27, 2016, respectively. These are the values which would have been received by option holders if all option holders exercised their options on that date.

 

In January 2012, we granted 480,000 performance-based stock options to our then CEO. The options were scheduled to vest in four equal annual installments at the end of fiscal years 2013 through 2016 if certain predetermined market based financial measures were met. If the financial measures are not met, each installment would be rolled over to the subsequent fiscal year. In January 2014, we granted 140,000 performance-based stock options to our then CEO. The options were scheduled to vest at the end of fiscal year 2017 if certain predetermined financial measures were met. Due to the departure of our then CEO in October 2015, we recorded a reversal of $34,000 of compensation expense for these options in fiscal year 2016 as the requisite service period for vesting was not completed. No additional compensation expense for these options was recorded since the termination date for our former CEO.

 

On July 1, 2016 we granted 280,000 and 120,000 performance-based stock options to our CEO and Chief Financial Officer (“CFO”), respectively. The options vest based on the achievement of company performance targets relating to our non-GAAP earnings per share in future periods. If the criteria are met, the options are scheduled to vest over a four-year period, with one-fourth vesting after 12 months from the date of the grant and the remaining shares vesting in equal monthly installments over the remaining three years, subject to the CEO’s and CFO’s continued service with us. As of October 2, 2016, we did not record any compensation expense associated with these performance-based stock options as a result of low probability of achieving their performance goals.

 

 
16

 

  

Options exercised for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Intrinsic value of options exercised

  $ 2,196     $ 172     $ 2,718     $ 598  

 

 

RSU Activities

 

Our RSU transactions during the six months ended October 2, 2016 are summarized as follows:

 

   

Shares

   

Weighted

Average

Grant-Date

Fair Value

   

Weighted

Average

Remaining

Contractual

Term

(in years)

   

 

Aggregate

Intrinsic

Value

(in thousands)

 

Unvested at March 27, 2016

    590,833     $ 9.39       1.45     $ 3,108  

Granted

    177,800       4.96                  

Issued and released

    (132,196 )     9.06                  

Forfeited

    (206,529 )     9.69                  

Unvested at October 2, 2016

    429,908     $ 7.52       1.45     $ 4,002  

Expected to vest, October 2, 2016

    344,706               1.35     $ 3,209  

 

 

The aggregate intrinsic value of RSUs represents the closing price per share of our stock at the end of the periods presented, multiplied by the number of unvested RSUs or the number of vested and expected to vest RSUs, as applicable, at the end of each period.

 

For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs less estimated forfeitures was recognized on a straight-line basis, over the vesting period. 

 

In March 2012, we granted 300,000 performance-based RSUs (“PRSUs”) to our then CEO. The PRSUs were scheduled to vest in three equal installments at the end of fiscal year 2013 through 2015 with three-year vesting periods for each installment if certain predetermined financial measures were met. If the financial measures were not met, each installment would be forfeited at the end of its respective fiscal year. Due to the departure of our then CEO in October, 2015, we recorded a reversal of $41,000 for these PRSUs in fiscal year 2016, as the requisite service period required for vesting was not completed. No additional compensation expense for these options was recorded since the termination date for our former CEO.

 

In July 2013, as part of the acquisition of Cadeka, in order to encourage retention of five former Cadeka employees, we agreed to recommend to our Board of Directors in July 2015 a bonus, which, if approved by the Board of Directors, would be settled in RSUs subject to fulfillment of the service period. The ultimate approval of these awards was subject to the discretion of the Board of Directors. We recorded no compensation expense for these awards in the three and six months ended October 2, 2016. We recorded $0.2 million of non-cash compensation expense for these awards in the three and six months ended September 27, 2015.The expense is reported in the other current liabilities line on the condensed consolidated balance sheet as the total amount of bonus was to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense was recorded as part of stock compensation expense in the condensed consolidated statements of operations. In July 2015, the Board of Directors ultimately determined not to approve the granting of these RSUs. In fiscal year 2016 we paid three of these five former Cadeka employees $75,000 in cash in exchange for a release of claims, including any claim such former employees may have to the RSUs described above. As a result of obtaining these releases, the proportional amount of liability net of cash payments was removed from our condensed consolidated balance sheet, with a corresponding increase in additional paid in capital. For the two remaining employees, an amount of $1.2 million is included in other liabilities as of October 2, 2016, pending the earlier of a settlement with such former employees or the expiration of the relevant statute of limitations.

