Notes to Condensed Consolidated Financial Statements
(Unaudited)
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1.
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Organization and Summary of significant accounting policies
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Organization and nature of operations
MRV Communications, Inc. and subsidiaries ("MRV" or the "Company"), a Delaware corporation, is a global supplier of communications solutions to telecommunications service providers, data center operators, enterprises and governments throughout the world. MRV markets and sells its products worldwide, through a variety of channels, which include a dedicated direct sales force, distributors, value-added-resellers, systems integrators and sales agents. Until the third quarter of 2015, MRV conducted its business along
two
principal segments: the Network Equipment segment and the Network Integration segment. MRV's Network Equipment segment designs, manufactures, sells and services equipment used by commercial customers, governments, and telecommunications service providers. Products include packet switching, optical transport, infrastructure management equipment and service orchestration and provisioning software. The Network Integration segment, which primarily operated in Italy and provided network system design, integration and distribution services that included products manufactured by third-party vendors, was sold in December 2015.
On December 3, 2015, the Company completed the sale of all of its shares of its wholly owned subsidiary, Tecnonet S.p.A.("Tecnonet"), pursuant to a shares purchase agreement, dated as of August 10, 2015 (the "Purchase Agreement") with Maticmind S.p.A, a company incorporated under the laws of Italy. Tecnonet was the last business unit in our Network Integration segment. On February 19, 2016, the Company received a payment of
€4.3 million
(approximately
$4.8 million
) representing the post-closing purchase price adjustment pursuant to the Purchase Agreement.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of MRV and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
The condensed consolidated unaudited financial statements included herein have been prepared by MRV pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The
December 31, 2016
Condensed Consolidated Balance Sheet was derived from the audited financial statements, but does not include all disclosures required by generally accepted in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The information included in this Quarterly Report on Form 10-Q for the quarter ended
June 30, 2017
, (this “Form 10-Q”) should be read in conjunction with the Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
, (the “
2016
Form 10-K”) filed with the SEC.
In the opinion of MRV's management, the unaudited interim financial information contained herein includes all normal recurring adjustments, necessary to present fairly the financial position of MRV as of
June 30, 2017
, and the results of its operations and cash flows for the
three and six months ended
June 30, 2017
and
2016
. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.
Recently Issued Accounting Standards
We consider the applicability and impact of all Accounting Standards Updates (“ASUs”). The ASUs not listed below were assessed and determined by management to be either not applicable or are expected to have minimal impact on our consolidated financial position and/or results of operations.
In May 2014, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09") and in August 2015 issued ASU No. 2015-14, which amended the effective date of the standard to annual reporting periods beginning after December 15, 2017. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. During 2016, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). Management is continuing to assess the potential impact that adopting the new revenue standards will have on its condensed consolidated financial statements and footnote disclosures. Management's current analysis indicates that the most significant effect of the new standard relates to the Company's accounting for certain fulfillment and contract acquisition costs, which will be capitalized, rather than expensed as incurred, which is the Company's current practice under the current guidance. In addition, management expects to continue recognizing product sales at a point in time and service revenue over time. While management continues its assessment of the potential effects of the new standard, management anticipates adopting the new standard on a modified retrospective basis effective January 1, 2018.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory" (“ASU 2015-11”). ASU 2015-11 simplifies the guidance on the subsequent measurement of inventory, excluding inventory measured using the last-in, first out (LIFO), or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value, and defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in ASU 2015-11 became effective in the first quarter of 2017. The Company adopted this standard on January 1, 2017, and the new standard did not have a material impact on its condensed consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). The amendments in ASU 2015-17 simplify the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as non-current. The amendments in ASU 2015-17 became effective in the first quarter of 2017. The Company adopted this standard on January 1, 2017, and the new standard did not have a material impact on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). The amendments in ASU 2016-02 require companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations generated by contracts longer than a year. ASU 2016-02 will become effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance is required to be applied using the modified retrospective transition approach. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-02 will have on its condensed consolidated financial statements and footnote disclosures.
