Note 12 - Stock-based Compensation

9 Months Ended

Dec. 28, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

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 28, 2014		Nine Months Ended December 28, 2014
	Shares of Common Stock		Shares of Common Stock		Weighted Average Price per Share
Authorized to issue		4,500
Reserved for future issuance		1,352
Issued				21	$	10.11

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 every award issued. As of December 28, 2014, there were 4.8 million shares available for future grant under the 2014 Plan.

Stock Option Activities

Our stock option transactions during the nine months ended December 28, 2014 were indicated below:

	Outstanding			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)		In-the-money Options Vested and Exercisable (in thousands)
Balance at March 30, 2014		7,213,848		$	8.98		5.02	$	21,301		2,170
Granted		2,517,178			8.64
Exercised		(523,193	)		6.85
Cancelled		(183,895	)		12.76
Forfeited		(981,008	)		10.49
Balance at December 28, 2014		8,042,840		$	8.74		4.97	$	15,344		2,959
Vested and expected to vest, December 28, 2014		7,487,866		$	8.66		4.88	$	14,864
Vested and exercisable, December 28, 2014		3,361,788		$	7.64		3.81	$	9,629

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stock of $10.29 and $11.71 as of December 28, 2014 and March 30, 2014, 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 CEO. The options are scheduled to vest in four equal annual installments at the end of fiscal years 2013 through 2016 if certain predetermined market based financial measures are met. If the financial measures are not met, each installment will be rolled over to the subsequent fiscal year. In January 2014, we granted 140,000 performance-based stock options to our CEO. The options are scheduled to vest at the end of fiscal year 2017 if certain predetermined financial measures are 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. We recorded $65,000 and $195,000 of compensation expense for these options in the three and nine months ended December 29, 2013, respectively.

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

	Three Months Ended				Nine Months Ended
	December 28, 2014		December 29, 2013		December 28, 2014		December 29, 2013
Intrinsic value of options exercised	$	668	$	805	$	1,524	$	2,699

RSU Activities

Our RSU transactions during the nine months ended December 28, 2014 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 30, 2014		1,177,126		$	10.94		1.62	$	13,784
Granted		337,022			9.27
Issued and released		(230,553	)		10.65
Cancelled		(178,663	)		12.05
Unvested at December 28, 2014		1,104,932		$	10.31		1.40	$	11,370
Vested and expected to vest, December 28, 2014		962,572					1.32	$	9,905

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

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

In March 2012, we granted 300,000 performance-based RSUs (“PRSUs”) to our CEO. The PRSUs were scheduled to vest in three equal installments at the end of fiscal 2013 through 2015 with three year vesting periods if certain predetermined financial measures are met. If the financial measures are not met, each installment will be forfeited at the end of its respective fiscal year. 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. We recorded $119,000 and $641,000 of compensation expense for these awards in the three and nine months ended December 28, 2013, respectively.

In December 2013, we granted 100,000 RSUs to our CEO. The RSUs were scheduled to vest in two equal installments at the end of fiscal 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 2017 if certain predetermined financial measures are met. For the three and nine months ended December 28, 2014, we did not record compensation expense for these modified PRSUs as a result of low probability of achieving performance goals measured by management.

In the first quarter of fiscal 2014, we granted 50,000 PRSUs to certain executives. The PRSUs were scheduled to vest in three equal installments at the end of fiscal year 2014 with a three-year vesting period if certain performance measures are met. We recorded stock compensation net recovery of $53,000 and $151,000 in the three and nine months ended December 28, 2014, respectively as a result of the termination of one executive. We recorded $91,000 and $239,000 of stock compensation expense for these awards in the three and nine months ended December 29, 2013, respectively.

In July 2013, as part of the acquisition of Cadeka, we agreed to pay retention bonuses to certain former Cadeka employees and the bonuses will be settled in RSUs subject to fulfillment of the service period. We recorded $506,000 and $1,519,000 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 obligations line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense is recorded as part of stock compensation expense in the condensed consolidated statements of operations.

In August 2013, we announced the Fiscal Year 2014 Management Incentive Program (“2014 Incentive Program”). Under this program, each participant’s award is denominated in stock and subject to achievement of certain financial performance goals and the participant’s annual Management by Objective goals. The expense is reported in the other current liabilities line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense is recorded as part of stock compensation expense in the condensed consolidated statements of operations. Due to only partially achieving the financial performance goals and the participant’s annual Management by Objectives goals, we reversed the previously recorded stock compensation of $295,000 in the second quarter of fiscal year 2015 which resulted in a net stock compensation recovery of $290,000 for the nine months ended December 28, 2014.

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 stock compensation net recovery of $78,000 and $208,000 of compensation expense for these awards in the three and nine months ended December 28, 2014, respectively, as a result of termination of one of our executives.

In January 2014, we granted 82,500 PRSUs to certain former Stretch employees. 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. We recorded stock compensation recovery of $47,000 and $122,000 of compensation expense in the three and nine months ended December 28, 2014, respectively, as a result of lower 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 $679,000 and $1,256,000 in the three and nine months ended December 28, 2014, respectively.

In January 2015, two of our executives were terminated. As part of their termination agreements, we extended the vesting periods of their outstanding stock awards and exercise periods of their vested stock awards for an additional thirteen and twenty-five months periods, respectively. We also granted total of 60,000 shares RSUs with a vesting period of twelve months. In addition, we granted RSUs valued at $479,000 to one of the executives which will be fully vested in February 2015. We recorded stock compensation expense of $1,519,000 for these awards in the three and six months ended December 28, 2014.

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 28, 2014		December 29, 2013		December 28, 2014		December 29, 2013
Cost of sales	$	496	$	165	$	983	$	519
Research and development		442		566		2,124		1,395
Selling, general and administrative		3,284		1,826		7,842		5,353
Total Stock-based compensation expense	$	4,222	$	2,557	$	10,949	$	7,267

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 for the period indicated below as follows:

	December 28, 2014
	Amount (in thousands)		Weighted Average Expected Remaining Period (in years)
Options	$	10,338		2.45
Performance Options		456		1.69
RSUs		7,051		1.89
PRSUs		1,329		1.98
Total Unrecognized Stock-based compensation expense	$	19,174

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.

We used the following weighted average assumptions to calculate the fair values of options granted during the fiscal periods presented:

	Three Months Ended				Nine Months Ended
	December 28, 2014		December 29, 2013		December 28, 2014		December 29, 2013
Expected term of options (years)		4.67		4.50		4.53 – 4.70		4.40– 4.50
Risk-free interest rate		1.28%		1.01%		1.25% – 1.34%		0.6% – 1.12%
Expected volatility		33%		32%		32% –33%		32% –35%
Expected dividend yield		—		—		—		—
Weighted average estimated fair value	$	2.65	$	3.74	$	2.79	$	3.56