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EX-32.2 - EXHIBIT 32.2 - EXAR CORPex32-2.htm


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 December 27, 2015

 

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 48,518,671 as of February 2, 2016.

 

 

 



 

 
1

 

 

EXAR CORPORATION AND SUBSIDIARIES

 

INDEX TO

 

QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 2015

 

   

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

25

     

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

49

     
 

Signatures

50

     
 

Index to Exhibits

51

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

EXAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

   

December 27,

2015

   

March 29,

2015

 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 53,449     $ 55,233  

Accounts receivable (net of allowances of $1,010 and $1,334)

    27,079       27,459  

Accounts receivable, related party (net of allowances of $296 and $774)

    4,554       1,663  

Inventories

    28,659       30,767  

Other current assets

    2,018       3,090  

Total current assets

    115,759       118,212  
                 

Property, plant and equipment, net

    21,567       26,077  

Goodwill

    44,871       44,871  

Intangible assets, net

    74,119       86,102  

Other non-current assets

    778       7,838  

Total assets

  $ 257,094     $ 283,100  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 13,234     $ 13,526  

Accrued compensation and related benefits

    4,207       5,649  

Deferred income and allowances on sales to distributors

    2,479       3,362  

Deferred income and allowances on sales to distributors, related party

    4,141       6,982  

Other current liabilities

    12,421       21,287  

Total current liabilities

    36,482       50,806  
                 

Long-term lease financing obligations

    1,714       5,069  

Other non-current obligations

    3,420       4,393  

Total liabilities

    41,616       60,268  
                 

Commitments and contingencies (Notes 14, 15 and 16)

               
                 

Stockholders' equity:

               

Common stock, $.0001 par value; 100,000,000 shares authorized; 48,481,338 and 47,745,618 shares outstanding

    5       5  

Additional paid-in capital

    527,980       521,490  

Accumulated other comprehensive loss

    (26 )     (26 )

Accumulated deficit

    (312,481 )     (298,637 )

Total stockholders' equity

    215,478       222,832  

Total liabilities and stockholders’ equity

  $ 257,094     $ 283,100  

 

 

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   
     

December 27, 

2015

     

December 28,

2014

     

December 27,  

2015

     

December 28,

2014

 

Sales:

                             

Net sales

  $ 29,013     $ 35,919     $ 84,095     $ 91,986  

Net sales, related party

    8,426       8,396       28,508       26,207  

Total net sales

    37,439       44,315       112,603       118,193  
                                 

Cost of sales:

                               

Cost of sales

    16,261       19,741       48,309       51,841  

Cost of sales, related party

    4,025       3,099       12,847       10,408  

Amortization of purchased intangible assets and inventory step-up costs

    2,461       2,533       7,422       9,215  

Restructuring charges and exit costs

          2,052       740       6,384  

Proceeds from legal settlement

                (1,500 )      

Impairment of intangibles

                      8,367  

Total cost of sales

    22,747       27,425       67,818       86,215  

Gross profit

    14,692       16,890       44,785       31,978  
                                 

Operating expenses:

                               

Research and development

    7,230       10,035       24,206       28,647  

Selling, general and administrative

    10,280       11,793       29,665       33,467  

Restructuring charges and exit costs

    2,228       1,418       3,550       4,052  

Impairment of intangibles

    1,807             1,807       3,917  

Merger and acquisition costs

          179             6,955  

Net change in fair value of contingent consideration

                      (4,343 )

Total operating expenses

    21,545       23,425       59,228       72,695  

Loss from operations

    (6,853 )     (6,535 )     (14,443 )     (40,717 )
                                 

Other income and expense, net:

                               

Interest income and other, net

    (7 )     53       (40 )     520  

Interest expense and other, net

    (69 )     (46 )     (170 )     (1,026 )

Total other income and expense, net

    (76 )     7       (210 )     (506 )
                                 

Loss before income taxes

    (6,929 )     (6,528 )     (14,653 )     (41,223 )

Provision for (benefit from) income taxes

    208       71       (809 )     870  

Net loss

    (7,137 )     (6,599 )     (13,844 )     (42,093 )

Less: Net loss attributable to non-controlling interests

                      (37 )

Net loss attributable to Exar Corporation

  $ (7,137 )   $ (6,599 )   $ (13,844 )   $ (42,056 )

Net loss per share:

                               

Basic

  $ (0.15 )   $ (0.14 )   $ (0.29 )   $ (0.89 )

Diluted

  $ (0.15 )   $ (0.14 )   $ (0.29 )   $ (0.89 )
                                 

Shares used in the computation of net loss per share:

                               

Basic

    48,386       47,119       48,146       47,165  

Diluted

    48,386       47,119       48,146       47,165  

 

 

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

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Net loss

  $ (7,137 )   $ (6,599 )   $ (13,844 )   $ (42,093 )

Changes in market value of investments:

                               

Changes in unrealized loss

                      199  

Reclassification adjustment for net realized gains

                      26  

Release of tax provision for unrealized gains

                      828  

Net change in market value of investments

                      1,053  

Comprehensive loss

  $ (7,137 )   $ (6,599 )   $ (13,844 )   $ (41,040 )

Less: comprehensive loss attributable to non-controlling interests

                      (37 )

Comprehensive loss attributable to Exar Corporation

  $ (7,137 )   $ (6,599 )   $ (13,844 )   $ (41,003 )

 

 

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

 
   

December 27,

2015

   

December 28,

2014

 

Cash flows from operating activities:

               

Net loss

  $ (13,844 )   $ (42,093 )

Reconciliation of net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    14,595       13,325  

Stock-based compensation expense

    4,431       10,949  

Restructuring charges and exit costs

    905       6,732  

Impairment of intangibles

    1,807       12,284  

Release of deferred tax valuation allowance

          828  

Net change in fair value of contingent consideration

          (4,343 )

Changes in operating assets and liabilities, net of effect of acquisitions:

               

Accounts receivable and accounts receivable, related party

    (2,511 )     (1,125 )

Inventories

    1,684       (3,506 )

Other current and non-current assets

    8,132       (1,087 )

Accounts payable

    (909 )     (2,945 )

Accrued compensation and related benefits

    (1,442 )     (231 )

Other current and non-current liabilities

    (8,020 )     (5,380 )

Deferred income and allowance to distributors including related party

    (3,724 )     581  

Net cash provided by (used in) operating activities

    1,104       (16,011 )
                 

Cash flows from investing activities:

               

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

    (954 )     (2,447 )

Purchases of short-term marketable securities

          (9,296 )

Proceeds from maturities of short-term marketable securities

          3,997  

Proceeds from sales of short-term marketable securities

          158,412  

Acquisition of Integrated Memory Logic Limited, net of cash acquired

          (72,658 )

Net cash provided by (used in) investing activities

    (954 )     78,008  
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    2,351       4,530  

Purchase of stock for withholding taxes on vested restricted stock

    (1,562 )     (629 )

Payments of lease financing obligations

    (2,294 )     (1,006 )

Cash settlement of equity award

    (429 )      

Proceeds from issuance of debt

          91,000  

Repayment of debt

          (91,000 )

Capital contribution from Integrated Memory Logic Limited non-controlling interest

          (18,883 )

Repurchase of common stock

          (7,999 )

Net cash used in financing activities

    (1,934 )     (23,989 )
                 

Net increase (decrease) in cash and cash equivalents

    (1,784 )     38,008  

Cash and cash equivalents at the beginning of period

    55,233       14,614  

Cash and cash equivalents at the end of period

  $ 53,449     $ 52,622  
                 

Supplemental disclosure of cash flow and non-cash information1

               

Engineering design tools acquired under capital lease

          2,924  

Increase in equity associated with release of liability for Cadeka restricted stock units

    1,875        

 

 

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 high performance analog mixed-signal integrated circuits (“ICs”) for the Industrial, High-End Consumer and Infrastructure markets. Our comprehensive knowledge of end-user markets along with 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, flat panel displays, 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, Flat Panel Display 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 29, 2015 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 December 27, 2015 and our results of operations for the three and nine months ended December 27, 2015 and December 28, 2014, 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.

 

Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Fiscal years 2016 and 2015 both consist of 52 weeks.

 

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS

 

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.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures requirement. ASU 2014-15 (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016, and for annual periods and interim periods thereafter. 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

 

 

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 September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. This ASU 2015-16 simplifies the treatment of adjustments to provisional amounts recognized in the period for items in a business combination for which the accounting is incomplete at the end of the reporting period. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015. As this applies to future business combinations, the adoption of this ASU has no impact on our current consolidated financial position, results of operations or cash flows.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 470): Balance Sheet Classification of Deferred Taxes. The amendments in ASU 2015-17 eliminate the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The amendments for ASU-2015-17 can be either applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented and early adoption is permitted. We early-adopted the ASU 2015-17 on a prospective basis as of December 27, 2015 and the statement of financial position as of this date reflects the revised classification of current deferred tax assets and liabilities as noncurrent. Adoption of the ASU resulted in an immaterial reclassification between current deferred tax assets and non-current deferred tax assets. There is no other impact on the financial statements of early-adopting the ASU.

 

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.

 

NOTE 3.    BUSINESS COMBINATIONS

 

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

 

Acquisition of Integrated Memory Logic Limited

 

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

 

Consideration

 

In June 2014, we acquired approximately 92% of iML’s outstanding shares for $206.4 million in cash. In September 2014, we acquired the remaining 8% of iML’s outstanding shares and vested options exercised subsequent to June 3, 2014 for $18.9 million which was included as part of financing activities in the cash flow since we maintained control of the subsidiary when the payments were made. Additionally, as required under the terms of the merger agreement, we assumed and converted iML’s employees’ then outstanding options into options to purchase 1.5 million shares of Exar’s common stock. The fair value of pre-merger vested options of $3.8 million was recorded as purchase consideration.

 

In accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations, the acquisition of iML’s outstanding shares was recorded as a purchase business acquisition since iML was considered a business. Under the purchase method of accounting, the fair value of the consideration was allocated to net assets acquired. The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from operating projections prepared by management using an internal rate of return of 16.9%. The excess of the fair value of consideration paid over the fair values of net assets acquired and identifiable intangible assets resulted in recognition of goodwill of $14.5 million. Goodwill was primarily from expected synergies resulting from combining the operations of iML with that of Exar and is not deductible for tax purposes. The fair value of non-controlling interests was calculated using cash value per acquired share multiplied by the remaining 8% outstanding shares.

 

 
8

 

 

The summary of the purchase consideration was as follows (in thousands):

 

   

Amount

 

Cash

  $ 206,411  

Consideration for the acquisition of non-controlling interests

    17,872  

Fair value of assumed iML employee options

    3,835  

Total purchase price

  $ 228,118  

 

Purchase Price Allocation

 

The allocation of total purchase price to iML’s tangible and identifiable intangible assets and liabilities assumed was based on their estimated fair values at the date of acquisition.

 

The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in the iML acquisition was as follows (in thousands):

 

   

Amount

 

Identifiable tangible assets (liabilities)

       

Cash

  $ 133,752  

Accounts receivable

    10,096  

Inventories

    3,950  

Other current assets

    962  

Property, plant and equipment

    480  

Other assets

    308  

Current liabilities

    (12,356 )

Long-term liabilities

    (3,595 )

Total identifiable tangible assets (liabilities), net

    133,597  

Identifiable intangible assets

    80,060  

Total identifiable assets, net

    213,657  

Goodwill

    14,461  

Fair value of total consideration transferred

  $ 228,118  

 

The following table sets forth the components of identifiable intangible assets acquired in connection with the iML acquisition (in thousands):

 

   

Amount

 

Developed technologies

  $ 55,780  

In-process research and development

    8,100  

Customer relationships

    15,060  

Trade names

    1,120  

Total identifiable intangible assets

  $ 80,060  

 

Acquisition Related Costs

 

Acquisition related costs relating to the acquisition of iML were included in the merger and acquisition costs and interest expense line on the consolidated statement of operations for fiscal year 2015 and were approximately $7.2 million.

