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 January 1, 2017

 

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 50,890,387 as of January 30, 2017.

 

 

 

 
1

 

 

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED January 1, 2017

 

   

Page

 

PART I – FINANCIAL INFORMATION

 
     
     

Item 1.

Financial Statements

3

     
 

Condensed Consolidated Balance Sheets (Unaudited)

3

     
 

Condensed Consolidated Statements of Operations (Unaudited)

4

     
  Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) 5
     
 

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

     

Item 2.

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

26

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

     

Item 4.

Controls and Procedures

33

     
     
 

PART II – OTHER INFORMATION

 
     
     

Item 1.

Legal Proceedings

34

     

Item 1A.

Risk Factors

34

     

Item 6.

Exhibits

35

     
 

Signatures

36

     
 

Index to Exhibits

37

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

(In thousands)

(Unaudited)

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 102,023     $ 55,070  

Short-term marketable securities

    125,621       -  

Accounts receivable (net of allowances of $831 and $809)

    12,842       16,130  

Accounts receivable, related party (net of allowances of $416 and $617)

    4,977       3,247  

Inventories

    24,221       20,807  

Other current assets

    3,081       1,922  

Assets of discontinued operations

    -       93,911  

Total current assets

    272,765       191,087  

Property, plant and equipment, net

    3,926       20,299  

Goodwill

    31,613       31,613  

Intangible assets, net

    9,602       11,735  

Other non-current assets

    5,605       639  

Total assets

  $ 323,511     $ 255,373  
                 
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 9,558     $ 11,258  

Accrued compensation and related benefits

    2,276       2,984  

Deferred income and allowances on sales to distributors

    3,221       3,053  

Deferred income and allowances on sales to distributor, related party

    2,988       4,683  

Other current liabilities

    10,200       10,669  

Liabilities of discontinued operations

    -       3,470  

Total current liabilities

    28,243       36,117  

Long-term lease financing obligations

    -       1,285  

Other non-current obligations

    3,536       3,422  

Total liabilities

    31,779       40,824  
                 

Commitments and contingencies (Notes 14 and 15)

               
                 

Stockholders’ equity:

               

Common stock, $.0001 par value; 100,000,000 shares authorized; 50,763,486 and 48,545,311 shares outstanding

    5       5  

Additional paid-in capital

    551,206       529,207  

Accumulated other comprehensive loss

    (141 )     -  

Accumulated deficit

    (259,338 )     (314,663 )

Total stockholders’ equity

    291,732       214,549  

Total liabilities and stockholders’ equity

  $ 323,511     $ 255,373  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
3

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Sales:

                               

Net sales

  $ 18,845     $ 16,884     $ 58,881     $ 47,740  

Net sales, related party

    8,377       8,426       23,078       28,508  

Total net sales

    27,222       25,310       81,959       76,248  
                                 

Cost of sales:

                               

Cost of sales

    10,054       9,716       31,473       29,922  

Cost of sales, related party

    3,118       4,025       8,468       12,847  

Restructuring charges and exit costs

    -       -       225       740  

Proceeds from legal settlement

    -       -       -       (1,500 )

Amortization of purchased intangible assets

    594       594       1,782       1,833  

Total cost of sales

    13,766       14,335       41,948       43,842  

Gross profit

    13,456       10,975       40,011       32,406  
                                 

Operating expenses:

                               

Research and development

    4,964       4,734       14,840       17,007  

Selling, general and administrative

    9,109       6,781       23,425       21,690  

Merger and acquisition costs

    -       -       1,270       544  

Restructuring charges and exit costs, net

    -       2,639       923       4,846  

Impairment of design tools

    -       -       1,519       -  

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

    -       -       (9,300 )     -  

Total operating expenses, net

    14,073       14,154       32,677       44,087  

Income (loss) from operations

    (617 )     (3,179 )     7,334       (11,681 )
                                 

Other income and (expense), net:

                               

Interest income and other, net

    212       (12 )     299       (60 )

Interest expense

    (80 )     (65 )     (147 )     (158 )

Total other income (expense), net

    132       (77 )     152       (218 )
                                 

Income (loss) before income taxes

    (485 )     (3,256 )     7,486       (11,899 )

Provision for (benefit from) income taxes

    (204 )     (1,211 )     141       (5,410 )