In March 2016, the FASB issued ASU No. 2016-09, "Stock Compensation (Topic 718): Improvements to employee Share-Based Payment Accounting" ("ASU 2016-09"). The amendments in ASU 2016-09 simplify the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in ASU 2016-09 became effective in the first quarter of 2017. Upon adoption of ASU 2016-09 on January 1, 2017, the Company recognized approximately
$57,000
in share-based compensation charges that had not been previously recognized for forfeitures based on the expected forfeitures method. This additional share-based compensation cost was recorded through a cumulative-effect adjustment to beginning accumulated deficit on January 1, 2017. Management determined that none of the other provisions of ASU 2016-09 will have a material impact on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). The amendments in ASU 2016-15 adjust how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable, the Company would be required to apply the amendments prospectively as of the earliest date possible. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-15 will have on its condensed consolidated financial statements and footnote disclosures.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash — a consensus of the FASB Emerging Issues Task Force" (“ASU 2016-18”). The purpose of ASU 2016-18 is to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. Specifically, ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2016-18 should be applied using a retrospective transition method to each period presented. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-18 will have on its condensed consolidated financial statements and footnote disclosures.
In May 2017, the FASB issued ASU 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The amendments in ASU 2017-09 require modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. ASU 2017-09 is effective on a prospective basis beginning on January 1, 2018. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2017-09 will have on its condensed consolidated financial statements and footnote disclosures.
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2.
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Cash and Cash Equivalents and Restricted Cash and Time Deposits
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MRV accounts for highly liquid investments with an original maturity of
90 days
or less as cash equivalents. Investments with original maturities at the date of purchase greater than
90 days
and remaining time to maturity of one year or less as short-term and are included in restricted time deposits. MRV maintains cash balances and investments in qualified financial institutions, and at various times such amounts are in excess of federally insured limits. As of
June 30, 2017
and
December 31, 2016
, the Company's U.S. entities held
$18.0 million
and
$19.2 million
in cash and cash equivalents. The remaining
$6.3 million
and
$5.9 million
as of
June 30, 2017
and
December 31, 2016
, respectively, was held by the Company's foreign subsidiaries in foreign bank deposit accounts.
Restricted time deposits represent investments that are restricted as to withdrawal or use and from time to time may include certificates of deposit. The investments in and releases of restricted time deposits are included in investing activities on the Company's Condensed Consolidated Statements of Cash Flows. As of
June 30, 2017
and
December 31, 2016
, the Company had
$4.9 million
and
$0.3 million
of restricted cash and time deposits, respectively, primarily comprised of insurance proceeds received by the Company from its insurer in connection with the resolution of certain indemnification claims in addition to security deposits that are restricted due to their respective agreements. The insurance proceeds will be paid upon the satisfaction of certain conditions. (See Note 13,
Indemnification Obligations
)
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3.
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Fair Value Measurement
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MRV's financial instruments, including cash and cash equivalents, restricted time deposits, accounts receivable, other receivables included in other assets and accounts payable are carried at cost, which approximates their fair value. The fair value of accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature.
The Company follows a framework for measuring fair value using a three-level hierarchy that prioritizes the use of observable inputs. The fair value hierarchy is divided into three levels based on the source of inputs as follows: Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs for similar instruments; Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Under this framework, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Management has not elected the fair value option for non-financial assets and liabilities.
MRV does not have any financial assets or liabilities that are re-measured at fair value on a recurring basis.
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality financial institutions, accounts receivable due from customers and other receivables.
Management evaluates the collectability of accounts receivable based on a combination of factors. If management becomes aware of a customer's inability to meet its financial obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount that management reasonably believes to be collectable from the customer. If the financial conditions of MRV's customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future. Accounts receivable are charged off at the point they are considered uncollectible.