 

NOTE 4.

BALANCE SHEET DETAILS

 

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

 

   

December 27,

2015

   

March 29,

2015

 

Work-in-process and raw materials

  $ 16,467     $ 16,789  

Finished goods

    12,192       13,978  

Total inventories

  $ 28,659     $ 30,767  

 

 
9

 

 

   

December 27,

2015

   

March 29,

2015

 

Land

  $ 6,660     $ 6,660  

Building

    17,415       17,431  

Machinery and equipment

    41,282       41,449  

Software and licenses

    22,217       22,044  

Property, plant and equipment, total

    87,574       87,584  

Accumulated depreciation and amortization

    (66,007

)

    (61,507

)

Total property, plant and equipment, net

  $ 21,567     $ 26,077  

 

In connection with our restructuring activities described in Note 11 – Restructuring Charges and Exit Costs, in fiscal year 2016 we wrote-off $0.4 million of mask set costs associated with our data compression product line and $0.5 million of design tools associated with processor product line.

 

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

 

   

December 27,

2015

   

March 29,

2015

 

Short-term lease financing obligations

  $ 3,796     $ 3,834  

Accrued retention bonus

    1,226       2,951  

Accrued restructuring charges and exit costs

    754       982  

Purchase consideration holdback

    1,006       1,006  

Accrued legal and professional services

    1,915       982  

Accrued manufacturing expenses, royalties and licenses

    660       1,122  

Accrued sales and marketing expenses

    534       686  

Deferred tax liability

          7,021  

Other current liabilities

    2,530       2,703  

Total other current liabilities

  $ 12,421     $ 21,287  

 

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

 

   

December 27,

2015

   

March 29,

2015

 

Long-term taxes payable

  $ 3,266     $ 4,351  

Other

    154       42  

Total other non-current obligations

  $ 3,420     $ 4,393  

 

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

 

 

In the first quarter of fiscal year 2015, we received approximately 93,000 common shares of CounterPath Corporation (“CounterPath”) through the dissolution of Skypoint Telecom Fund II (US), LP. (“Skypoint Fund”) in which we were a limited partner since 2001. CounterPath was one of the investee companies of Skypoint Fund. We estimated the fair value using the market value of common shares as determined by trading on the Nasdaq Capital Market. These securities have been classified to Level 2 as of September 28, 2014 and recorded in the other non-current assets line item on the condensed consolidated balance sheet. We believe the fair value inputs of CounterPath do not meet all of the criteria for Level 1 classification primarily due to the low trading volume of the stock. See Note 7–Long-term Investments for the discussion on Skypoint Fund.

 

We had no assets or liabilities utilizing Level 3 inputs as of December 27, 2015 or March 29, 2015.

 

There were no transfers between Level 1 and Level 2 during the fiscal quarter ended December 27, 2015.

 

The following table summarizes our investment assets as of December 27, 2015 (in thousands):

 

   

December 27, 2015

 
   

Level 1

   

Level 2

   

Total

 

Assets:

                       

Money market funds

  $ 4     $     $ 4  

Common shares of CounterPath

          43       43  

Total investment assets

  $ 4     $ 43     $ 47  

 

The following table summarizes our investment assets as March 29, 2015 (in thousands):

 

   

March 29, 2015

 
   

Level 1

   

Level 2

   

Total

 

Assets:

                       

Money market funds

  $ 6     $     $ 6  

Common shares of CounterPath

          48       48  

Total investment assets

  $ 6     $ 48     $ 54  

 

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

 

   

December 27,

2015

   

March 29,

2015

 

Cash and cash equivalents

               

Cash at financial institutions

  $ 53,445     $ 55,227  

Money market funds

    4       6  

Total cash and cash equivalents

  $ 53,449     $ 55,233  

 

Realized gains (losses) on the sale of marketable securities are determined by the specific identification method and are reflected in the interest income and other net, line item on the condensed consolidated statements of operations.

 

Our net realized gains (losses) on marketable securities for the periods indicated below were as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27, 2015

   

December 28, 2014

   

December 27, 2015

   

December 28, 2014

 

Gross realized gains

  $     $     $     $ 264  

Gross realized losses

                      (238 )

Net realized income (losses)

  $     $     $     $ 26  

 

 

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 President and Chief Executive Officer (“CEO”), we utilize an entity-wide approach to assess goodwill for impairment. In the second and third quarters of fiscal year 2016, due to the significant decrease of our company’s stock value, we conducted impairment analysis by comparing the fair value of our single reporting unit with its carrying value. As of the test date and as of fiscal quarter-end, and before consideration of a control premium, the fair value, which was estimated as our market capitalization, exceeded the carrying value of our net assets. As a result, no goodwill impairment was recorded for the third quarter of fiscal year 2016.

 

 
11

 

 

The carrying amount of goodwill for the nine months ended December 27, 2015 remained the same as last fiscal year end.

 

Intangible Assets

 

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

 

    December 27, 2015     March 29, 2015  
   

Carrying

Amount

   

Accumulated Amortization

   

 

Impairment

Charge

   

Net Carrying

Amount

   

Carrying

Amount

   

Accumulated Amortization

   

Impairment

Charge

   

Net

Carrying

Amount

 

Amortized intangible assets:

                                                               

Existing technology

  $ 114,433     $ (55,230

)

  $     $ 59,203     $ 120,041     $ (47,259

)

  $ (9,134

)

  $ 63,648  

Customer relationships

    14,295       (5,877

)

          8,418       15,165       (4,520

)

    (870

)

    9,775  

Distributor relationships

    7,254       (2,616

)

          4,638       7,254       (1,973

)

          5,281  

Patents/core technology

    3,459       (3,459

)

                3,459       (3,446

)

          13  

Trade names

    1,330       (466

)

          864       1,330       (274

)

          1,056  

Total intangible assets subject to amortization

    140,771       (67,648

)

          73,123       147,249       (57,472

)

    (10,004

)

    79,773  

In-process research and development

    2,803             (1,807 )     996       9,148             (2,819

)

    6,329  

Total

  $ 143,574     $ (67,648

)

  $ (1,807 )   $ 74,119     $ 156,397     $ (57,472

)

  $ (12,823

)

  $ 86,102  

 

Long-lived assets are amortized on a straight-line basis over their respective estimated useful lives. Existing technology is amortized over four 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. In-process research & development (“IPR&D”) is reclassified as existing technology upon completion or written off upon abandonment. During the first and third quarters of fiscal year 2016, $2.9 million and $0.6 million, respectively, of IPR&D was reclassified as existing technology upon completion and started amortization. In the third quarter of fiscal year 2016, we conducted a review of our business environment, and as a result of a decline in forecasted gross margins related to three of the IPR&D projects, we abandoned those projects and recorded a $1.8 million charge in the impairment of intangibles line on the condensed consolidated statement of operations. During the third quarter of fiscal year 2015, $1.2 million of IPR&D was reclassified as existing technology upon completion and started amortization. As a result of a decline in forecasted revenue and not meeting critical specifications, we abandoned two IPR&D projects and recorded a $2.3 million charge in the impairment of intangibles line on the consolidated statement of operations in the first nine months of fiscal 2015. We expect the remaining IPR&D projects to be completed and to start amortization within the next six months. 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 when events or changes in business circumstances indicate that the carrying amount of the assets (or asset group) may not be fully recoverable. When events or changes in circumstances suggest that the carrying amount of long-lived assets may not be recoverable, we estimate the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in the discounted cash flow method of valuation. If our actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

 

As of December 27, 2015, except as noted above, there were no indicators or events that required us to perform an intangible assets impairment review.

 

 
12

 

 

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

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Amortization expense

  $ 3,401     $ 3,248     $ 10,176     $ 9,429  

 

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

 

Amortization Expense (by fiscal year)

 

2016 (3 months remaining)

  $ 3,406  

2017

    13,552  

2018

    13,516  

2019

    13,203  

2020

    12,412  

2021 and thereafter

    17,034  

Total future amortization

  $ 73,123  

 

NOTE 7.

LONG-TERM INVESTMENTS

 

In July 2001, Exar became a Limited Partner in the Skypoint Fund, a venture capital fund focused on investments in communications infrastructure companies. We accounted for this non-marketable equity investment under the cost method in the other non-current assets line item on the consolidated balance sheet. During the term of the fund, we made $4.8 million in capital contributions to Skypoint Fund since we became a limited partner in July 2001. The partnership was dissolved and the fund distributed stock of invested companies to us during the first quarter of fiscal year 2015.

 

We regularly review and determine whether each investment asset 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):

 

   

December 27,

2015

 

Beginning balance as of March 29, 2015

  $ 394  

Net distributions

     

Impairment charges

    (5 )

Ending balance

  $ 389  

 

Impairment

 

We evaluate each of our long-term investments for impairment on an annual basis or when events and changes in circumstances suggest that the carrying amount may not be recoverable. If the carrying amount exceeds its fair value, the long term-investment is considered impaired and a second step is performed to measure the amount of impairment loss.

 

During the first quarter of fiscal year 2015, we received approximately 93,000 common shares of CounterPath through the dissolution of Skypoint Fund in which we were a limited partner since 2001. CounterPath was one of the investee companies of Skypoint Fund. We estimated the fair value using the market value of CounterPath’s common shares on the Nasdaq Capital Market. We also received common shares from the other two private investee companies of Skypoint Fund through the dissolution. We regularly assess the fair value of the common shares received from these three companies and recorded $5,000 of impairment charges in the interest expense and other, net line on the condensed consolidated statements of operations during the nine months ended December 27, 2015. We recorded $35,000 of impairment charges during the nine months ended December 28, 2014.

 

NOTE 8.

RELATED PARTY TRANSACTIONS

 

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 December 27, 2015. 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

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Future and affiliates of Alonim

    23 %     19 %     25 %     22 %

 

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

 

   

December 27,

2015

   

March 29,

2015

 

Future and affiliates of Alonim

    14 %     6 %

 

Related party expenses for marketing promotional materials reimbursed were not significant for the three and nine months ended December 27, 2015 and December 28, 2014, respectively.

 

NOTE 9.

SHORT-TERM DEBT

 

As part of the acquisition of iML in the first quarter of fiscal year 2015, we entered into short-term financing agreements with Stifel Financial Corporation (“Stifel”) and CTBC Bank Corporation (USA) (“CTBC”) to provide bridge financing for the acquisition.

 

CTBC

 

On June 9, 2014 we entered into a Business Loan Agreement with CTBC to provide a loan for $26.0 million. This loan bore an interest rate of 3.25% and had a maturity date of December 9, 2014. Interest payments were due monthly with the entire principal due not later than December 9, 2014.

 

All our obligations under the Business Loan Agreement were unconditionally guaranteed by iML through a $26.0 million short-term certificate deposit with the same institution. We repaid the CTBC business loan was paid off in the third quarter of fiscal year 2015.

 

Stifel

 

On May 27, 2014 (the “Initial Funding Date”), we entered into a bridge credit agreement (the “Credit Agreement”) with certain lender parties and Stifel Financial Corp., as Administrative Agent. The Credit Agreement provided us with a bridge term loan credit facility in an aggregate principal amount of up to $90.0 million (the “Bridge Facility”).