Net income (loss) from continuing operations

    (281 )     (2,045 )     7,345       (6,489 )

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

    45,660       (5,092 )     47,982       (7,355 )

Net income (loss)

  $ 45,379     $ (7,137 )   $ 55,327     $ (13,844 )
                                 

Net income (loss) per share from continuing operations:

                               

Basic

  $ (0.01 )   $ (0.04 )   $ 0.15     $ (0.13 )

Diluted

  $ (0.01 )   $ (0.04 )   $ 0.15     $ (0.13 )

Net income (loss) per share from discontinued operations:

                               

Basic

  $ 0.91     $ (0.11 )   $ 0.97     $ (0.15 )

Diluted

  $ 0.89     $ (0.11 )   $ 0.95     $ (0.15 )

Net income (loss) per share:

                               

Basic

  $ 0.90     $ (0.15 )   $ 1.12     $ (0.28 )

Diluted

  $ 0.88     $ (0.15 )   $ 1.10     $ (0.28 )

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

                               

Basic

    50,409       48,386       49,548       48,146  

Effect of options and awards

    -       -       713       -  

Diluted

    50,409       48,386       50,261       48,146  

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

                               

Basic

    50,409       48,386       49,548       48,146  

Effect of options and awards

    956       -       713       -  

Diluted

    51,365       48,386       50,261       48,146  

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

                               

Basic

    50,409       48,386       49,548       48,146  

Effect of options and awards

    956       -       713       -  

Diluted

    51,365       48,386       50,261       48,146  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
4

 

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Net income (loss)

  $ 45,379     $ (7,137 )   $ 55,327     $ (13,844 )

Changes in market value of investments, net of tax:

                               

Changes in unrealized loss on investments

    (141 )     -       -       -  

Net change in market value of investments

    (141 )     -       -       -  

Comprehensive income (loss)

  $ 45,238     $ (7,137 )   $ 55,327     $ (13,844 )

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
5

 

  

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

January 1,

   

December 27,

 
   

2017

   

2015

 

Cash flows from operating activities:

               

Net income (loss)

  $ 55,327     $ (13,844 )

Income (loss) from discontinued operations

    47,982       (7,355 )

Income (loss) from continuing operations

    7,345       (6,489 )

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

               

Depreciation and amortization

    4,739       6,908  

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

    (9,300 )     -  

Amortization of deferred gain on sale-leaseback arrangement

    (996 )     -  

Stock-based compensation expense

    7,131       3,810  

Impairment of design tools

    1,519       -  

Restructuring charges and exist costs

    1,148       905  

Changes in operating assets and liabilities:

               

Accounts receivable

    1,558       (1,822 )

Inventories

    (3,414 )     3,495  

Prepaid expenses, other current assets and other assets

    (515 )     7,488  

Accounts payable

    5,049       1,055  

Accrued compensation and related benefits

    (708 )     (646 )

Deferred income

    (1,527 )     (2,841 )

Other current and non-current liabilities

    (2,219 )     (7,875 )

Net cash provided by operating activities - continuing operations

    9,810       3,988  

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

    979       (2,884 )

Net cash provided by operating activities

    10,789       1,104  
                 

Cash flows from investing activities:

               

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

    (769 )     (954 )

Sale of land and building under sale-leaseback arrangement

    24,051       -  

Purchases of short-term marketable securities

    (125,762 )     -  

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

    (102,480 )     (954 )

Net cash provided by investing activities - discontinued operations

    127,933       -  

Net cash provided by (used in) investing activities

    25,453       (954 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    13,950       2,351  

Purchase of stock for withholding taxes on vested restricted stock

    (456 )     (1,562 )

Cash settlement of equity award

    -       (429 )

Payments of lease financing obligations

    (2,783 )     (2,294 )

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

    10,711       (1,934 )

Net cash provided by financing activities - discontinued operations

    -       -  

Net cash provided by (used in) financing activities

    10,711       (1,934 )

Net increase in cash and cash equivalents

    46,953       (1,784 )

Cash and cash equivalents at the beginning of the period

    55,070       55,233  

Cash and cash equivalents at the end of the period

  $ 102,023     $ 53,449  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 
6

 

  

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 January 1, 2017 and our results of operations for the three months and nine months ended January 1, 2017 and December 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 Operations— On November 9, 2016, we completed the sale of 100% of the issued and outstanding shares of our wholly-owned subsidiary Integrated Memory Logic Limited (“iML”). As a result, we report the operating results of iML prior to the completion of the sale and the gain on the sale 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 of discontinued operations and liabilities of discontinued operations, 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 in the initial stages of evaluating the effect of adoption of this standard, if any, on our consolidated financial position, results of operations or cash flows.