The following table summarizes the changes in the allowance for doubtful accounts during the
six months ended
June 30, 2017
(in thousands):
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Balance at beginning of period
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$
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267
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Reversed to expense
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(94
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)
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Write-offs, net of amounts recovered
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22
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Balance at end of period
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$
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195
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Inventories are stated at the lower of cost or market and consist of materials, labor and overhead. Cost is computed using global standard cost, which approximates actual cost, on a first-in, first-out basis.
Inventories, net of reserves, consisted of the following (in thousands):
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June 30, 2017
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December 31, 2016
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Raw materials
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$
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3,079
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$
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2,485
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Work-in process
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219
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347
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Finished goods
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6,076
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6,825
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Total
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$
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9,374
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$
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9,657
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Intangible assets, net of amortization, consisted of intellectual property such as license agreements and totaled
$0.9 million
and
$1.1 million
as of
June 30, 2017
and
December 31, 2016
, respectively. The terms of some of these license agreements provide for use of the licensed software into perpetuity while others are definite. The Company amortizes the cost of the license agreements over the estimated useful life, which can range between
three
to
five
years. Amortization expense related to intangible assets was approximately
$172,000
and
$122,000
for the
six months ended
June 30, 2017
and
2016
, respectively. The gross carrying amount of intangible assets before amortization was
$1.6 million
with an accumulated amortization of approximately
$0.7 million
through
June 30, 2017
.
The following table illustrates the estimated future amortization expense of intangible assets as of
June 30, 2017
(in thousands):
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Year Ending December 31,
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Estimated Amortization Expense
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2017
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$
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133
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2018
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247
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2019
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247
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2020
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149
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2021
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110
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Thereafter
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7
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Total
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$
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893
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Other current assets include other accounts receivable, prepaid expenses and other assets that will be consumed or collected within a twelve month period. Other current assets as of
June 30, 2017
and
December 31, 2016
includes pre-paid expenses of
$0.6 million
and
$1.1 million
, respectively and other receivables of
$0.8 million
and
$1.3 million
, respectively.
As of
June 30, 2017
and
December 31, 2016
, MRV's product warranty liabilities recorded in accrued liabilities was
$0.6 million
. MRV accrues for warranty costs as part of cost of sales based on associated material product costs, technical support labor costs and associated overhead. The products sold are generally covered by a warranty for periods of
90
days to
three
years.
The following table summarizes the activity related to the product warranty liability during the
six months ended
June 30, 2017
(in thousands):
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Balance at beginning of the period
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$
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587
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Reversed to income
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(33
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)
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Cost of warranty claims
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(2
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)
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Balance at end of the period
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$
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552
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9.
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Other Current Liabilities
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Other current liabilities include customer pre-payments and reserves for sales returns that will be settled within a twelve month period. Other current liabilities as
June 30, 2017
also includes a liability in connection with the resolution of certain indemnification claims. The liability will be released and paid with insurance proceeds received by the Company from its insurer upon the satisfaction of certain conditions. (See Note 13,
Indemnification Obligations
)
Basic net loss per share is computed using the weighted average number of shares of common stock ("Common Stock") outstanding, including restricted shares which, although they are legally outstanding and have voting rights, are subject to vesting and are treated as Common Stock equivalents in calculating basic net loss per share. Diluted net loss per share is computed using the weighted average number of shares of Common Stock outstanding and potential dilutive shares of Common Stock from stock options and warrants outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each period using the treasury stock method.
Employee equity share options, non-vested shares and similar equity instruments granted by MRV are treated as potential shares of Common Stock outstanding in computing diluted net income per share. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service not yet recognized, and the amount of income tax benefits that would be realized and recorded in additional paid-in capital if the deduction for the award would reduce income taxes payable are assumed to be used to repurchase shares.