 

Interest on loans made under the Bridge Facility accrued, at our option, at a rate per annum equal to (1) the Base Rate (as defined below) plus (a) during the first 90 days following the Initial Funding Date, 7.5% and (b) thereafter, 8.5% or (2) 1-month LIBOR plus (a) during the first 90 days following the Initial Funding Date, 8.5% and (b) thereafter, 9.5%. The “Base Rate” was equal to, for any day, a rate per annum equal to the highest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) 1 month LIBOR plus 1.00%. The Base Rate was subject to a floor of 2.5%, and LIBOR was subject to a floor of 1.5%.

 

We had drawn $65.0 million in May 2014 to fund our acquisition of iML’s outstanding shares. We repaid $26.0 million of the debt in June 2014 through a loan from CTBC with a lower interest rate. We repaid the Credit Agreement in full in the second quarter of fiscal year 2015.

 

 
14

 

 

Interest

 

For the three and nine months ended December 27, 2015 and December 28, 2014, interest on our short-term debt, which is included in the “Interest expense” line item on the condensed consolidated statement of operations, consisted of the following (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

CTBC

  $     $ 9     $     $ 265  

Stifel

                      646  

Total interest on short-term debt

  $     $ 9     $     $ 911  

 

NOTE 10.

COMMON STOCK REPURCHASES

 

From time to time, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs, to increase our return on our invested capital and to bring our cash to a more appropriate level for Exar.

 

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.

 

We did not repurchase any common stock during the three or nine months ended December 27, 2015. Stock repurchase activities during fiscal year 2015 were indicated below (in thousands, except per share amounts):

 

   

Total number of

Shares Purchased

   

Average Price Paid

Per Share

(or Unit)

   

Amount Paid for

Purchase

 

As of March 30, 2014

    10,319     $ 9.42     $ 97,189  

Repurchases – March 31 to April 27, 2014

    273       10.98       3,000  

Repurchases – July 28 to September 28, 2014

    393       9.83       3,864  

Repurchases – September 29 to December 28, 2014

    125       9.08       1,135  

As of March 29, 2015

    11,110     $ 9.47     $ 105,188  

—————

Note: The average price paid per share is based on the total price paid by Exar, which includes applicable broker fees.

 

NOTE 11.

RESTRUCTURING CHARGES AND EXIT COSTS

 

2016 Restructuring Charges and Exit Costs

 

During the second and third quarters of fiscal year 2016, we decided to restructure our business that mainly impacted our data compression and processor product lines. We believe this restructuring positions us to achieve operating efficiencies and to focus our resources on strategic priorities. During the three and nine months ended December 27, 2015, we incurred $2.2 million and $4.3 million of restructuring charges and exit costs, respectively. The charges consisted primarily of reduction of our workforce, the impairment of certain fixed assets and licensed technologies and the write-off of related inventory. Inventory write-offs are included in cost of sales and all other restructuring charges and exit costs are included in operating expenses

 

2015 Restructuring Charges and Exit Costs

 

We completed a significant strategic restructuring process that began in the quarter ended September 28, 2014 and ended in October 2014.  This restructuring was prompted by the recent acquisition of iML, and an associated significant reduction in force, including reductions at our Hangzhou, China; Loveland, Colorado; and Ipoh, Malaysia locations.  We completed this restructuring to enable us to achieve meaningful synergies and operating efficiencies and focus our resources on strategic priorities. During the three and nine months ended December 28, 2014, we incurred $3.5 million and $10.4 million restructuring charges and exit costs, respectively. The charges consisted primarily of reduction of our workforce, the impairment of certain fixed assets, licensed technologies and write-off of related inventory. Inventory write-offs are included in cost of sales and all other restructuring charges and exist costs are included in operating expenses

 

 
15

 

 

Our restructuring liabilities were included in the other current liabilities and other non-current obligations lines within our condensed consolidated balance sheets. Restructuring expenses of $22,000 are included in interest expense for the three and nine months ended December 27, 2015. The following table summarizes the activities affecting the liabilities as of the dates indicated below (in thousands):

 

   

March 29,

2015

   

Additions/

Adjustments

   

Non-cash

charges

   

Payments

   

December 27,

2015

 

Lease termination costs and others

  $ 330     $ 297     $ (165

)

  $ (293

)

  $ 169  

Impairment of fixed assets, licensed technologies and write down of inventory

          740       (740

)

           

Severance

    652       2,232             (2,299

)

    585  

Total

  $ 982     $ 3,269     $ (905

)

  $ (2,592

)

  $ 754  

 

NOTE 12.

STOCK-BASED COMPENSATION

 

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

December 27, 2015

   

Nine Months Ended

December 27, 2015

 
   

Shares of Common

Stock

   

Shares of Common

Stock

   

Weighted Average

Price per Share

 

Authorized to issue

    4,500                  

Reserved for future issuance

    1,325                  

Issued

            21     $ 7.87  

 

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.

 

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 December 27, 2015, there were 3.9 million shares available for future grant under the 2014 Plan.

 

 
16

 

 

Stock Option Activities

 

Our stock option transactions during the nine months ended December 27, 2015 are summarized below:

 

   

Outstanding

   

Weighted
Average
Exercise
Price per
Share

   

Weighted
Average
Remaining
Contractual
Term

(in years)

   

Aggregate
Intrinsic

Value

(in thousands)

 

Balance at March 29, 2015

    7,609,622     $ 8.77       4.86     $ 14,377  

Granted

    1,845,120       6.03                  

Exercised

    (369,967 )     6.47                  

Cancelled

    (236,895 )     9.16                  

Forfeited

    (898,691 )     9.81                  

Balance at December 27, 2015

    7,949,189     $ 8.11       4.63     $ 1,420  
                                 

Vested and expected to vest, December 27, 2015

    7,284,444     $ 8.17       4.50     $ 1,186  

Vested and exercisable, December 27, 2015

    4,069,324     $ 8.30       3.55     $ 364  

 

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 $6.44 and $10.30 as of December 27, 2015 and March 29, 2015, 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. We recorded $75,000 and $262,000 of compensation expense for these options in the three and nine months ended December 28, 2014, respectively. Due to the departure of our then CEO in October 2015, we recorded a reversal of $151,000 and $34,000 of compensation expense for these options in the three and nine months ended December 27, 2015, respectively as the requisite service period required for vesting was not completed.

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Intrinsic value of options exercised

  $ 39     $ 668     $ 637     $ 1,524  

 

 

RSU Activities

 

Our RSU transactions during the nine months ended December 27, 2015 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 29, 2015

    1,072,925     $ 10.26       1.50     $ 11,051  

Granted

    277,095       9.22                  

Issued and released

    (543,037 )     8.43                  

Cancelled

    (184,386 )     7.99                  

Unvested at December 27, 2015

    622,597     $ 12.07       1.52     $ 4,010  

 

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.

 

 
17

 

 

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 $169,000 and $41,000 of compensation expense for these PRSUs in the three and nine months ended December 27, 2015, respectively as the requisite service period required for vesting was not completed. We recorded $146,000 and $1,026,000 of compensation expense for these awards in the three and nine months ended December 28, 2014, respectively.

 

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 $0 and $0.2 million of compensation expense for these awards in the three and nine months ended December 27, 2015, respectively. We recorded $0.5 million and $1.5 million of compensation expense for these awards in the three and nine months ended December 28, 2014, respectively. 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. During the three months ended December 27, 2015, 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 other liabilities as of December 27, 2015, pending the earlier of a settlement with such former employees or the expiration of the relevant statue of limitations.

 

In October 2013, we granted 70,000 PRSUs to certain executives. The first 50% of the PRSUs are 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 are met. The second 50% of the PRSUs are 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 are met. We recorded $18,000 and $96,000 of compensation expense for these awards in the three and nine months ended December 27, 2015, respectively. We recorded a reversal of 78,000 and compensation expense of $208,000 associated with these awards in the three and nine months ended December 28, 2014, respectively, as a result of termination of one of our executives since the requisite service period required for vesting was not completed.

 

In December 2013, we granted 100,000 RSUs to our then CEO. The RSUs were scheduled to vest in two equal installments at the end of fiscal years 2016 and 2017. In October 2014, the second installment of 50,000 RSUs was modified to 50,000 PRSUs. These modified PRSUs were scheduled to vest at the end of fiscal year 2017 if certain predetermined financial measures are met. Due to the departure of our then CEO in October 2015, we recorded a reversal of $40,000 and $54,000 of compensation expense for these awards for the three and nine months ended December 27, 2015, respectively as the requisite service period for vesting was not completed. For the three and nine months ended December 28, 2014, we did not record compensation expense for these modified PRSUs as a result of a low probability of achieving performance goals measured by management.

 

In August 2014, we announced the Fiscal Year 2015 Management Incentive Program (“2015 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 2015. We recorded a stock compensation expense of $2.0 million in fiscal year 2015 related to these awards. During the first quarter of fiscal year 2016, we settled 20% of these awards with cash and recorded $50,000 additional compensation cost due to the fair value change between grant day and settlement day.

 

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. In the three and nine months ended December 27, 2015, we recorded $39,000 and $125,000 of stock compensation expense related to these PRSUs, respectively. In the three and nine months ended December 28, 2014, we did not record stock compensation expense related to these PRSUs.

 

In May 2015, we announced the Fiscal Year 2016 Management Incentive Program (“2016 Incentive Program”). Under this program, each participant’s award is subject to attainment of Exar’s performance goals as established by the Compensation Committee of the Board of Directors for fiscal year 2016 and the Committee reserves the right to settle awards either entirely with RSUs or with a combination of 20% settled in cash and 80% settled with RSUs We did not record any compensation expense for the three and nine months ended December 27, 2015 related to the 2016 Incentive Program as we do not expect to meet the performance goals established under the awards.

 

 
18

 

 

Stock-Based Compensation Expense

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Cost of sales

  $ 104     $ 496     $ 276     $ 983  

Research and development

    269       442       923       2,124  

Selling, general and administrative

    669       3,284       3,232       7,842  

Total Stock-based compensation expense

  $ 1,042     $ 4,222     $ 4,431     $ 10,949  

 

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

 

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 December 27, 2015:

 

   

December 27, 2015

 
   

Amount

(in thousands)

   

Weighted Average

Expected Remaining

Period (in years)

 

Options

  $ 7,094       2.62  

RSUs

    2,390       1.83  

PRSUs

    475       1.76  

Total Unrecognized Stock-based compensation expense

  $ 9,959          

 

Valuation Assumptions

 

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

 

Our Black-Scholes valuation model for valuing stock option grants uses the following assumptions and estimates:

 

Expected Volatility. The Company calculates expected volatility based on the historical price volatility of the Company's stock.

 

Expected Term. The Company utilizes a model, which uses historical exercise, cancellation and outstanding option data to calculate the expected term of stock option grants.

 

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on a U.S. Treasury note with a term approximately equal to the expected term of the underlying grants.

 

Dividend Yield. The dividend yield was calculated by dividing the annual dividend by the average closing price of the Company's common stock on a quarterly basis.

 

 
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NOTE 13. NET LOSS PER SHARE

 

Basic net 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 loss per share for the periods indicated below (in thousands, except per share amounts):

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Net loss attributable to Exar Corporation

  $ (7,137 )   $ (6,599 )   $ (13,844 )   $ (42,056 )
                                 

Shares used in computation of net loss per share:

                               

Basic

    48,386       47,119       48,146       47,165  

Effect of options and awards

 

   

   

   

 

Diluted

    48,386       47,119       48,146       47,165  

Net loss per share

                               

Basic

  $ (0.15 )   $ (0.14 )   $ (0.29 )   $ (0.89 )

Diluted

  $ (0.15 )   $ (0.14 )   $ (0.29 )   $ (0.89 )

 

Outstanding stock options and RSUs are potentially dilutive securities. For all periods presented, all outstanding stock options and RSUs were excluded from the computation of diluted net loss per share because they were determined to be anti-dilutive. 