 

 
7

 

 

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 in the initial stages of 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 in the initial stages of 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.

 

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is intended to clarify or correct narrow aspects of the guidance issued in Update 2014-09, which is not yet effective. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). We are currently in the initial stages of evaluating the impact of these amendments on our financial statements. 

 
8

 

 

NOTE 3.

DISCONTINUED OPERATIONS

 

On November 9, 2016, we completed the sale of 100% of the issued and outstanding shares of our wholly-owned subsidiary iML. We received total cash proceeds of $127.9 million net of iML’s cash at closing and other adjustments for fluctuations in working capital. This resulted in the recognition of a total gain of $45.4 million. In addition to the proceeds, $5.0 million of purchase price consideration is held in escrow (the “Holdback Amount”) and will be paid to us subject to the satisfaction of certain conditions. The amount was recorded in other non-current assets line in the condensed consolidated balance sheet.

 

The following table summarizes certain statements of operations information for discontinued operations for the three months and nine months ended January 1, 2017 and December 27, 2015, respectively (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Net sales

  $ 4,628     $ 12,129     $ 30,936     $ 36,354  
                                 

Cost of sales:

                               

Cost of sales

    2,863       6,546       17,935       18,388  

Amortization of purchased intangible assets

    -       1,867       1,245       5,589  

Total cost of sales

    2,863       8,413       19,180       23,977  

Gross profit

    1,765       3,716       11,756       12,377  

Operating expenses:

                               

Research and development

    974       4,036       5,634       7,571  

Selling, general and administrative

    655       3,355       3,459       7,569  

Total operating expenses, net

    1,629       7,391       9,093       15,140  
                                 

Gain on sale of iML

    45,382       -       45,382       -  

Interest income and other, net

    (10 )     2       69       9  

Income (loss) before income taxes

    45,508       (3,673 )     48,114       (2,754 )

Provision for (benefit from) income taxes

    (152 )     1,419       132       4,601  

Net income (loss) from discontinued operations

  $ 45,660     $ (5,092 )   $ 47,982     $ (7,355 )

 

The gain on sale was calculated as the cash proceeds, less iML assets of $90.4 million, including inventories, intangibles, goodwill, and fixed assets, plus (i) the transfer of liabilities of $2.8 million including accounts payables and other accrued liabilities, and (ii) the $5.0 million of purchase price held in escrow. The following table summarizes the calculation of the gain on sale of iML (in thousands):

 

Net proceeds

  $ 127,933  

Assets sold

    (90,394 )

Liabilities transferred

    2,843  

Holdback amount

    5,000  

Gain on sale of iML

  $ 45,382  

  

 
9

 

 

After the completion of the sale, all of iML's assets were sold and all liabilities were transferred. As of March 27, 2016, the aggregate components of assets and liabilities classified as held for sale and included in assets and liabilities consisted of the following (in thousands):

 

   

March 27,

 
   

2016

 

Accounts receivable, net

  $ 13,427  

Inventories

    7,944  

Deferred income taxes and other assets

    248  

Property, plant and equipment, net

    88  

Goodwill

    13,258  

Identifiable intangible assets, net

    58,946  

Total assets

  $ 93,911  
         

Accounts payable

  $ 2,024  

Accrued liabilities

    1,422  

Deferred income taxes and other liabilities

    24  

Total liabilities

  $ 3,470  

 

 

NOTE 4.