 

 
17

 

 

In October 2013, we granted 70,000 PRSUs to certain executives. The first 50% of the PRSUs was scheduled to start vesting in three equal installments at the end of fiscal year 2015 with a three-year vesting period if certain performance measures were met. The second 50% of the PRSUs was scheduled to start vesting in three equal installments at the end of fiscal year 2016 with a three-year vesting period if certain performance measures were met. We recorded approximately $18,000 and $37,000 of compensation expense for these awards in the three and six months ended October 2, 2016, respectively. We recorded $39,000 and $78,000 of compensation expense for these awards in the three and six months ended September 27, 2015, respectively. One of the executives’ employment was terminated in fiscal year 2015.

 

In August and December 2014, we granted 88,448 PRSUs to certain former iML employees. The PRSUs are scheduled to start vesting in three equal annual installments upon achievement of certain performance measures. We modified all stock awards outstanding in June 2016 for iML employees impacted by the pending sale of the iML entity. Under the modification, a certain portion of outstanding stock awards will early vest at the close of the transaction based on continued employment as of that date. As a result, we recorded a one-time reversal of $311,000 in stock compensation expense related to these stock awards in the three months ended July 3, 2016. The fair value of modified awards that are expected to vest is being recognized ratably over the estimated requisite service period. We recorded approximately $452,000 of stock compensation expense related to these modified awards in the three months ended October 2, 2016, which is included in discontinued operations.

 

In July 2016, we granted 60,000 and 30,000 PRSUs to our CEO and CFO, respectively, which vests based on the achievement of company stock price targets in future periods. If the performance criteria are met, the PRSUs will vest over a three-year period, with one-third of the PRSUs vesting after 12 months from the date of grant and the remaining PRSUs vesting in equal quarterly installments over the remaining two years, subject to the CEO and CFO’s continued service with Exar. The value of these awards is estimated using a Monte-Carlo simulation model using the following valuation assumptions:

 

Expected term of grants (years)

    3  

Risk-free interest rate

    0.76

%

Expected volatility

    50

%

 

For the three and six months ended October 2, 2016, we recorded approximately $24,000 of stock compensation expense related to these PRSUs.

 

In July 2016, we announced the Fiscal Year 2017 Management Incentive Program (“2017 Incentive Program”). Under this program, each participant’s award is denominated in shares of our common stock and is subject to attainment of Exar’s performance goals as established by the Compensation Committee of the Board of Directors for fiscal year 2017. We recorded a stock compensation expense of $1.2 million in the three months ended October 2, 2016.

 

Stock-Based Compensation Expense

 

The following table summarizes stock-based compensation expense related to stock options and RSUs for continuing operations during the fiscal periods presented (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Cost of sales

  $ 301     $ 79     $ 415     $ 159  

Research and development

    524       98       770       392  

Selling, general and administrative

    1,579       1,099       2,312       2,448  

Total stock-based compensation expense

  $ 2,404     $ 1,276     $ 3,497     $ 2,999  

 

The amount of stock-based compensation cost capitalized in inventory was immaterial for all periods presented. 

 

 
18

 

 

Unrecognized Stock-Based Compensation Expense 

 

The following table summarizes unrecognized stock-based compensation expense related to stock options and RSUs, net of reversals, as of October 2, 2016:

 

   

October 2, 2016

 
   

Amount

(in thousands)

   

Weighted

Average

Remaining

Recognition

Period (in years)

 

Options

  $ 4,968       2.61  

RSUs

    1,412       1.66  

PRSUs

    481       1.93  

Total unrecognized stock-based compensation expense

  $ 6,861          

 

 

NOTE 12. NET INCOME (LOSS) PER SHARE

 

Basic net income (loss) per share excludes dilution and is computed by dividing net loss attributable to Exar by the weighted average number of common shares outstanding for the applicable period. Diluted earnings per share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for common stock, using the treasury stock method, and the common stock underlying outstanding RSUs was issued.

The following table summarizes our net income (loss) per share for the periods indicated below (in thousands, except per share amounts):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Net income (loss) from continuing operations

  $ 83     $ (2,090 )   $ 7,626     $ (4,444 )

Net income (loss) from discontinued operations

  $ 925     $ (2,107 )   $ 2,322     $ (2,263 )

Net income (loss)

  $ 1,008     $ (4,197 )   $ 9,948     $ (6,707 )

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

                               

Basic

    49,614       48,121       49,129       48,024  

Effect of options and awards

    820        -       532       -  

Diluted

    50,434       48,121       49,661       48,024  

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

                               

Basic

    49,614       48,121       49,129       48,024  

Effect of options and awards

    820       -       532       -  

Diluted

    50,434       48,121       49,661       48,024  

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

                               