 

NOTE 14.

LEASE FINANCING OBLIGATIONS

 

We have acquired engineering design tools (“Design Tools”) under capital leases. We acquired 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 December 27, 2015 and March 29, 2015, respectively. The effective interest rates for the Design Tools range from 2.0% to 7.25%.

 

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

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Amortization expense

  $ 941     $ 848     $ 2,979     $ 2,448  

 

Future minimum lease and sublease income payments for the lease financing obligations as of December 27, 2015 are as follows (in thousands):

 

Fiscal Years

 

Design Tools

 

2016 (3 months remaining)

  $ 465  

2017

    3,947  

2018

    1,355  

Total minimum lease payments

    5,767  

Less: amount representing interest

    257  

Present value of minimum lease payments

    5,510  

Less: short-term lease financing obligations

    3,796  

Long-term lease financing obligations

  $ 1,714  

 

 
20

 

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Interest expense

  $ 43     $ 37     $ 136     $ 115  

 

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

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Rent expense

  $ 257     $ 266     $ 748     $ 1,162  

 

Our future minimum lease payments for the lease operating obligations as of December 27, 2015 are as follows (in thousands):

 

 

Fiscal Years

 

Facilities

 

2016 (3 months remaining)

  $ 189  

2017

    351  

2018

    129  

2019

    3  

Total minimum lease payments

  $ 672  

 

NOTE 15.      COMMITMENTS AND CONTINGENCIES

 

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, 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.

 

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 hawse 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.

 

 
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Warranty expense has historically been immaterial for our products. A warranty liability of $1.4 million was established during fiscal year 2014 for the return of certain older generation data compression products shipped in prior years. This liability has been fully fulfilled as of March 29, 2015. In February 2015, we received $0.5 million reimbursement from our insurance company and in July 2015, we received $1.5 million legal settlement from our vendor related to their defective products. Our warranty reserve balance as of December 27, 2015 and March 29, 2015 was $0.2 million and $0.3 million, respectively.

 

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 16.

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.

 

In April 2015, Phenix, LLC (“Phenix”) filed a complaint against us and iML for patent infringement in the United States District Court for the Eastern District of Texas. Phenix alleged in its complaint that at least the iML 7990 and 7991 integrated circuit P-Gamma products and power management integrated circuit products that are combined with the functionality of the iML 7990 and 7991 integrated circuits infringe one of its patents. In October 2015, Phenix filed an amended complaint, adding a subsidiary of iML as a defendant, and in December 2015 Phenix filed a second amended complaint, adding additional iML P-Gamma integrated circuits as accused products. The court has set a trial date of September 6, 2016 for this matter, and discovery is ongoing. The parties have engaged in settlement discussions, but no settlement has been reached. During the three and nine months ended December 27, 2015, we recorded $1.0 million expense for a possible settlement of this matter. We do not expect an ultimate settlement in this case to be materially different from our accrual.

 

NOTE 17.

INCOME TAXES

 

During the three months ended December 27, 2015, we recorded an income tax expense of $208,000 due to income generated in foreign jurisdictions, and we recorded a benefit of $0.8 million during the nine months ended December 27, 2015 primarily due to the lapsing of the statute of limitations related to the U.S. federal tax reserves. During the three months and nine months ended December 28, 2014, we recorded an income tax expense of approximately $0.1 million and $0.9 million, respectively. The income tax expense was primarily related to the allocation of tax expense between continuing operations and other comprehensive income when applying the exception to ASC 740 intraperiod allocation rule upon liquidation of our available for sale security portfolio.

 

During the three months ended December 27, 2015, the unrecognized tax benefits increased by $0.3 million to $16.8 million primarily related to the increase of unrecognized tax benefit on R&D tax credits. If recognized, $13.8 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.

 

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):

 

   

December 27,

2015

   

March 29,

2015

 

Accrued interest and penalties

  $ 1,295     $ 1,187  

 

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.

 

 
22

 

 

NOTE 18.

SEGMENT AND GEOGRAPHIC INFORMATION

 

We operate in one reportable segment, which is comprised of one operating segment. We design, develop and market high performance analog mixed-signal integrated circuits and advanced sub-system solutions for the Industrial, High-End Consumer and Infrastructure markets.

 

Our net sales by end market were summarized as follows as of the dates indicated below (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Industrial

  $ 18,339     $ 20,506     $ 54,339     $ 59,029  

High-End Consumer

    13,207       16,202       39,906       35,825  

Infrastructure

    5,893       7,607       18,358       23,339  

Total net sales

  $ 37,439     $ 44,315     $ 112,603     $ 118,193  

 

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

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

China

  $ 18,109     $ 17,089     $ 50,931     $ 44,586  

United States

    5,071       6,070       13,468       17,309  

Singapore

    3,255       4,076       10,740       11,271  

Germany

    2,992       2,008       9,951       8,020  

Taiwan

    2,395       5,496       11,363       12,732  

Korea

    2,294       4,666       7,134       11,920  

Rest of world

    3,323       4,910       9,016       12,355  

Total net sales

  $ 37,439     $ 44,315     $ 112,603     $ 118,193  

 

Substantially all of our long-lived assets at each of December 27, 2015 and March 29, 2015 were located in the United States.

 

The following distributors and customer accounted for 10% or more of our net sales in the periods indicated:

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 27,

2015

   

December 28,

2014

   

December 27,

2015

   

December 28,

2014

 

Distributor A +

    23 %     19 %     25 %     22 %

Customer D

    12 %     *       11 %     *  

 

—————

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

+      Related Party

 

No other distributor or customer accounted for 10% or more of the net sales for the three and nine months ended December 27, 2015 or December 28, 2014, respectively.

 

 
23

 

 

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

 

   

December 27,

2015

   

March 29,

2015

 

Customer D

    18 %     10 %

Distributor A +

    14 %     *  

Distributor E

    12 %     12 %

Distributor B

    *       11 %

Distributor D

    *       10 %

—————

*      Accounts receivable for this distributor for this period were less than 10% of total account balance.

+      Related Party

 

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

 

 
24

 

 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Part II, Item 1A.” below and elsewhere in this Quarterly Report on Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “would,” “could,” “expect,” “suggest,” “possible,” “potential,” “target,” “commit,” “continue,” “believe,” “anticipate,” “intend,” “project,” “projected,” “positioned,” “plan,” or other similar words. Forward-looking statements contained in this Quarterly Report include, among others, statements made in Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations— Third Quarter of Fiscal 2016 Executive Summary” and elsewhere regarding (1) our future strategies and target markets, (2) our future revenues, gross profits and margins, (3) our future research and development (“R&D”) efforts and related expenses, (4) our future selling, general and administrative expenses (“SG&A”), (5) our cash and cash equivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements and capital equipment needs for at least the next 12 months, (6) the possibility of future acquisitions and investments, (7) our ability to accurately estimate our assumptions used in valuing stock-based compensation, (8) our ability to estimate and reconcile distributors’ reported inventories to their activities, (9) our ability to estimate future cash flows associated with long-lived assets, and (10) the volatile global economic and financial market conditions. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our business, operating results and financial condition to differ materially and adversely from what is projected or implied by any forward- looking statement included in this Quarterly Report. Factors that could cause actual results to differ materially from those stated herein include, but are not limited to: the information contained under the caption “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 1A. Risk Factors,” as well as those risks discussed in our Annual Report on Form 10-K for the fiscal year ended March 29, 2015. We disclaim any obligation to update information in any forward-looking statement, except as required by law.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto, included in this Quarterly Report and our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2015, as filed with the Securities and Exchange Commission (“SEC”). Our results of operations for the three and nine months ended December 27, 2015 are not necessarily indicative of results to be expected for any future period.

 

Business Overview

 

Exar Corporation (“Exar,” “us,” “our” or “we”) designs, develops and markets high performance analog mixed-signal integrated circuits (“ICs”) for the Industrial, High-End Consumer and Infrastructure 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, flat panel displays, 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, Flat Panel Display and LED lighting.

 

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

 

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

 

 

Third Quarter of Fiscal 2016 Executive Summary

 

Net sales increased $2.7 million, or 8%, from $34.7 million in the second quarter of fiscal year 2016 to $37.4 million for the third quarter of fiscal year 2016. The increase was primarily attributable to a $2.5 million cash consideration we agreed to pay to one of our distributors to settle a dispute relating to our Data Compression products, which is recorded as a one-time reduction of revenue in the second quarter of fiscal year 2016. Revenues for the third quarter of fiscal year 2016 were also impacted by $0.8 million associated with certain distributors where we previously deferred revenue until such products were sold to the end customer as we did not have sufficient historical data to estimate returns and price reduction refunds. In the third quarter of fiscal year 2016, we determined that we had sufficient historical data and began recognizing revenue and related allowances when the product is sold to the distributor.

 

 
25

 

 

Net loss increased $2.9 million or 70% from $4.2 million in the second quarter of fiscal year 2016 to $7.1 million in the third quarter of fiscal year 2016. The increase in net loss was primarily due to a $1.8 million impairment of intangible assets from the abandonment of two IPR&D projects, a $1.0 million accrual for legal settlement and $2.2 million of restructuring expenses, all recognized in the third quarter of the fiscal year 2016. In the second quarter of fiscal year 2016, we received $1.3 million net proceeds from a legal settlement related to our Data Compression products and released $1.1 million of tax assets due to the lapsing of the statute of limitations related to the U.S. federal tax reserves, which decreased our net loss in the second quarter of fiscal 2016. The overall increase in net loss was offset by a $2.5 million expense recognized in the second quarter as a result of a one-time payment to one of our distributors and a decrease in expense in the third quarter due to reduced headcount. We believe we are effectively managing our operating expenses while continuing to invest an appropriate amount in research and development projects for future products.

 

Critical Accounting Policies and Estimates

 

There have been no significant changes to our critical accounting policies during the three and nine months ended December 27, 2015, as compared to the previous disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

Results of Operations

 

Our Statements of Operations data were as follows for the periods presented (in thousands, except percentages):

 

   

Three Months Ended

                 
   

December 27,

2015

   

December 28,

2014

   

Change

 
                                 

Net Sales

  $ 37,439     $ 44,315     $ (6,876 )     (16

)%

Cost of sales:

                               

Cost of sales

    16,261       20,113       (3,852 )     (19

)%

Cost of sales-related party

    4,025       3,099       926       30

%

Amortization of purchased intangible assets and inventory step-up costs

    2,461       2,533       (72 )     (3

)%

Restructuring charges and exit costs

          2,052       (2,052 )     (100

)%

Impairment of intangibles

          (372 )     372       100

%

Total cost of sales

    22,747       27,425       (4,678 )     (17

)%

Gross profit

    14,692       16,890       (2,198 )     (13

)%

Operating expenses:

                               

Research and development

    7,230       10,035       (2,805 )     (28

)%

Selling, general and administrative

    10,280       11,793       (1,513 )     (13

)%

Restructuring charges and exit costs

    2,228       1,418       810       57

%

Impairment of intangibles

    1,807             1,807       100

%

Merger and acquisition costs

          179       (179 )     (100

)%

Total operating expenses

    21,545       23,425       (1,880 )     (8

)%

Loss from operations

    (6,853 )     (6,535 )     (318 )     5

%

Interest income and other, net

    (7 )     53       (60 )     (113

)%

Interest expense and other, net

    (69 )     (46 )     (23 )     50

%

Loss before income taxes

    (6,929 )     (6,528 )     (401 )     6

%

Provision for (benefit from) income taxes

    208       71       137       193

%

Net loss   $ (7,137 )   $ (6,599 )   $ (538 )     8

 