BALANCE SHEET DETAILS

 

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

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

Raw materials

  $ 1,252     $ 1,012  

Work-in-progress

    9,729       9,780  

Finished goods

    13,240       10,015  

Total inventories

  $ 24,221     $ 20,807  

 

 
10

 

 

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

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

Land

  $ -     $ 6,660  

Building

    -       16,365  

Machinery and equipment

    38,214       37,813  

Software and licenses

    21,561       22,045  

Leasehold Improvement

    833       755  

Property, plant and equipment, total

    60,608       83,638  

Accumulated depreciation, amortization and impairment

    (56,682 )     (63,339 )

Total property, plant and equipment, net

  $ 3,926     $ 20,299  

 

The decrease in land and building relates to the sale-leaseback of our Fremont facility. The accumulated depreciation and amortization for the three and nine months ended January 1, 2017 includes a $1.0 million and $2.5 million, respectively, 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):

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

Short-term lease financing obligations

  $ 1,714     $ 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 sales and marketing expenses

    894       699  

Accrued legal and professional services

    792       1,247  

Accrued manufacturing expenses, royalties and licenses

    674       486  

Accrued restructuring charges and exit costs

    157       494  

Other current liabilities

    2,169       1,753  

Total other current liabilities

  $ 10,200     $ 10,669  

  

 

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

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

Long-term taxes payable

  $ 3,446     $ 3,339  

Deferred tax liability

    90       83  

Total other non-current obligations

  $ 3,536     $ 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”.

 

 
11

 

 

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.

 

There were no transfers between Level 1 and Level 2 during the nine months ended January 1, 2017. Exar had no assets or liabilities utilizing Level 3 inputs as of January 1, 2017 or March 27, 2016.

 

Our investment assets, measured at fair value on a recurring basis, consisted of the following as of the dates indicated below (in thousands):

 

   

January 1, 2017

 
       
   

Level 1

   

Level 2

   

Total

 

Assets:

                       

Money market funds

  $ 65,114     $ -     $ 65,114  

U.S. government and agency securities

    11,041       10,120       21,161  

Corporate bonds and securities

    -       96,993       96,993  

State and local government securities

    -       4,195       4,195  

Certificates of deposit

    -       3,272       3,272  

Total investment assets

  $ 76,155     $ 114,580     $ 190,735  

 

 

   

March 27, 2016

 
       
   

Level 1

   

Level 2

   

Total

 

Assets:

                       

Money market funds

  $ 4     $ -     $ 4  

Common shares of CounterPath

    -       43       43  

Total investment assets

  $ 4     $ 43     $ 47  

 

In June 2016, we donated the 93,000 common shares of CounterPath Corporation (“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.

 

 
12

 

 

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

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

Cash and cash equivalents

               

Cash in financial institutions

  $ 36,909     $ 55,066  

Money market funds

    65,114       4  

Total cash and cash equivalents

  $ 102,023     $ 55,070  

 

Our marketable securities include U.S. government and agency securities, state and local government securities, corporate bonds and securities, and certificates of deposit. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. We amortize premiums and accrete discounts to interest income over the life of the investment. Our available-for-sale securities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90 days or less from the date of purchase and as short-term marketable securities if the maturity date is greater than 90 days from the date of purchase.

 

All marketable securities are reported at fair value based on the estimated or quoted market prices as of each balance sheet date, with unrealized gains or losses, net of tax effect, recorded in the condensed consolidated statements of other comprehensive income except those unrealized losses that are deemed to be other than temporary which are reflected in the impairment charges on investments line item on the condensed consolidated statements of operations.

 

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 nine months ended January 1, 2017 and December 27, 2015, there were no net realized gains (losses) on the sale of marketable securities.

 

The following table summarizes our investments in marketable securities as of January 1, 2017 (in thousands):

 

   

January 1, 2017

 
   

Amortized

   

Unrealized Gross

   

Unrealized Gross

       
   

Cost

   

Gains

   

Losses

    Fair Value  

Money market funds

  $ 65,114     $ -     $ -     $ 65,114  

U.S. government and agency securities

    21,161       13       (13 )     21,161  

Corporate bonds and securities

    97,133       19       (159 )     96,993  

State and local government securities

    4,196       1       (2 )     4,195  

Certificates of deposit

    3,272       -       -       3,272  

Total investments

  $ 190,876     $ 33     $ (174 )   $ 190,735  

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will not have to sell the security before recovery of its cost basis. For the three months and nine months ended January 1, 2017, no investments were identified with other-than-temporary declines in value. 