The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):
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Three months ended
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Six months ended
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June 30
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June 30
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2017
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2016
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2017
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2016
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Numerator:
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Net loss
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$
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(2,097
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)
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$
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(2,023
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)
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$
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(3,138
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)
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$
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(5,919
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)
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Denominator
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Basic weighted average common shares outstanding
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6,786
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7,092
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6,784
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|
|
7,042
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Effect of dilutive securities
|
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—
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|
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—
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|
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—
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|
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—
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Diluted weighted average common shares outstanding
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6,786
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|
7,092
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|
|
6,784
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|
7,042
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Net loss per common share
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Basic
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$
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(0.31
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)
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$
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(0.29
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)
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$
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(0.46
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)
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$
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(0.84
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)
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Diluted
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$
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(0.31
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)
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$
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(0.29
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)
|
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$
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(0.46
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)
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$
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(0.84
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)
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Outstanding stock options to purchase
684,772
and
460,692
shares of Common Stock were excluded from the computation of diluted loss per shares for the
three months ended
June 30, 2017
and
2016
, respectively, as they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.
Outstanding stock options to purchase
640,303
and
419,990
shares of Common Stock were excluded from the computation of diluted loss per shares for the
six months ended
June 30, 2017
and
2016
, respectively, as they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.
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11.
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Share-Based Compensation
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MRV records share-based compensation expense based on fair value at the grant date. The following table summarizes the impact on MRV's results of operations of recording share-based compensation for the
three and six months ended
June 30, 2017
and
2016
(in thousands):
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Three months ended
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Six months ended
|
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|
|
June 30,
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|
June 30,
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|
|
2017
|
|
2016
|
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2017
|
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2016
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|
Cost of goods sold
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$
|
21
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|
|
$
|
28
|
|
|
$
|
36
|
|
|
$
|
70
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Product development and engineering
|
|
39
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|
63
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|
98
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|
|
139
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Selling, general and administrative
|
|
329
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|
|
259
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|
670
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|
|
488
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Total share-based compensation expense
(1)
|
|
$
|
389
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|
$
|
350
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|
$
|
804
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|
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$
|
697
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(1)
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Income tax benefits realized from stock option exercises and similar awards were immaterial in all periods.
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During the
three and six months ended
June 30, 2017
, the Company granted
405,475
stock options with a related fair value of
$4.14
per option and
38,525
restricted shares with a related fair value
$8.90
per share. During the
three and six months ended
June 30, 2016
, the Company granted
240,039
stock options with a related fair value of
$4.86
per option and
88,869
restricted shares with a related fair value of
$10.95
per share.
No
stock options or restricted shares were granted during the
three months ended
March 31, 2017 and 2016.
As of
June 30, 2017
, the total unrecognized share-based compensation balance for unvested options, net of expected forfeitures, was
$3.6 million
and is expected to be amortized over a weighted-average period of
2.4 years
.
Valuation Assumptions
MRV uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The Black-Scholes model requires the use of subjective and complex assumptions, including the option's expected life and the underlying stock price volatility. MRV bases volatility on the Company's historical quoted prices and peer company data. The expected term of options granted is based on the simplified method, using the mid-point between the vesting term and the original contractual term. The risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.
The following weighted average assumptions were used for estimating the fair value of options granted during the
six months ended
June 30, 2017
and 2016:
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Six Months Ended June 30:
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
1.9
|
%
|
|
1.4
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%
|
|
Dividend yield
(1)
|
|
—
|
|
|
—
|
|
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Volatility
|
|
48
|
%
|
|
46
|
%
|
|
Expected life (in years)
|
|
5.8
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|
|
5.9
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|
|
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(1)
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As the Company does not pay a dividend on a regular basis, and dividends paid in the past have been special in nature, a dividend rate of zero was used.
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12.
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Geographic Information
|
Following the completion of the sale of the Tecnonet business unit on December 3, 2015, MRV now has
one
reportable segment: Network Equipment.
MRV's Network Equipment segment designs, manufactures, sells and services equipment used by commercial customers, governments, and telecommunications service providers. Network Equipment revenue primarily consists of carrier Ethernet equipment, optical transport equipment, lab automation equipment, out-of-band networking equipment, service orchestration and provisioning software, and the related service revenue and fiber optic components sold as part of system solutions.