 
26

 

  

   

Nine Months Ended

                 
   

December 27,

2015

   

December 28,

2014

   

Change

 
                                 

Net Sales

  $ 112,603     $ 118,193     $ (5,590 )     (5

)%

Cost of sales:

                               

Cost of sales

    48,309       51,841       (3,532 )     (7

)%

Cost of sales-related party

    12,847       10,408       2,439       23

%

Amortization of purchased intangible assets and inventory step-up costs

    7,422       9,215       (1,793 )     (19

)%

Restructuring charges and exit costs

    740       6,384       (5,644 )     (88

)%

Impairment of intangibles

          8,367       (8,367 )     (100

)%

Proceeds from legal settlement

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

)%

Total cost of sales

    67,818       86,215       (18,397 )     (21

)%

Gross profit

    44,785       31,978       12,807       40

%

Operating expenses:

                               

Research and development

    24,206       28,647       (4,441 )     (16

)%

Selling, general and administrative

    29,665       33,467       (3,802 )     (11

)%

Restructuring charges and exit costs

    3,550       4,052       (502 )     (12

)%

Impairment of intangibles

    1,807       3,917       (2,110 )     (54

)%

Merger and acquisition costs

          6,955       (6,955 )     (100

)%

Net change in fair value of contingent consideration

          (4,343 )     4,343       100

%

Total operating expenses

    59,228       72,695       (13,467 )     (19

)%

Loss from operations

    (14,443 )     (40,717 )     26,274       (65

)%

Interest income and other, net

    (40 )     520       (560 )     (108

)%

Interest expense and other, net

    (170 )     (1,026 )     856       (83

)%

Loss before income taxes

    (14,653 )     (41,223 )     26,570       (64

)%

Provision for (benefit from) income taxes

    (809 )     870       (1,679 )     (193

)%

Net loss

  $ (13,844 )   $ (42,093 )   $ 28,249       (67

)%

Less: Net income attributable to non-controlling interests

          (37 )     37       100

%

Net loss attributable to Exar Corporation

  $ (13,844 )   $ (42,056 )   $ 28,212       (67

)%

 

 

Revenue

 

Our net sales by end market in dollars and as a percentage of net sales were as follows for the periods presented (in thousands, except percentages):

 

      Three Months Ended               Nine Months Ended          
     

December 27,

2015

     

December 28, 

2014

      Change      

December 27, 

2015

     

December 28,

2014

      Change  
Net Sales:                                                                                

Industrial

  $ 18,339       49

%

  $ 20,506       46

%

    (11

)%

  $ 54,339       48

%

  $ 59,029       50

%

    (8

)%

High-End Consumer

    13,207       35

%

    16,202       37

%

    (18

)%

    39,906       36

%

    35,825       30

%

    11

%

Infrastructure

    5,893       16

%

    7,607       17

%

    (23

)%

    18,358       16

%

    23,339       20

%

    (21

)%

Total

  $ 37,439       100

%

  $ 44,315       100

%

    (16

)%

  $ 112,603       100

%

  $ 118,193       100

%

    (5

)%

 

 
27

 

 

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

 

   

Three Months Ended

           

Nine Months Ended

         
   

December 27,

2015

   

December 28,

2014

   

Change

   

December 27,

2015

   

December 28,

2014

   

Change

 

Net Sales:

                                                                               

Asia

  $ 28,039       75

%

  $ 33,004       74

%

    (15

)%

  $ 85,403       76

%

  $ 85,772       73

%

    (0

)%

Americas

    5,542       15

%

    7,082       16

%

    (22

)%

    14,423       13

%

    19,437       16

%

    (26

)%

Europe

    3,858       10

%

    4,229       10

%

    (9

)%

    12,777       11

%

    12,984       11

%

    (2

)%

Total   $ 37,439       100 %   $ 44,315       100 %     (16 )%   $ 112,603       100 %   $ 118,193       100 %     (5 )%

 

Three Months Ended December 27, 2015 Compared with Three Months Ended December 28, 2014

 

Total net sales decreased by $6.9 million or 16%. The decrease was mainly due to a $2.6 million decrease in sales volume from display products in the High-End Consumer and Asia market, a $2.3 million decrease in component products (principally connectivity and communications) due largely to lower average selling prices, and a $1.3 million decrease in system product sales mainly due to decrease in sales volume. This was partially offset by $0.8 million recognition of previously deferred revenue with certain distributors due to our ability to estimate returns and price reduction refunds.

 

Nine Months Ended December 27, 2015 Compared with Nine Months Ended December 28, 2014 

 

Total revenue decreased by $5.6 million or 5%. The decrease is mainly attributable to a $5.1 million decrease in system product sales, which included a one-time revenue reduction of $2.5 million in the Industrial and Americas market resulting from cash consideration paid to one of our distributors to settle a dispute relating our Data Compression products. $4.0 million decrease in sales of component products due largely to lower average selling prices were offset by a net increase of $3.5 million in revenue from display product sales in the High-End Consumer and Asia market due to the inclusion of nine months of revenue in fiscal year 2016 compared to seven months of revenue in fiscal year 2015 after the acquisition of iML in June 2014, $1.0 million from the sale of certain intellectual property in the first quarter of fiscal year 2016, and $0.8 million recognition of previously deferred revenue with certain distributors due to our ability to estimate returns and price reduction refunds. Sales were also impacted by the implementation of commodity market pricing programs with one of our distributors.

 

Gross Profit

 

Gross profit as a percentage of net sales for the three months and nine months ended December 27, 2015 increased by 1% and 13%, respectively, as compared to the same period a year ago. In addition to being impacted by the items described in the Revenue section above, the increase was primarily due to restructuring charges and impairment of intangible assets recorded in the prior fiscal year 2015 and a $1.5 million legal settlement received from a vendor related to defective products in the second quarter of the 2016 fiscal year, partially offset by $0.7 million inventory write-off due to restructuring activities conducted in fiscal year 2016.

  

We believe that gross profit will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, the inclusion of the amortization of the costs of acquired intangibles, product and manufacturing costs, our ability to leverage fixed operational costs, shipment volumes, competitive pricing pressure on our products, and currency fluctuations.

 

Research and Development (“R&D”)

 

R&D expenses for the three months ended December 27, 2015 decreased by $2.8 million as compared to the same period a year ago. The decrease was primarily due to our strategic restructuring activities resulting in an average headcount decrease from 159 to 119 for the three months ended December 28, 2014 and December 27, 2015, respectively.

 

R&D expenses for the nine months ended December 27, 2015 decreased by $4.4 million as compared to the same period a year ago. The decrease was primarily due to an average headcount decrease from 149 to 135 for the nine months ended December 28, 2014 and December 27, 2015, respectively, and $1.2 million decrease in stock-based compensation expense.

 

We believe that R&D expenses will fluctuate in absolute dollars due to, among other factors, the inclusion of costs associated with acquired operations, increased investment in software development, variable compensation, incentives, annual merit increases and fluctuations in reimbursements under a research and development contract.

 

 
28

 

 

Selling, General and Administrative (“SG&A”)

 

SG&A expenses for the three months ended December 27, 2015 decreased $1.5 million as compared with the same period a year ago. The decrease was mainly due to $2.6 million decrease in stock-based compensation expense and an average headcount decrease resulting from our strategic restructuring activities, partially offset by $1.0 million accrual for a legal settlement.

 

SG&A expenses for the nine months ended December 27, 2015 decreased $3.8 million as compared with the same period a year ago. The decrease was mainly due to $4.6 million decrease in stock-based compensation expense and an average headcount decrease resulting from our strategic restructuring activities, partially offset by $1.0 million accrual for a legal settlement.

 

We believe that SG&A expenses will fluctuate in absolute dollars due to, among other factors, the inclusion of costs associated with acquired operations, variable commissions, legal costs, variable compensation, incentives and annual merit increases.

 

Merger and Acquisition Costs

 

Merger and acquisition costs for the three and nine months ended December 27, 2015 decreased $0.2 million and $7.0 million, respectively, as compared with the same periods a year ago. The decrease was primarily due to transaction costs incurred for the acquisition of iML, which was finalized in September 2014.

 

Restructuring Charges and Exit Costs

 

Restructuring charges and exit costs for the three and nine months ended December 27, 2015, decreased $1.2 million and $6.1 million, respectively, compared with the same periods a year ago. The decrease was mainly due to the significant strategic restructuring resulting in a reduction of our workforce, the impairment of certain fixed assets and intangible assets, and the write-off of related inventory in fiscal year 2015. Inventory write-offs are included in cost of sales and all other restructuring charges and exit costs are included in operating expenses. We believe this restructuring allows us to achieve meaningful synergies and operating efficiencies. See “Note 11 – Restructuring Charges and Exit Costs.”

 

Interest Income and Other, Net

 

Interest income and other, net primarily consists of interest income, foreign exchange gains or losses, and realized gains or losses on marketable securities.

 

Interest income and other, net during the three and nine months ended December 27, 2015 each decreased $0.1 million and $0.6 million, respectively, as compared to the same periods a year ago. The decrease was mainly due to the sale of short-term investments to fund the iML acquisition in fiscal year 2015.

 

Interest Expense and Other, Net

 

Interest expense for the three months ended December 27, 2015 remained consistent compared to the same period a year ago.

 

Interest expense for the nine months ended December 27, 2015 decreased $0.9 million compared to the same period a year ago. The interest expense incurred in fiscal year 2015 was primarily related to the $65.0 million of short-term debt borrowed from Stifel Financial Corporation (“Stifel”) and CTBC Bank Corporation (USA) (“CTBC”). The debt was paid off in the second quarter of fiscal year 2015. Interest expense had been immaterial since the repayment of this debt.

 

Provision for Income Taxes

 

During the three months and nine months ended December 27, 2015, we recorded an income tax expense of approximately $0.2 million and an income tax benefit of $0.8 million, respectively. The income tax expense is attributable to income generated in foreign jurisdictions and the income tax benefit was primarily due to the lapsing of the statute of limitations related to US federal tax reserve. During the three months and nine months ended December 28, 2014, we recorded an income tax expense of approximately $0.1 million and $0.9 million, respectively. The expense is primarily related to the allocation of tax expense between continuing operations and other comprehensive income when applying the exception to the ASC 740 intraperiod allocation rule upon liquidation of our available for sale security portfolio in 2014.

 

On December 18, 2015, President Obama signed H.R. 2029, the tax (the "Protecting Americans from Tax Hikes Act of 2015), which permanently extended Sec. 41 research credit for qualified research expenditures. The benefit of the reinstated credit did not impact the income statement in the period of enactment, which was the quarter ended December 27, 2015, as the R&D credit carryforwards are offset by a full valuation allowance.                                                    

 

 
29

 

  

Liquidity and Capital Resources

 

   

Nine Months Ended

 
   

December 27, 2015

   

December 28, 2014

 
   

(dollars in thousands)

 

Total cash, cash equivalents and short-term investments

  $ 53,449     $ 52,622  

Percentage of total assets

    21 %     19 %
                 

Net cash provided by (used in) operating activities

  $ 1,104     $ (16,011 )

Net cash provided by (used in) investing activities

    (954 )     78,008  

Net cash used in financing activities

    (1,934 )     (23,989 )

Net increase (decrease) in cash and cash equivalents

  $ (1,784 )   $ 38,008  

 

Nine months ended December 27, 2015

 

Our net loss was approximately $13.8 million for the nine months ended December 27, 2015. After adjustments for non-cash items and changes in working capital, we generated $1.1 million of cash from operating activities.