Basic

    49,614       48,121       49,129       48,024  

Effect of options and awards

    820       -       532       -  

Diluted

    50,434       48,121       49,661       48,024  

Net income (loss) per share from continuing operations:

                               

Basic

  $ -     $ (0.04 )   $ 0.15     $ (0.09 )

Diluted

  $ -     $ (0.04 )   $ 0.15     $ (0.09 )

Net income (loss) per share from discontinued operations:

                               

Basic

  $ 0.02     $ (0.04 )   $ 0.05     $ (0.05 )

Diluted

  $ 0.02     $ (0.04 )   $ 0.05     $ (0.05 )

Net income (loss) per share:

                               

Basic

  $ 0.02     $ (0.08 )   $ 0.20     $ (0.14 )

Diluted

  $ 0.02     $ (0.08 )   $ 0.20     $ (0.14 )

 

 

NOTE 13.

LEASE FINANCING OBLIGATIONS

 

We have acquired licenses to engineering design tools (“Design Tools”) under capital leases. We acquired licenses to Design Tools of $6.9 million in January 2015 under a two-year license and two three-year licenses with prepayment of $1.0 million, $4.4 million in October 2014 under a three-year license with a prepayment of $1.5 million for the first year license and $0.9 million in July 2012 under a three-year license all of which were accounted for as capital leases and recorded in the property, plant and equipment, net line item in the consolidated balance sheets. The obligations related to the Design Tools were included in other current liabilities and long-term lease financing obligations in our condensed consolidated balance sheets as of October 2, 2016 and March 27, 2016, respectively. The effective interest rates for the Design Tools range from 2.0% to 7.25%.

 

 
19

 

 

Amortization expense related to the Design Tools, which was recorded using the straight-line method over the remaining useful life for the periods indicated below, was as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Amortization expense

  $ 464     $ 965     $ 1,342     $ 2,038  

 

During the six months ended October 2, 2016, we recorded an impairment charge of $1.5 million and a restructuring expense of $0.4 million associated with a portion of these Design Tools.

 

Future minimum lease and sublease income payments for the lease financing obligations as of October 2, 2016 are as follows (in thousands):

 

Fiscal Years

 

Design Tools

 

2017 (6 months remaining)

  $ 3,427  

2018

    1,530  

Total minimum lease payments

    4,957  

Less: amount representing interest

    (769 )

Present value of future minimum lease payments

    4,188  

Less: short-term lease financing obligations

    (3,760 )

Long-term lease financing obligations

  $ 428  

 

Interest expense for the lease financing obligations for the periods indicated below was as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Interest expense

  $ 29     $ 45     $ 68     $ 93  

 

In the course of our business, we enter into arrangements accounted for as operating leases related to rental of office space. Rent expenses for all operating leases for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

Rent expense

  $ 67     $ 163     $ 167     $ 344  

 

Our future minimum lease payments for the lease operating obligations as of October 2, 2016 are as follows (in thousands):

 

Fiscal Years

 

Facilities

 

2017 (6 months remanining)

  $ 922  

2018

    1,403  

2019

    264  

2020

    50  

Total future minimum lease payments

  $ 2,639  

 

NOTE 14.      COMMITMENTS AND CONTINGENCY

 

In early 2012, we received correspondences from the California Department of Toxic Substance Control (“DTSC”) regarding its ongoing investigation of hazardous wastes and hazardous waste constituents at a former regulated treatment facility in San Jose, California. In 1985, Micro Power Systems Inc. (“MPSI”) made two separate permitted hazmat deliveries to a licensed and regulated site for treatment. DTSC has requested that former or current property owners and companies, that had hazardous waste treated at the site participate in further site assessment and limited remediation activities. We have entered into various agreements with other named generators, former property owners and DTSC limited to the investigation of the sites’ condition and evaluation, and selection of appropriate remedial measures. The designated environmental consulting firm has prepared and submitted to DTSC a site profile and is currently engaged in further study. Given that this matter is under investigation and discussions are ongoing with respect to various related considerations, we are unable to ascertain our exposure, if any, or estimate a reasonably possible range of loss. In the opinion of management, after consulting with legal counsel, and taking into account insurance coverage, any ultimate liability related to current outstanding claims and lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our financial statements, as a whole.