Revenues:
The following table summarizes revenue by geographic region for the
three months ended
June 30, 2017
and
2016
(in thousands):
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Three months ended June 30:
|
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2017
|
|
% of revenue
|
|
2016
|
|
% of revenue
|
|
Revenue:
|
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|
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|
United States
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|
$
|
8,665
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|
|
44
|
%
|
|
$
|
11,916
|
|
|
55
|
%
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|
Americas (excluding U.S.)
|
|
2,245
|
|
|
11
|
%
|
|
2,665
|
|
|
12
|
%
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|
Europe
|
|
3,309
|
|
|
17
|
%
|
|
4,251
|
|
|
20
|
%
|
|
Asia Pacific
|
|
5,506
|
|
|
28
|
%
|
|
2,752
|
|
|
13
|
%
|
|
Total
|
|
$
|
19,725
|
|
|
100
|
%
|
|
$
|
21,584
|
|
|
100
|
%
|
A significant percentage of the revenues generated in the Asia Pacific region are derived from Australia and accounted for
25%
and
12%
of our consolidated revenue for the
three months ended
June 30, 2017
and
2016
, respectively. Revenues generated in Europe and the Americas (excluding U.S.) did not reflect any significant individual country concentration for the
three months ended
June 30, 2017
and
2016
.
The following table summarizes revenue by geographic region for the
six months ended
June 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30:
|
|
2017
|
|
% of revenue
|
|
2016
|
|
% of revenue
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
19,936
|
|
|
49
|
%
|
|
$
|
20,956
|
|
|
52
|
%
|
|
Americas (Excluding U.S.)
|
|
4,648
|
|
|
11
|
%
|
|
3,955
|
|
|
10
|
%
|
|
Europe
|
|
6,902
|
|
|
17
|
%
|
|
7,448
|
|
|
18
|
%
|
|
Asia Pacific
|
|
9,414
|
|
|
23
|
%
|
|
8,107
|
|
|
20
|
%
|
|
Total
|
|
$
|
40,900
|
|
|
100
|
%
|
|
$
|
40,466
|
|
|
100
|
%
|
A significant percentage of the revenues generated in the Asia Pacific region are derived from Australia and accounted for
21%
and
17%
of our consolidated revenue for the
six months ended
June 30, 2017
and
2016
, respectively. Revenues generated in Europe and the Americas (excluding U.S.) did not reflect any significant individual country concentration for the
six months ended
June 30, 2017
and
2016
.
Significant Customers:
Revenue from one customer accounted for
23%
and
11%
of our consolidated revenue for the
three months ended
June 30, 2017
and
2016
, respectively, and
20%
and
14%
of our consolidated revenue for the
six months ended
June 30, 2017
and
2016
, respectively. As of
June 30, 2017
and
December 31, 2016
, amounts due from this customer accounted for
30%
and
11%
of our consolidated gross accounts receivables, respectively.
Revenue from another customer accounted for
9%
and
14%
of our consolidated revenue for the
three months ended
June 30, 2017
and
2016
, respectively, and
11%
and
14%
of our consolidated revenue for the
six months ended
June 30, 2017
and
2016
, respectively. As of
June 30, 2017
and
December 31, 2016
, amounts due from this customer accounted for
11%
of our consolidated gross accounts receivables.
Long-lived Assets:
The following table summarizes long-lived assets, consisting of property and equipment, by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
United States
|
|
$
|
2,088
|
|
|
$
|
2,336
|
|
|
Europe
(1)
|
|
888
|
|
|
782
|
|
|
Asia Pacific
|
|
9
|
|
|
12
|
|
|
Total
|
|
$
|
2,985
|
|
|
$
|
3,130
|
|
(1) Includes Long-lived Assets of
$0.9 million
and
$0.8 million
held in Israel as June 30, 2017 and December 31, 2016, respectively.
13. Indemnification Obligations
In connection with the sale by MRV of Source Photonics, Inc. ("SPI") in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. Most of the indemnification obligations have expired; however, indemnification related to employee benefits, environmental liabilities and taxes extend until their applicable statute of limitations has run plus
90
days, and indemnification obligations are not time limited for title and ownership representations. These indemnification obligations are subject to a
$1.0 million
deductible and a
$20.0 million
cap, and we have purchased an insurance policy to protect against such obligations.