 

Significant non-cash charges and credits included:

 

 

depreciation and amortization expenses of $14.6 million;

 

 

stock-based compensation expense of $4.4 million;

 

 

Impairment of intangible assets of $1.8 million; and

 

 

Restructuring charges and exit costs of $1.0 million

 

Working capital changes included:

 

 

a $2.5 million increase in accounts receivable primarily due to timing of shipments made and timing of collections from customers and distributors;

 

 

a $0.9 million decrease in accounts payable and a $1.4 million decrease in accrued compensation and related benefits primarily due to timing of payments made and reduced headcounts;

 

 

a $1.7 million decrease of inventory due to improved inventory management;

 

 

an $8.0 million net decrease in other current and non-current assets primarily due to release of valuation allowance of current deferred tax assets upon completion of foreign cash repatriation in the second quarter of fiscal year 2016;

 

 

a $3.7 million decrease in deferred income due to timing of products selling through the distribution channels, our distribution partners looking to reduce inventory, the recognition of previously deferred revenue with certain distributors due to our ability to estimate returns and price reduction refunds, moving portions of our commodity business to market price programs, and the lowering of our list price for many of our products.

 

In the nine months ended December 27, 2015, net cash used in investing activities was $1.0 million due to purchases of property, plant and equipment.

 

In the nine months ended December 27, 2015, net cash used in financing activities was $1.9 million, which reflects $2.3 million repayment of lease financing obligation, and $0.4 million net cash settlement for equity awards, partially offset by receipt of $0.8 million net proceeds associated with our employee stock plans.

 

 
30

 

 

Nine months ended December 28, 2014

 

Our net loss was approximately $42.1 million for the nine months ended December 28, 2014. After adjustments for non-cash items and changes in working capital, we used $16.0 million of cash in operating activities.

 

 

Significant non-cash charges and credits included:

 

 

depreciation and amortization expenses of $13.3 million;

 

 

intangibles impairment of $12.3 million;

 

 

restructuring charges and exit costs of $6.7 million resulting from reduction of our workforce, impairment of certain intangible and fixed assets;

 

 

stock-based compensation expense of $10.9 million;

 

 

reduction in estimated fair value of contingent consideration liabilities of $4.3 million related to the acquisitions of Cadeka Microcircuits LLC and Altior Inc; and

 

 

release of $0.8 million of the deferred tax valuation allowance due to liquidation of our short term investments.

 

Working capital changes included:

 

 

a $1.1 million increase in accounts receivable primarily due to timing of shipments made and timing of collections from customers;

 

 

a $3.5 million increase in inventory to avoid shortage of supplies in the future primarily related to the Display Products and Processor Product lines;

 

 

a $1.1 million net increase in other current and noncurrent assets primarily due to estimated tax payments made;

 

 

a $2.9 million net decrease in accounts payable and $0.2 million decrease in accrued compensation and related benefits primarily due to timing of payments made;

 

 

a $5.4 million net decrease in other current and noncurrent liabilities mainly due to payments made for liabilities acquired through acquisitions and offset by additional accrued liability for a three-year license of design tool acquired; and

 

 

a $0.6 million increase in deferred income due to timing of products selling through the distribution channels.

 

In the nine months ended December 28, 2014, net cash provided by investing activities was $78.0 million. Proceeds of $162.4 million from sales and maturities of investments was partially offset by $9.3 million in purchases of investments, net $72.7 million used for the acquisition of iML and $2.5 million used for purchases of property, plant and equipment.

 

In the nine months ended December 28, 2014, net cash used by financing activities was $24.0 million, which reflects $91.0 million of proceeds received from Stifel and CTBC short-term financing agreements, $18.9 million for payment of non-controlling interest in the acquisition of iML, receipt of $3.9 million net proceeds associated with our employee stock plans partially offset by $91.0 million repayment of Stifel short-term financing agreements, $8.0 million repurchase of our common stock and $1.0 million repayment of lease financing obligations.

 

Recent Accounting Pronouncements

 

Please refer to “Part I, Item 1. Financial Statements” and “Notes to Condensed Consolidated Financial Statements, Note 2 – Recent Accounting Pronouncements.”

 

 
31

 

 

Off-Balance Sheet Arrangements

 

We have not utilized special purpose entities to facilitate off-balance sheet financing arrangements. However, we have, in the normal course of business, entered into agreements which impose warranty obligations with respect to our products or which obligate us to provide indemnification of varying scope and terms to customers, vendors, lessors and business partners, our directors and executive officers, purchasers of assets or subsidiaries, and other parties with respect to certain matters. These arrangements may constitute “off-balance sheet transactions” as defined in Section 303(a)(4) of Regulation S-K. Please see “Note 15Commitments and Contingencies” to the condensed consolidated financial statements for further discussion of our product warranty liabilities and indemnification obligations.

 

As discussed in “Note 15Commitments and Contingencies,” during the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to other parties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable.

 

Contractual Obligations and Commitments

 

Our contractual obligations and commitments at December 27, 2015 were as follows (in thousands):

 

   

Payments due by period

 

Contractual Obligations

 

Total

   

Less than

1 year

   

1-3

years

   

3-5

years

   

More than

5 years

 

Purchase commitments (1)

  $ 23,032     $ 20,337     $ 700     $ 753     $ 1,242  

Lease obligations (2)

    672       461       211       --       --  

Total

  $ 23,704     $ 20,798     $ 911     $ 753     $ 1,242  

 

—————

(1)

We place purchase orders with wafer foundries, back end suppliers and other vendors as part of our normal course of business. We expect to receive and pay for wafers, capital equipment and various service contracts over the next 12 months from our existing cash balances.

(2)

Operating lease payments including real property leases for our worldwide offices.

 

Other commitments

 

As of December 27, 2015, our unrecognized tax benefits were $16.8 million, of which $3.3 million was classified as other non-current obligations. We believe that it is reasonably possible that the amount of gross unrecognized tax benefits related to the resolution of income tax matters could be reduced by approximately $0.1 million during the next 12 months as the statute of limitations expires. See “Note 17 – Income Taxes.”                                                  

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are interest rate risk and foreign currency exchange rate risk.

 

Interest Rate Risk. As of December 27, 2015, we had cash and cash equivalents of $53.5 million. Cash and cash equivalents consisted of cash and highly liquid money market instruments. We would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio. A hypothetical increase in market interest rates of 1% from the market rates in effect at December 27, 2015 would cause the fair value of these investments to decrease by an immaterial amount, which would not have significantly impacted our financial position or results of operations. Declines in interest rates over time will result in lower interest income and interest expense.   

 

 
32

 

 

Foreign Currency Fluctuations. We are exposed to foreign currency fluctuations primarily through our foreign operations. This exposure is the result of foreign operating expenses and cash balances being denominated in foreign currency. Operational currency requirements are typically forecasted for a one-month period. If there is a need to hedge this risk, we may enter into transactions to purchase currency in the open market or enter into forward currency exchange contracts. A hypothetical change of 10% of an exchange rate would not result in a material impact to our financial condition or results of operations.

 

Except for the foreign exchange rate risk, there have been no material changes in the quantitative or qualitative aspect of our market risk profile since March 29, 2015. For additional information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended March 29, 2015.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures (“Disclosure Controls”)

 

Our management, including our Chief Executive Officer (Interim) (our principal executive officer) (the “Interim CEO”) and our Chief Financial Officer (our principal financial and accounting officer) (the “CFO”) have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (the “Evaluation”), as of the end of the period covered by this Quarterly Report on Form 10-Q. This Evaluation was performed under the supervision and with the participation of management, including our Interim CEO, as principal executive officer, and CFO, as principal financial and accounting officer. Attached as Exhibits 31.1 and 31.2 of this Quarterly Report on Form 10-Q are the certifications of the Interim CEO and the CFO, respectively, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Certifications”). This section of the Quarterly Report on Form 10-Q provides information concerning the Evaluation referred to in the Certifications and should be read in conjunction with the Certifications.

 

Based on the Evaluation, our Interim CEO and CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of December 27, 2015.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 
33

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

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.

 

In April 2015, Phenix, LLC (“Phenix”) filed a complaint against us and iML for patent infringement in the United States District Court for the Eastern District of Texas. Phenix alleged in its complaint that at least the iML 7990 and 7991 integrated circuit P-Gamma products and power management integrated circuit products that are combined with the functionality of the iML 7990 and 7991 integrated circuits infringe one of its patents. In October 2015, Phenix filed an amended complaint, adding a subsidiary of iML as a defendant, and in December 2015 Phenix filed a second amended complaint, adding additional iML P-Gamma integrated circuits as accused products. The court has set a trial date of September 6, 2016 for this matter, and discovery is ongoing. The parties have engaged in settlement discussions, but no settlement has been reached. During the three and nine months ended December 27, 2015, we recorded $1.0 million expense for anticipated possible settlement of this matter. We do not expect an ultimate settlement in this case to be materially different from our accrual.

 

ITEM 1A.      RISK FACTORS

 

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

 

Our financial results may fluctuate significantly because of a number of factors, many of which are beyond our control.

 

Our financial results may fluctuate significantly as a result of a number of factors, many of which are difficult or impossible to control or predict, which include:

  

 

the continuing effects of economic uncertainty;

 

 

the cyclical nature of the general economy and the semiconductor industry;

 

 

difficulty in predicting revenues and ordering the correct mix of components from suppliers due to limited visibility into customers and channel partners;

 

 

changes in the mix of product sales as our margins vary by product;

 

 

fluctuations in the capitalization and amortization of unabsorbed manufacturing costs;

 

 

the impact of our revenue recognition policies on reported results;

 

 

warranty costs related to our product sales;

 

 

the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channel partners;

 

 

management of customer, subcontractor, logistic provider and/or channel inventory;

 

 

delays in shipments from our foundries and subcontractors causing supply shortages;

 

 

inability of our foundries and subcontractors to provide quality products, in adequate quantities and in a timely manner;

 

 

dependency on products with few customers and/or distributors;

 

 

volatility of demand for equipment sold by our large customers, which in turn, introduces demand volatility for our products;

 

 
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demand disruption if customers change or modify their complex subcontract manufacturing supply chain;

 

 

demand disruption in customer demand due to technical or quality issues with our devices or components in their system;

 

 

the inability of our customers to obtain components from their other suppliers;

 

 

disruption in sales or distribution channels;

 

 

our ability to maintain and expand distributor relationships;

 

 

 

changes in sales and implementation cycles for our products;

 

 

the ability of our suppliers and customers to remain solvent, obtain financing or fund capital expenditures as a result of the recent global economic slowdown;

 

 

risks associated with entering new markets;

 

 

the announcement or introduction of products by our existing competitors or new competitors;

 

 

loss of market share by us or by our customers;

 

 

competitive pressures on selling prices or product availability;

 

 

pressures on selling prices overseas due to foreign currency exchange fluctuations;

 

 

erosion of average selling prices coupled with the inability to sell newer products with higher average selling prices, resulting in lower overall revenue and margins;

 

 

delays in product releases;

 

 

market and/or customer acceptance of our products;

 

 

consolidation among our competitors, our customers and/or our customers’ customers;

 

 

changes in our customers’ end user concentration or requirements;

 

 

loss of one or more major customers;

 

 

significant changes in ordering patterns by major customers;

 

 

our or our channel partners’ or logistic providers’ ability to maintain and manage appropriate inventory levels;

 

 

the availability and cost of materials, services or processing capabilities, including foundry, assembly and test capacity, needed by us from our foundries and other manufacturing suppliers;

 

 

disruptions in our or our customers’ supply chain due to natural disasters, fire, outbreak of communicable diseases, labor disputes, civil unrest or other reasons;

 

 

delays in successful transfer of products or manufacturing processes to or between our subcontractors;

 

 

fluctuations in the product quality or manufacturing output, yields, and capacity of our suppliers;

 

 

fluctuation in suppliers’ capacity due to reorganization, relocation or shift in business focus, financial constraints, or other reasons;

 

 

problems, costs, or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher levels of design and device integration;

 

 
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our ability to successfully introduce and transfer into production new products and/or integrate new technologies;

 

 

excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize or inventory becomes obsolete;

 

 

increased manufacturing costs;

 

 

higher mask tooling costs associated with advanced technologies;

 

 

the amount and timing of our investment in research and development;

  

 

costs and business disruptions associated with stockholder or regulatory issues;

 

 

the timing and amount of employer payroll tax to be paid on our employees’ gains on exercise of stock options;

 

 

increased costs and time associated with compliance with new accounting rules or new regulatory requirements;

 

 

changes in accounting or other regulatory rules, such as the requirement to record assets and liabilities at fair value;

 

 

write-off of some or all of our goodwill and other intangible assets;

 

 

litigation costs associated with the defense of suits brought or complaints made against us or enforcement of our rights;

 

 

change in fair value of contingent consideration; and/or

 

 

changes in or continuation of certain tax provisions.