 

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale by expected maturity as of January 1, 2017 (in thousands):

 

   

January 1, 2017

 
   

Amortized Cost

   

Fair Value

 

Less than 1 year

  $ 93,565     $ 93,519  

Due in 1 to 5 years

    97,311       97,216  

Total

  $ 190,876     $ 190,735  

 

 
13

 

 

The following table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as of January 1, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

   

January 1, 2017

 
   

Less than 12 months

   

Total

 
   

Fair Value

   

Gross Unrealized Losses

   

Fair Value

   

Gross Unrealized Losses

 

Corporate bonds and securities

  $ 77,362     $ (159 )   $ 77,362     $ (159 )

U.S. government and agency securities

    15,379       (13 )     15,379       (13 )

State and local government securities

    1,471       (2 )     1,471       (2 )

Total

  $ 94,212     $ (174 )   $ 94,212     $ (174 )

 

 

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.

 

As of July 3, 2016, we performed a goodwill impairment analysis and concluded that the goodwill remaining in the portion of the reporting unit to be retained was not impaired.

 

Intangible Assets

 

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

 

   

January 1, 2017

   

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     $ (45,292 )   $ 8,586       3.9     $ 53,878     $ (43,502 )   $ 10,376       4.6  

Customer relationships

    5,225       (4,209 )     1,016       3.0       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     $ (54,434 )   $ 9,602             $ 64,036     $ (52,301 )   $ 11,735          

 

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.

 

 
14

 

 

During the three and nine months ended January 1, 2017 and December 27, 2015, there were no indicators or events that required us to perform an intangible assets impairment review for intangibles from our continuing operations. 

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Amortization expense

  $ 705     $ 723     $ 2,133     $ 2,238  

 

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

 

Amortization Expense (by fiscal year)  

2017 (3 months remaining)

  $ 705  

2018

    2,802  

2019

    2,488  

2020

    1,989  

2021

    1,325  

2022 and thereafter

    293  

Total future amortization

  $ 9,602  

 

 

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):

 

   

January 1,

   

March 27,

 
   

2017

   

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 January 1, 2017 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 January 1, 2017. 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.

 

 
15

 

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Future and affiliates of Alonim

    31%       33%       28%       25%  

 

 

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

 

   

January 1,

   

March 27,

 
   

2017

   

2016

 

Future and affiliates of Alonim

    28%       17%  

 

 

Related party expenses for marketing promotional materials reimbursed were not significant for the three months and nine months ended January 1, 2017 or December 27, 2015.

 

FusionOps, Inc.

 

The former CEO of FusionOps, Inc. is a member of the Board of Directors for Exar. For the three and nine months ended December 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 expenses in the periods in which such costs were incurred. Our board member who was previously affiliated with FusionOps, Inc., 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 nine months ended January 1, 2017 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 the inception of the repurchase plan through January 1, 2017, 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 nine months ended January 1, 2017 or December 27, 2015. 

 

 

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.

 

 
16

 

 

During the three and nine months ended January 1, 2017, we incurred $0 and $1.1 million of restructuring charges and exit costs, respectively. The restructuring charges for the nine months ended January 1, 2017 consist of $0.2 million of cost of goods sold and $0.9 million as operating expense, due to both the reduction of our workforce and the impairment of certain fixed assets and licensed technologies. During the three and nine months ended December 27, 2015, we incurred $2.6 million and $5.6 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):

 

           

Additions/

                         
   

March 27, 2016

   

adjustments

   

Non-cash charges

   

Payments

   

January 1, 2017

 

Lease termination costs and others

  $ 130     $ 467     $ (27 )   $ (436 )   $ 134  

Severance

    364       681       -       (1,022 )     23  

Total

  $ 494     $ 1,148     $ (27 )   $ (1,458 )   $ 157  

 

 

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

   

Nine Months Ended

 
   

January 1, 2017

   

January 1, 2017

 
                   

Weighted

 
   

Shares of

   

Shares of

   

Average

 
   

Common Stock

   

Common Stock

   

Price per Share

 

Authorized to issue

    4,500                  

Reserved for future issuance

    1,298                  

Issued

            19     $ 7.54  

 

 

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.

 

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.  

 

 
17

 

 

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 January 1, 2017, there were approximately 3.3 million shares available for future grants under the 2014 Plan.