The Company has received a notice from SPI, advising the Company of a tax audit for periods including tax returns filed prior to the acquisition of SPI by the buyer. In April 2017, this matter was resolved. The liability in connection with the resolution of the indemnification claim is included in other current liabilities as
June 30, 2017
, and will be released and paid with insurance proceeds included in restricted cash received by the Company from its insurer, upon the satisfaction of certain conditions. MRV does not anticipate any further material impacts upon its business, operating results or financial condition related to this matter.
Our agreements for the sale of certain business (CES in March 2012, Alcadon and Interdata in October 2012, and Tecnonet in December 2015) include customary indemnification obligations to the respective buyers.
In connection with the sale of CES, MRV agreed to indemnify the buyer for the representations and warranties made in the sale purchase agreement and purchased an insurance policy to protect against any claims of indemnification related to the representations and warranties.
In addition, the Company has indemnification obligations to its current and former officers and directors as set forth in the Company's bylaws. We have agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we retain directors and officers insurance that reduces our exposure and enables us to recover portions of amounts paid. As a result of our insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.
Other than the liability in connection with SPI,
no
liabilities have been recorded for these indemnification agreements as of
June 30, 2017
and
December 31, 2016
.
In the normal course of business to facilitate sales of its products, MRV indemnifies other parties, including customers, lessors and parties to other transactions with us, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representation or covenants, for intellectual property infringement, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.
We cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these obligations. Over the last decade, the Company has not incurred any significant expense as a result of obligations of this type. Accordingly, the Company has not accrued any amounts for such indemnification obligations. However, there can be no assurances that expenses will not be incurred under these indemnification provisions in the future.
|
|
|
|
14.
|
Commitments and Contingencies
|
Purchase Commitments with Outsourcing Partners and Component Suppliers
We utilize several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to
150
days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of
June 30, 2017
and
December 31, 2016
, the Company had outstanding minimum future commitments for manufacturing and component purchases which totaled
$13.7 million
and
$14.2 million
, respectively.
The Company records a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of its future demand forecasts. As of
June 30, 2017
and
December 31, 2016
, the liability for these purchase commitments was
$0.6 million
and
$0.4 million
, respectively, and is included in accounts payable on the condensed consolidated balance sheets.
Litigation
We are subject to legal claims and litigation in the ordinary course of business, including but not limited to product liability, employment and intellectual property claims. The outcome of any such matters is currently not determinable. In addition, we were party to the litigation set forth below.
Nhan T. Vo, individually and on behalf of other aggrieved employees vs. MRV Communications, Inc., Superior Court of California, County of Los Angeles.
On June 27, 2013, the plaintiff in this matter filed a lawsuit against the Company alleging claims for failure to properly pay overtime or provide meal and rest breaks to its non-exempt employees in California, among other things. The complaint seeks an unspecified amount of damages and penalties under provisions of the Labor Code, including the Labor Code Private Attorneys General Act. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. Management believes it has accrued adequate reserves for this matter and does not expect the matter to have a material adverse effect on its business or financial condition. However, depending on the actual outcome of this case, further provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.
In April 2017, MRV received a complaint from Nestor Hilsenrat, a former employee, and a request for a labor board hearing. Mr. Hilsenrat, who had been working in Argentina as the Company's Regional Sales Director for Caribbean and Latin America prior to being terminated as part of a reduction in force, claims that MRV improperly calculated severance payouts related to his termination. Mr. Hilsenrat alleges that MRV owes additional severance along with penalties and interest totaling approximately
$2.9 million
. Management believes that these allegations are without merit and therefore has not accrued any provisions as of June 30, 2017. However, depending on the actual outcome of the prcoeedings, provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.
Kachelmyer v. MRV Communications, Inc., et al.