 

 
20

 

 

In a letter dated March 27, 2012, we were notified by the Alameda County Water District (“ACWD”) of the recent detection of volatile organic compounds at a site adjacent to a facility that was previously owned and occupied by Sipex. The letter was also addressed to prior and current property owners and tenants (collectively “Property Owners”). ACWD requested that the Property Owners carry out further site investigation activities to determine if the detected compounds are emanating from the site or simply flowing under it. In June 2012, the Property Owners filed with ACWD a report of its investigation/characterization activities and analytical data obtained. Accumulated data suggests that compounds of concern in groundwater appear to be from an offsite source. ACWD is investigating alternative upgradient sites. Given that this investigation is ongoing and we have not received any recent communications from ACWD, we are unable to ascertain our exposure, if any, or estimate a reasonably possible range of loss. In the opinion of management, after consulting with legal counsel, and taking into account insurance coverage, any ultimate liability related to current outstanding claims and lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our financial statements, as a whole.

 

We warrant all custom products and application specific products, including cards and boards, against defects in materials and workmanship for a period of 12 months, and occasionally we may provide an extended warranty from the delivery date. We warrant all of our standard products against defects in materials and workmanship for a period of 90 days from the date of delivery. Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty, historical warranty costs incurred and customer/product specific circumstances. Our liability is generally limited, at our option, to replacing, repairing, or issuing a credit (if it has been paid for). Our warranty does not cover damage which results from accident, misuse, abuse, improper line voltage, fire, flood, lightning or other damage resulting from modifications, repairs or alterations performed other than by us, or resulting from failure to comply with our written operating and maintenance instructions.

 

Our warranty reserve balances as of October 2, 2016 and March 27, 2016 were immaterial.

 

In the ordinary course of business, we may provide for indemnification of varying scope and terms to customers, vendors, lessors, business partners, purchasers of assets or subsidiaries, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us, services to be provided by us, intellectual property infringement claims made by third parties or, matters related to our conduct of the business. In addition, we have entered into indemnification agreements with our directors and certain of our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or executive officers. We maintain director and officer liability insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers, and former directors and officers of acquired companies, in certain circumstances.

 

It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement and claims. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our condensed consolidated financial statements.

 

 

NOTE 15.

LEGAL PROCEEDINGS

 

From time to time, we are involved in various claims, legal actions and complaints arising in the normal course of business. We are not a named party to any ongoing lawsuit or formal proceeding that, in the opinion of our management, is likely to have a material adverse effect on our financial position, results of operations or cash flows.

 

NOTE 16.

INCOME TAXES

 

During the three and six months ended October 2, 2016, we recorded an income tax expense from continuing operations of approximately $0.1 million and $0.3 million, respectively. The income tax expense was primarily due to federal alternative minimum taxes on the building sale gain. During the three and six months ended September 27, 2015, we recorded an income tax benefit from continuing operations of approximately $3.4 million and $4.2 million, respectively. The income tax benefit was primarily due to losses benefited against income from discontinued operations.

 

During the three months ended October 2, 2016, the unrecognized tax benefits increased by $0.2 million to $17.1 million primarily related to the increase of unrecognized tax benefit on R&D tax credits, offset by the lapsing of the statute of limitations. If recognized, $14.1 million of these unrecognized tax benefits (net of federal benefit) would be recorded as a reduction of future income tax provision before consideration of changes in valuation allowance.

 

 
21

 

 

Estimated interest and penalties related to the income taxes are classified as a component of the provision for income taxes in the condensed consolidated statement of operations. Accrued interest and penalties consisted of the following as of the dates indicated (in thousands): 

 

   

October 2,

   

March 27,

 
   

2016

   

2016

 

Accrued interest and penalties

  $ 1,507     $ 1,364  

 

Our major tax jurisdictions are the United States federal and various states, Canada, China, Hong Kong, Korea and certain other foreign jurisdictions. The fiscal years 2003 through 2015 remain open and subject to examinations by the appropriate governmental agencies in the United States and certain of our foreign jurisdictions.

 

 

NOTE 17.

SEGMENT AND GEOGRAPHIC INFORMATION

 

Our foreign operations are conducted primarily through our wholly-owned subsidiaries in Canada, China, France, Germany, Japan, Malaysia, South Korea, Taiwan and the United Kingdom. Our principal markets include Asia Pacific region, North America, and Europe. Net sales by geographic areas represent direct sales principally to original equipment manufacturers (“OEM”), or their designated subcontract manufacturers, and to distributors (affiliated and unaffiliated) who buy our products and resell to their customers.

 

Our net sales by geographic area for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

October 2,

   

September 27,

   

October 2,

   

September 27,

 
   

2016

   

2015

   

2016

   

2015

 

China

  $ 11,975       10,045