 

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

 

We continue to secure design wins for new and existing products. Such design wins are necessary for revenue growth. However, many of our design wins may never generate revenues if end-customer projects are unsuccessful in the market place, the end-customer terminates the project, or the end-customer selects a competitive solution. Mergers, consolidations, changing market requirements and cost reduction activities among our customers may lead to termination of certain projects before the associated design win generates revenue. If design wins do generate revenue, the time lag between the design win and meaningful revenue is typically between six months to more than 18 months. If we fail to grow and convert a significant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materially and adversely impacted. Under continued uncertain global economic conditions, our design wins could be delayed even longer than the typical lag period and our eventual revenue could be less than anticipated from products that were introduced within the last 18 to 36 months, which could materially and adversely affect our business, financial condition and results of operations.

 

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

 

Because our customers, suppliers and other business partners are in many countries around the world, we must monitor general global conditions for impact on our business. Economies throughout global regions continue to be volatile and, in many countries, inconsistent with trends in the U.S. or other stable economies. In Europe, uncertainty continues regarding the ability of certain countries to service their level of debt. In recent quarters in China and other Asian countries, growth has continued but at a slower pace than earlier in the recovery. Unstable political conditions in individual countries or across regions can also impact our business.

 

We cannot predict the timing, severity or duration of any economic slowdown or pace of recovery or the impact of any such events on our vendors, customers or us. If the economy or markets in which we operate deteriorate from current levels, many related factors could have a material adverse effect on our business, operating results, and financial condition, including the following:

 

 

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

 

 

we may be unable to predict the strength or duration of market conditions or the effects of consolidation of our customers or competitors in their industries, which may result in project delays or cancellations;

 

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

 

 

the failure of financial institution counterparties to honor their obligations to us under credit instruments could jeopardize our ability to rely on and benefit from those instruments, and our ability to replace those instruments on the same or similar terms may be limited under poor market conditions;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

The markets for our products are characterized by a number of factors, some of which are listed below:

 

 

changing or disruptive technologies;

 

 

evolving and competing industry standards;

 

 

changing customer requirements;

 

 

increasing price pressure from lower priced solutions;

 

 

increasing product development costs;

 

 

finite market windows for product introductions;

 

 

lengthy design-to-production cycles;

 

 

increasing functional integration;

 

 

competitive solutions with stronger customer engagement or broader product offerings;

 

 

fluctuations in capital equipment spending levels and deployment;

 

 

rapid adjustments in customer demand and inventory;

   

 

frequent product introductions and enhancements; and

 

 

changing competitive landscape.

 

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

 

Products for our customers’ applications are subject to continually evolving industry standards and new technologies. Our ability to compete will depend in part on our ability to identify and ensure compliance with these industry standards. The emergence of new standards could render our products incompatible with other products that meet those standards. We could be required to invest significant time, effort and expense to develop and qualify new products to ensure compliance with industry standards.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

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

 

  

failure to satisfy or set effective strategic objectives;

   

 

  

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

 

 

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

 

  

the possibility of planned acquisitions failing to materialize after incurring costs to evaluate these opportunities; and

 

 

the diversion of management’s attention from day-to-day operations of the business and the resulting potential disruptions to the ongoing business.

 

Additional risks involved with acquisitions include:

 

 

exposure to foreign exchange risk associated with acquisition consideration denominated in foreign currencies;

 

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

 

 

difficulties in incorporating or leveraging acquired technologies in new products;

 

 

difficulties or delays in the transfer of product manufacturing flows and supply chains of acquired businesses;

 

 

failure to retain and integrate key personnel;

 

 

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

 

 

failure to manage and operate multiple geographic locations both effectively and efficiently;

 

  

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

 

 

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

 

 

unexpected capital equipment outlays and continuing expenses related to technical and operational integration;

 

 

difficulties in entering markets or retaining current markets in which we have limited or no direct prior experience or where competitors in such markets may have stronger market positions;

 

 

insufficient revenues to offset increased expenses associated with acquisitions;

 

 

under-performance problems with an acquired company;

 

 

issuance of common stock that would dilute our current stockholders’ percentage ownership;

 

 

reduction in liquidity and interest income on lower cash balances;

 

 

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

 

 

incurring amortization expenses related to certain intangible assets; and

 

 

incurring large write-offs of assets.

 

Strategic equity investments also involve risks associated with third parties managing the funds and the risk of poor strategic choices or execution of strategic or operating plans.

 

We may not address these risks successfully without substantial expense, delay or other operational or financial problems, or at all. Any delays or other operations or financial problems could materially and adversely impact our business, financial condition and results of operations.

 

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

 

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

 

We have recorded material write-downs of the acquired technologies in fiscal years 2016, 2015 and 2014 associated with restructurings and annual impairment reviews. See Note 6 – “Goodwill and Intangible Assets”.

 

We depend on third-party subcontractors to manufacture our products. We utilize wafer foundries for processing our wafers and assembly and test subcontractors for manufacturing and testing our integrated circuit products and board assembly subcontractors for our board-level products. Any disruption in or loss of our subcontractors’ capacity to manufacture and test our products subjects us to a number of risks, including the potential for an inadequate supply of products and higher materials costs. These risks may lead to delayed product delivery or increased costs, which could materially and adversely impact our business, financial condition and results of operations.

 

We do not own or operate a semiconductor fabrication facility or a foundry. We utilize various foundries for different processes. Our products are based on processes such as CMOS processes, bipolar processes, BiCMOS and BCD processes. Our foundries produce semiconductors for many other companies (many of which have greater volume requirements than us), and therefore, we may not have access on a timely basis to sufficient capacity or certain process technologies and we have from time to time, experienced extended lead times on some products. In addition, we rely on our foundries’ continued financial health and ability to continue to invest in smaller geometry manufacturing processes and additional wafer processing capacity.

 

Many of our new products are designed to take advantage of smaller geometry manufacturing processes. Due to the complexity and increased cost of migrating to smaller geometries, as well as process changes, we could experience interruptions in production or significantly reduced yields causing product introduction or delivery delays. If such delays occur, our products may have delayed market acceptance or customers may select our competitors’ products during the design process.

 

New and current process technologies or products can be subject to wide variations in manufacturing yields and efficiency. Our foundries or the foundries of our suppliers may experience unfavorable yield variances or other manufacturing problems that result in product introduction or delivery delays. Further, if the products manufactured by our foundries contain production defects, reliability issues or quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may cancel orders, assert product warranty or damage claims, or be reluctant to continue to buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these errors and defects could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition and results of operations.

 

Our foundries and test and assembly subcontractors manufacture our products on a purchase order basis. We provide our foundries with rolling forecasts of our production requirements; however, the ability of our foundries to provide wafers is limited by the foundries’ available capacity. Our third-party foundries may not allocate sufficient capacity to satisfy our requirements. In addition, there is no guarantee that we will be able to continue to do business with our foundries on terms as favorable as our current terms.

 

Furthermore, any reduction or discontinuance, either on a permanent or temporary basis, of any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products, lost sales opportunities, and increased costs. Any delays or shortages would likely materially and adversely impact our business, financial condition and results of operations. In particular, the products produced from the wafers manufactured by our suppliers in China currently constitute a significant part of our total revenue, and so any delay, reduction or elimination of our ability to obtain wafers from any of these suppliers could materially and adversely impact our business, financial condition and results of operations.

 

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

 

 

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

 

 

disruption of manufacturing or assembly or test services due to vendor transition, relocation or limited capacity of the foundries or subcontractors;

 

 

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

 

 

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

 

 

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

 

 

increasing cost of commodities, resulting in higher wafer or package costs;

 

 

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

 

 

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

 

  

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

 

 

 

a sudden, sharp increase in demand for semiconductor devices, which could strain the foundries’ or subcontractors’ manufacturing resources and cause delays in manufacturing and shipment of our products;

 

 

manufacturing quality control or process control issues, including reduced control over manufacturing yields, production schedules and product quality;

 

 

potential misappropriation of our intellectual property;

 

 

disruption of transportation to and from Asia where most of our foundries and subcontractors are located;

 

 

political, civil, labor or economic instability;

 

 

embargoes or other regulatory limitations affecting the availability of raw materials or equipment, or changes in tax laws, tariffs, services and freight rates; and/or

 

 

compliance with U.S., local or international regulatory requirements.

 

If we are unable to accurately forecast demand for our products or efficiently manage our inventory, it could materially and adversely impact our business, financial conditions and the results of operations.

 

Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on customer forecasts, internal evaluation of customer demand and current backlog, which can fluctuate substantially. Due to a number of factors, such as: customer changes in delivery schedules and quantities actually purchased, cancellation of orders, distributor returns or price reductions, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Other factors such as purchase order cancellations or delays, product returns and price reductions may also affect our backlog. We may not be able to meet our expected revenue levels or results of operations if there is a reduction in our order backlog for any particular period and we are unable to replace those anticipated sales during the same period. Our forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, new part introductions by our competitors, loss of previous design wins, adverse changes in our scheduled product order mix and demand for our customers’ products or models. As a consequence of these factors and other inaccuracies inherent in forecasting, inventory imbalances can occur, resulting in surplus amounts of some of our products and shortages of others. Such shortages can adversely impact customer relations and surpluses can result in larger-than-desired inventory levels, either of which can materially and adversely impact our business, financial condition and results of operations. Due to the unpredictability of global economic conditions and increased difficulty in forecasting demand for our products, we could experience an increase in inventory levels.

 

 
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In instances where we have hub agreements with certain vendors, the inability of our partners to provide accurate and timely information regarding inventory and related shipments of the inventory may impact our ability to maintain the proper amount of inventory at the hubs, forecast usage of the inventory and record accurate revenue recognition which could materially and adversely impact our business, financial conditions and the results of operations.

 

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

 

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

 

Moreover, we depend on the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic and semiconductor industry conditions. We believe that our success will continue to depend on these distributors and sales representatives. If some or all of our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell our products, our business, financial condition and results of operations could be materially and adversely impacted.

 

Certain of our distributors may rely heavily on the availability of short-term capital at reasonable rates to fund their ongoing operations. If this capital is not available, or is only available on onerous terms, certain distributors may not be able to pay for inventory received or we may experience a reduction in orders from these distributors, which would likely cause our revenue to decline and materially and adversely impact our business, financial condition and results of operations.