On July 21, 2017, a putative securities class action complaint (the “Kachelmyer Complaint”) for an action captioned Kachelmyer v. MRV Communications, Inc., et al. was filed in the Superior Court of California, Los Angeles County. The complaint names as defendants the members of the MRV Board of Directors, as well as MRV. The complaint purports to be brought individually and on behalf of similarly situated public shareholders of MRV and alleges, among other things, that the members of the MRV Board of Directors breached their fiduciary duties to the stockholders of MRV by approving the Merger Agreement and the transactions contemplated therein (the “Transactions”) on terms and conditions alleged to be materially unfair to MRV’s stockholders, and by issuing allegedly materially incomplete and misleading disclosures in connection therewith in the Schedule 14D-9. For descriptions of the Merger Agreement, the Transactions, and the Schedule 14D-9, see Note 17,
Subsequent Events.
The complaint seeks, among other things, (i) injunctive relief, including enjoining the MRV Board of Directors, and anyone acting in concert with them, from consummating the Transactions, (ii) certification of the action as a class action, (iii) in the event the Transactions are consummated, rescinding the Transactions or awarding damages to MRV’s stockholders, (iv) an award of attorneys’ fees and other fees and costs and (v) such other further relief as the court deems just and proper. A preliminary injunction could delay or jeopardize the completion of the Transactions, and permanent injunctive relief could indefinitely enjoin completion of the Transactions. MRV believes that the claims stated in the Kachelmyer Complaint have no merit; however, the outcome of this matter is uncertain.
Allia v. MRV Communications, Inc. et al.
On July 24, 2017, a putative securities class action complaint (the “Allia Complaint”) for an action captioned Allia v. MRV Communications, Inc., et al. was filed in the United States District Court for the Central District of California by Peter Allia, a purported owner of Shares, on behalf of himself and all other public stockholders of MRV, against MRV and the members of the MRV Board of Directors in connection with the pending Offer, the Merger and the other transactions contemplated by the Merger Agreement. The Allia Complaint claims that, among other things, the members of the MRV Board of Directors breached their fiduciary duties to the stockholders of MRV by approving the Merger Agreement and the transactions contemplated thereby on terms and conditions alleged to be materially unfair to MRV’s stockholders and by allegedly omitting and misrepresenting material information on MRV’s Schedule 14D-9 in connection therewith, with such material information alleged to include, among other things, MRV’s financial projections and sales process and certain financial analyses performed by Cowen in connection with the pending Offer, the Merger and the other transactions contemplated by the Merger Agreement. The Allia Complaint further alleges that MRV and the members of the MRV Board of Directors violated Section 14(e) and 20(a) of the Exchange Act by issuing the Schedule 14D-9 with such alleged omissions and misrepresentations of material information as described in the immediately preceding sentence. The Allia Complaint seeks various remedies, including, among other things, (i) certification of the action as a class action, (ii) enjoining the pending Offer and the Merger, (iii) in the event the Offer and the Merger are consummated, rescinding them and setting them aside or awarding rescissory damages, (iv) declaring the Merger Agreement unlawful and unenforceable, (v) awarding damages to the plaintiff and the public stockholders of MRV, (vi) awarding the plaintiff fees and expenses (including reasonable attorneys’ and experts’ fees and expenses) incurred by the plaintiff in connection with the litigation and (vii) granting such other and further relief as the court may deem just and proper. A preliminary injunction could delay or jeopardize the completion of the Transactions, and permanent injunctive relief could indefinitely enjoin completion of the Transactions. MRV believes that the claims stated in the Allia Complaint have no merit; however, the outcome of this matter is uncertain.
Chelvaratnam v. Ken Traub, et al.