 

Stock Option Activities

 

Our stock option transactions during the nine months ended January 1, 2017 are summarized below:

 

                   

Weighted

                 
                   

Average

           

In-the-money

 
           

Weighted

   

Remaining

   

Aggregate

   

Options

 
   

Outstanding

   

Average

   

Contractual

   

Intrinsic

   

Vested and

 
   

Options /

   

Exercise

   

Term

   

Value

   

Exercisable

 
   

Quantity

   

Price per Share

   

(in years)

   

(in thousands)

   

(in thousands)

 

Balance at March 27, 2016

    7,722,383     $ 7.96       4.40     $ 87       48  

Granted

    1,466,800       7.30                          

Exercised

    (2,045,504 )     6.97                          

Cancelled

    (614,454 )     9.84                          

Forfeited

    (1,055,074 )     7.53                          

Balance at January 1, 2017

    5,474,151       8.02       4.66       16,195       4,787  
                                         

Vested and expected to vest, January 1, 2017

    4,909,103       8.12       4.50       14,140          

Vested and exercisable, January 1, 2017

    2,491,344     $ 8.85       3.19     $ 5,620          

 

 

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 $10.78 and $5.26 as of January 1, 2017 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 were 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 of 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 criteria are met, the options are scheduled to vest with four equal annual installments during the next four years, subject to the CEO’s and CFO’s continued service with us. As of January 1, 2017, we recorded $0.2 million compensation expense associated with a portion of such performance-based stock options for which the vesting criteria has been determined by the Compensation Committee of the Board of Directors.

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Intrinsic value of options exercised

  $ 1,367     $ 39     $ 4,085     $ 637  

 

 
18

 

 

RSU Activities

 

Our RSU transactions during the nine months ended January 1, 2017 are summarized as follows:

 

 

                   

Weighted

         
                   

Average

         
           

Weighted

   

Remaining

   

Aggregate

 
           

Average

   

Contractual

   

Intrinsic

 
           

Grant-Date

   

Term

   

Value

 
   

Shares

   

Fair Value

   

(in years)

   

(in thousands)

 

Unvested at March 27, 2016

    590,833     $ 9.39       1.45     $ 3,108  

Granted

    622,039       8.63                  

Issued and released

    (209,236 )     8.94                  

Forfeited

    (215,029 )     9.68                  

Unvested at January 1, 2017

    788,607     $ 8.83       1.81     $ 8,501  

Vested and expected to vest, January 1, 2017

    608,111               1.62       6,555  

 

 

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 of 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 nine months ended January 1, 2017. We recorded $0.2 million of non-cash compensation expense for these awards in the three and nine months ended December 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 January 1, 2017, pending the earlier of a settlement with such former employees or the expiration of the relevant statute of limitations.

 

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 $5,000 and $42,000 of compensation expense for these awards in the three and nine months ended January 1, 2017, respectively. We recorded $18,000 and $96,000 of compensation expense for these awards in the three and nine months ended December 27, 2015, respectively. One of the executives’ employment was terminated in fiscal year 2015.

 

 
19

 

 

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 sale of iML. Under the modification, a certain portion of outstanding stock awards vested 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 $0.2 million and $0.7 million of stock compensation expense related to these modified awards in the three months and nine months ended January 1, 2017, respectively, 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’s 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 nine months ended January 1, 2017, we recorded approximately $56,000 and $80,000 of stock compensation expense related to these PRSUs, respectively.  

 

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 $2.2 million in the nine months ended January 1, 2017.

 

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

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Cost of sales

  $ 474     $ 98     $ 889     $ 257  

Research and development

    926       117       1,696       509  

Selling, general and administrative

    2,234       596       4,546       3,044  

Total stock-based compensation expense

  $ 3,634     $ 811     $ 7,131     $ 3,810  

 

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

 

 
20

 

 

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 January 1, 2017:

 

   

January 1, 2017

 
           

Weighted

 
           

Average

 
           

Remaining

 
   

Amount

   

Recognition

 
   

(in thousands)

   

Period (in years)

 

Options

  $ 4,887       2.59  

RSUs

    4,557       2.58  

PRSUs

    630       1.69  

Total unrecognized stock-based compensation expense

  $ 10,074          

 

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

   

Nine Months Ended

 
   

January 1,

   

December 27,

   

January 1,

   

December 27,

 
   

2017

   

2015

   

2017

   

2015

 

Net income (loss) from continuing operations

  $ (281 )   $ (2,045 )   $ 7,345     $ (6,489 )

Net income (loss) from discontinued operations

  $ 45,660     $ (5,092 )   $ 47,982     $ (7,355 )

Net income (loss)

  $ 45,379     $ (7,137 )   $ 55,327     $ (13,844 )

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

                               

Basic

    50,409       48,386