 

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

 

Our future success depends on the contributions of our executive officers, as well as continued service of our key design, engineering, technical, sales, marketing and managerial personnel and our ability to identify, hire, motivate and retain such qualified personnel, as well as effectively and quickly replacing key personnel with qualified successors. In October 2015, our Chief Executive Officer and President, by mutual agreement with the Board of Directors, was terminated and we have appointed an Interim President and Chief Executive Officer while our board of directors conducts a search for a permanent Chief Executive Officer. During our search for a new Chief Executive Officer, it is important that we retain key personnel. If we lose the services of key personnel, especially during this period of leadership transition, or do not hire or retain other personnel for key positions, including the Chief Executive Officer position, our business could be adversely affected.

 

Under certain circumstances, including a company acquisition, significant restructuring or business downturn, current and prospective employees may experience uncertainty about their future roles with us. Volatility or lack of positive performance in our stock price and the ability or willingness to offer meaningful competitive equity compensation and incentive plans or in amounts consistent with market practices may also adversely affect our ability to retain and incentivize key employees. In addition, competitors may recruit our employees, as is common in the high tech sector, which may require us to provide more competitive compensation packages in order to recruit or retain current and potential employees. If we are unable to retain personnel that are critical to our future operations, we could face disruptions in operations, loss of existing customers, loss of key information, expertise or know-how, unanticipated additional recruiting and training costs, and potentially higher compensation costs.

 

Competition for skilled employees having specialized technical capabilities and industry-specific expertise is intense and continues to be a considerable risk inherent in the markets in which we compete. At times, competition for such employees has been particularly notable in California.

 

 
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Our employees are employed “at-will”, which means that they can terminate their employment at any time. Our international locations are subject to local labor laws, which are often significantly different from U.S. labor laws and which may, under certain conditions, result in large separation costs upon termination. Further, employing individuals in international locations is subject to other risks inherent in international operations, such as those discussed with respect to international sales below, among others. The failure to recruit and retain, as necessary, key design engineers and technical, sales, marketing and executive personnel could materially and adversely impact our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

A portion of our revenue is derived from selling integrated circuits and board level products to end customer equipment vendors. Due to their product development cycle, we have typically experienced at least an 18 month time lapse between our initial contact with a customer and realizing volume shipments. In such instances, we first work with customers to achieve a design win, which may take six months or longer. Our customers then complete their design, test and evaluation process and begin production, a period which typically lasts an additional six months. The customers of equipment manufacturers may also require a period of time for testing and evaluation, which may cause further delays. As a result, a significant period of time may elapse between our research and development efforts and realization of revenue, if any, from volume purchasing of our products by our customers. Due to the length of the end customer equipment vendors’ product development cycle, the risks of project cancellation by our customers, price erosion or volume reduction are common aspects of such engagements.

 

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

 

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

 

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

 

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

 

We compete in markets that are intensely competitive, and which are subject to both rapid technological change, continued price erosion and changing business terms with regard to risk allocation. Our competitors include many large domestic and foreign companies that may have substantially greater financial, technical and management resources, name recognition and leverage than we have. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to promote the sale of their products.

 

We have experienced increased competition at the design stage, where customers evaluate alternative solutions based on a number of factors, including price, performance, product features, technologies, and availability of long-term product supply and roadmap guarantee. Additionally, we experience, and may in the future experience, in some cases, severe pressure on pricing from competitors or on-going cost reduction expectations from customers. Such circumstances may make some of our products unattractive due to price or performance measures and result in the loss of design opportunities or a decrease in our revenue and margins.

 

Also, competition from new companies, including those from emerging economy countries, with significantly lower costs could affect our selling price and gross margins. In addition, if competitors in Asia continue to reduce prices on commodity products, it could adversely affect our ability to compete effectively in that region. Specifically, we have licensed rights to a supplier in China to market our commodity connectivity products, which could reduce our sales in the future should they become a meaningful competitor. Our inability to compete effectively with our competitors could result in price reductions, fewer customer orders, reduced revenues, reduced gross margins and loss of market share, any of which would adversely affect our operating results and financial condition.

 

Furthermore, many of our existing and potential customers internally develop solutions which attempt to perform all or a portion of the functions performed by our products. To remain competitive, we continue to evaluate our manufacturing operations for opportunities for additional cost savings and technological improvements. If we or our contract partners are unable to successfully implement new process technologies and to achieve volume production of new products at acceptable yields, our business, financial condition and results of operations may be materially and adversely affected.

 

Our stock price is volatile.

 

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

 

 

our anticipated or actual operating results;

 

 

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

 

 

technological innovations by us or our competitors;

 

 

investor perception of the semiconductor sector;

 

 

loss of or changes to key executives;

 

 

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

 

 

potential supply disruptions;

 

 

sales channel interruptions;

 

 

concentration of sales among a small number of customers;

 

 

conditions in our customers’ markets and the semiconductor markets;

 

 

the commencement and/or results of litigation;

 

 

changes in estimates of our performance by securities analysts;

 

 

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

 

 
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repurchasing shares of our common stock;

 

 

announcements of merger or acquisition transactions; and/or

 

 

general global economic and capital market conditions.

 

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

 

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

 

Occasionally, we enter into agreements that expose us to potential damages that exceed the value of the agreement.

 

We have given certain customers increased indemnification protection for product deficiencies or intellectual property infringement that is in excess of our standard limited warranty and indemnification provisions and could result in costs that are in excess of the original contract value. In an attempt to limit this liability, we have purchased insurance coverage to partially offset some of these potential additional costs; however, our insurance coverage could be insufficient in terms of amount and/or coverage to prevent us from suffering material losses if the indemnification amounts are large enough or if there are coverage issues.

 

Based upon most recent filings available as of December 27, 2015, affiliates of Future, Alonim Investments Inc. and two of its affiliates (collectively “Alonim”), beneficially own approximately 16% of our common stock. This substantial ownership position provides the opportunity for Alonim to significantly influence matters requiring stockholder approval, which may or may not be in our best interests or the interest of our other stockholders. In addition, Alonim is an affiliate of Future and an executive officer of Future is on our board of directors, which could lead to actual or perceived influence from Future.

 

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

 

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

 

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

 

Any error in our sell-through revenue recognition judgment or estimates could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances on sales to distributors and net income.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As a general matter, semiconductor companies may from time to time become involved with ongoing litigation regarding patents and other intellectual property rights. If a third party were to prove that our technology infringed its intellectual property rights, we could be required to pay substantial damages for past infringement and could be required to pay license fees or royalties on future sales of our products. If we were required to pay such license fees when we sold our products, such fees could exceed our revenue. In addition, if it was proven that we willfully infringed a third party’s proprietary rights, we could be held liable for three times the amount of the damages that we would otherwise have to pay. Such intellectual property litigation could also require us to:

 

 

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

 

 

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

 

 

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

 

The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive and could require a significant portion of management’s time. In addition, rather than litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include the payment of damages and our agreement to license technology in exchange for a license fee and ongoing royalties. These fees could be substantial. If we were required to pay damages or otherwise became subject to equitable remedies, our business, financial condition and results of operations would suffer. Similarly, if we were required to pay license fees to third parties based on a successful infringement claim brought against us, such fees could exceed our revenue.

 

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

 

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

 

 
46

 

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

adjustments to estimated taxes upon finalization of various tax returns;

 

 

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

 

  

changes in available tax credits;

 

 

 

changes in stock-based compensation expense;

 

 

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

 

 

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

 

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

 

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

 

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

 

International sales have accounted for, and will likely continue to account for a significant portion of our revenues, which subjects us to the following risks, among others:

 

 

changes in or compliance with regulatory requirements;

 

 

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

 

 

timing and availability of export or import licenses;

 

 

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

 

 

disruption of services due to natural disasters outside the United States;

 

 

disruptions to customer operations outside the United States due to the outbreak of communicable diseases;

 

 

difficulties in accounts receivable collections;

 

 

difficulties in staffing and managing foreign subsidiary and branch operations;

 

 

difficulties in managing sales channel partners;

 

 

difficulties in obtaining governmental approvals for our products;

 

 

limited intellectual property protection;

 

 

foreign currency exchange fluctuations;

 

 

the burden of complying with foreign laws and treaties;

 

 

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

 

  

potentially adverse tax consequences.

 

 

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

 

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

 

From time to time, one of our customers has contributed more than 10% of our quarterly net sales. For example in the nine months ended December 27, 2015 one customer contributed approximately 25% of our quarterly net sales. A number of our customers are OEMs, or the manufacturing subcontractors of OEMs, which might result in an increase in concentrated credit risk with respect to our trade receivables and therefore, if a large customer were to be unable to pay, it could materially and adversely impact our business, financial condition and results of operations.

 

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

 

In August 2012, the U.S. Securities and Exchange Commission (“SEC”) issued final rules for compliance with Section 1502 of the Dodd-Frank Act, and outlined what U.S. publicly-traded companies have to disclose regarding their use of conflict minerals in their products. According to the rule, companies that utilize any of the 3TG (tin, tantalum, tungsten and gold) and other listed minerals in their products need to conduct a reasonable country of origin inquiry to determine if the minerals are coming from the conflict zones in and around the Democratic Republic of Congo. We filed our annual conflict minerals report on June 1, 2015. The implementation of these new regulations may limit the sourcing and availability of some metals used in the manufacture of our products and may affect our ability to obtain products in sufficient quantities or at competitive prices. Our customers, including our OEM customers, may require that our products contain only conflict free 3TG, and our revenues and margins may be harmed if we are unable to meet this requirement at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting this requirement. Additionally, we may suffer reputational harm with our customers and other stakeholders if our products are not conflict free or if we are unable to sufficiently verify the origins of the 3TG contained in our products through the due diligence procedures that we implement. We could incur significant costs to the extent that we are required to make changes to products, processes or sources of supply due to the foregoing requirements or pressures.

 

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

 

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

 

ITEM 6.

EXHIBITS

 

(a) Exhibits required by Item 601 of Regulation S-K

 

See the Exhibit Index, which follows the signature page to this Quarterly Report on Form 10-Q.

 

 
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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q of Exar Corporation to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

EXAR CORPORATION

(Registrant)

     

February 4, 2016

By

/s/ Ryan A. Benton

   

Ryan A. Benton

Senior Vice President and Chief Financial Officer

(On the Registrant’s Behalf and as Principal Financial and Accounting Officer)

 

 
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INDEX TO EXHIBITS

  

 

 

Incorporated by Reference

 
 

Exhibit Number

Exhibit

 

Form

 

File No.

 

Exhibit

 

Filing Date

Filed Herewith

2.1

Form of Merger Agreement

8-K

0-14225

2.1

4/30/2014

 

2.2

Form of Tender Agreement

8-K

0-14225

2.2

4/30/2014

 

10.1

Bridge Credit Agreement, dated May 27, 2014

8-K

0-14225

10.1

5/30/2014

 

10.2

Form of Parent Agreement

8-K

0-14225

10.1

4/30/2014

 

10.3

Form of Tender Agreement

8-K

0-14225

10.2

4/30/2014

 

10.4

Fiscal Year 2015 Management Incentive Plan

10-Q

001-36012

10.3

8/8/2014

 

10.5

Separation and Release Agreement between Exar Corporation and Louis DiNardo, dated October 19, 2015

8-K

0-14225

10.1

10/20/2015

 

10.6

Services Agreement between Exar Corporation and Richard L. Leza, dated October 16, 2015

8-K

0-14225

10.2

10/20/2015

 

10.7

Fiscal Year 2016 Management Incentive Plan

10-Q

001-36012

10.7

11/6/2015

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)

       

X

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)

       

X

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

       

X

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

       

X

101.INS

XBRL Instance Document

       

X

101.SCH

XBRL Taxonomy Extension Schema Document

       

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

       

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

       

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

       

X

101.PRE XBRL Taxonomy Extension Presentation        

 

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