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

Basis of Presentation and Use of Management Estimates—The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 27, 2016 as filed with the SEC. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, that we believe are necessary for a fair statement of Exar’s financial position as of July 3,October 2, 2016 and our results of operations for the three months and six months ended July 3,October 2, 2016 and June 28,September 27, 2015, respectively. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.

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

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

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

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

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.

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. We2016.We are currently evaluating the effect of adoption of this standard, if any, on our consolidated financial position, results of operations or cash flows.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases: (Topic 842)842,) to provide guidance on recognizing lease assets and lease liabilitiesamend the existing accounting standards for leases. The amendments require lessees to recognize, on the balance sheet, and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement,for the rights and presentationobligations created by leases of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position.greater than twelve months. The accounting applied by a lessor islessors will remain largely unchanged from that applied under previous U.S. GAAP. We are required to adopt the amendments in the first quarter of fiscal 2019, with early adoption permitted. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. Inrequire a modified retrospective transition lessees and lessors are requiredapproach to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.presented. We are currently evaluating the impact of these amendments and the transition alternatives on ourits consolidated financial statements.

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

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition, amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective transition method or a retrospective transition method. An entity that elects early adoption must adopt all of the amendments in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. We are currently evaluating the impact of these amendments on our financial statements.

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

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

NOTE 3.    DISCONTINUED OPERATIONS

On June 1, 2016, we entered into a definitive agreement to sell iML to Beijing E-town Chipone Technology Co., Ltd for $136 million, payable in cash, and adjusted for iML’s cash and debt at closing. At July 3, 2016, weWe have classified the iML disposal group as held-for-sale and presented the results of iML’s operations as net income (loss) from discontinued operations in the condensed consolidated statements of operations.operations for all period presented. The assets and liabilities of iML are recorded as assets held for sale and liabilities held for sale within the condensed consolidated balance sheets, respectively. We are expecting to record a gain on the sale of iML that will be recognized when the transaction closes. The transition services associated with this transaction are expected to be immaterial.

Summarized financial results are presented as net income (loss) from discontinued operations duringfor the first quarter of fiscal 2017three months and 216 aresix months ended October 2, 2016 and September 27, 2015, respectively as follows:

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

 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.

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

There were no transfers between Level 1 and Level 2 during the fiscal quartersix months ended July 3,October 2, 2016.

As of July 3,October 2, 2016, all of our investments, consisting of money market funds with a fair value of $36.3$46.4 million, were classified as Level 1 investments.

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

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

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We evaluate goodwill for impairment on an annual basis or when events and changes in circumstances suggest that the carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Estimations and assumptions regarding the number of reporting units, future performances, results of our operations and comparability of our market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one single operating segment and one chief operating decision maker, our Chief Executive Officer (“CEO”), we assess goodwill for impairment at the enterprise level.

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

Intangible Assets

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

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

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

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

Alonim Investments Inc.

Alonim Investments Inc. (“Alonim”) through its wholly-owned affiliate, Rodfre Holdings LLC, owns approximately 7.6 million shares, or approximately 16%, of our outstanding common stock as of July 3,October 2, 2016. As such, Alonim is our largest stockholder. Future Electronics Inc. (“Future”) is also an affiliate of Alonim and our largest distributor. One of our directors is an executive officer of Future. Our related party transactions primarily involved sales to Future.

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

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

Related party expenses for marketing promotional materials reimbursed were not significant for the three months and six months ended July 3,October 2, 2016 and June 28,September 27, 2015, respectively.

FusionOps, Inc.

The former CEO of FusionOps, Inc. is a member of the board of directors for Exar Corporation. For the three and six months ended July 3, 2016September 27, 2015, we paid $28,200 and June 28, 2015 the Company paid $49,000 and $53,200,$81,400, respectively to FusionOps, Inc. to build an application for internal data analysis andanalysis. Through July 2016 in fiscal year 2017, we paid $82,200 to FusionOps, Inc. We recorded these amounts as expense in the period in which such costs were incurred. Our board member resigned from FusionOps, Inc. in July 2016.

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

Richard Leza served as our interim CEO through May 31, 2016 when the Board of Directors appointed him as Executive Chairman and Technology Advisor. For the threesix months ended July 3,October 2, 2016 we paid $0.1 million and issued 8,000 fully vested restricted stock units with a grant date fair value of $52,600 for his services provided. On June 30, 2016, Mr. Leza resigned as our Executive Chairman and Technology Advisor.

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

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

On July 9, 2013, we announced the approval of a share repurchase program under which we were authorized to repurchase an additional $50.0 million of our common stock. The repurchase program does not have a termination date, and may be modified, extended or terminated at any time. We intend to retire all shares repurchased under the stock repurchase plan. The purchase price for the repurchased shares of Exar is reflected as a reduction of common stock and additional paid-in capital. Since inception of the repurchase plan to July 3,October 2, 2016, we have repurchased a total of 11.1 million shares for an aggregate purchase price of $105.2 million.

We did not repurchase any common stock during the three or six months ended July 3,October 2, 2016 or June 28,September 27, 2015.

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

During the three and six months ended July 3,October 2, 2016, we incurred $0.9$0.2 million and $1.1 million of restructuring charges and exit costs.costs, respectively. The charges consisted primarily of reduction of our workforce and the impairment of certain fixed assets and licensed technologies. We recorded $0.2 million of the restructuring charges and exit costs as cost of goods sold and $0.9 million as operating expense, respectively. During the three and six months ended June 28,September 27, 2015, we incurred immaterial$1.7 million and $2.9 million of restructuring charges and costs. Allcosts, respectively. The restructuring charges and exit costs are included in cost of sales and operating expenses.

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

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

Employee Stock Participation Plan (“ESPP”)

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

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