On July 25, 2017, a putative class action complaint (the “Chelvaratnam Complaint”) for an action captioned
Chelvaratnam v. Ken Traub, et al.,
was filed in the Superior Court of the State of California for the County of Los Angeles by Ravindran Chelvaratnam, a purported owner of Shares, on behalf of himself and all other public stockholders of MRV, against the members of the MRV Board of Directors in connection with the pending Offer and the Merger. The Chelvaratnam Complaint claims that, among other things, the members of the MRV Board of Directors breached their fiduciary duties to the stockholders of MRV by approving the Merger Agreement and the Transactions on terms and conditions and through processes alleged to be materially unfair to MRV’s stockholders, and by issuing allegedly materially incomplete and misleading disclosures in connection therewith in the Schedule 14D-9. The Chelvaratnam Complaint seeks various remedies, including, among other things, (i) certification of the action as a class action; (ii) preliminarily and permanently enjoining the Merger from being consummated, (iii) to the extent already implemented, rescinding the Merger Agreement or any of the terms thereof, or granting the plaintiff and MRV’s public stockholders rescissory damages, (iv) directing the defendants to account to the plaintiff and the public stockholders of MRV for all damages allegedly suffered, (v) awarding the plaintiff fees and expenses (including reasonable attorneys’ and experts’ fees and expenses) incurred by the plaintiff in connection with the action and (vi) granting such other and further relief as the court may deem just and proper. A preliminary injunction could delay or jeopardize the completion of the Offer or the Merger, and permanent injunctive relief could indefinitely enjoin completion of the Offer or the Merger. MRV believes that the claims stated in the Chelvaratnam Complaint have no merit; however, the outcome of this matter is uncertain.
Scarantino v. MRV Communications, Inc.
On July 25, 2017, a putative securities class action complaint (the “Scarantino Complaint”) for an action captioned Scarantino v. MRV Communications, Inc., et al. was filed in the United States District Court for the Central District of California by Louis Scarantino, a purported owner of Shares, on behalf of himself and all other public stockholders of MRV, against MRV and the members of the MRV Board of Directors in connection with the pending Offer and the Merger. The Scarantino Complaint claims that, among other things, MRV and the members of the MRV Board of Directors violated Sections 14(e), 14(d) and 20(a) of the Exchange Act, as applicable, by allegedly misrepresenting and omitting material information on the Schedule 14D-9 in connection with the pending Offer, the Merger and the Transactions. The Scarantino Complaint seeks various remedies, including, among other things, (i) enjoining the Merger from being consummated, (ii) in the event the Merger is consummated, rescinding it and setting it aside or awarding rescissory damages, (iii) awarding the plaintiff fees and expenses (including reasonable attorneys’ and experts’ fees and expenses) incurred by the plaintiff in connection with the action and (iv) granting such other and further relief as the court may deem just and proper. A preliminary injunction could delay or jeopardize the completion of the Offer or the Merger, and permanent injunctive relief could indefinitely enjoin completion of the Offer or the Merger. MRV believes that the claims stated in the Scarantino Complaint have no merit; however, the outcome of this matter is uncertain.
Trottier v. MRV Communications, Inc., et al.
On July 27, 2017, a putative securities class action complaint (the “
Trottier Complaint
”) for an action captioned
Trottier v. MRV Communications, Inc., et al.
, Case No. 2:17-cv-05581, was filed in the United States District Court for the Central District of California by Mark Trottier, a purported owner of Shares, on behalf of himself and all other public stockholders of MRV, against MRV and the members of the MRV Board of Directors in connection with the pending Offer and the Merger. The Trottier Complaint claims that, among other things, MRV and the members of the MRV Board of Directors violated Sections 14(e), 14(d)(4) and 20(a) of the Exchange Act and Rule 14a-9 under the Exchange Act (17 C.F.R. § 240.14a-9), as applicable, by allegedly making untrue statements of material fact and allegedly omitting certain material facts relating to the pending Offer, the Merger and the other transactions contemplated by the Merger Agreement on the Schedule 14D-9. The Trottier Complaint seeks various remedies, including, among other things, (i) certification of the action as a class action, (ii) preliminarily and permanently enjoining the Offer and the Merger from being consummated, (iii) in the event the Offer and the Merger are consummated, rescinding them and setting them aside or awarding rescissory damages, (iv) awarding the plaintiff costs (including reasonable attorneys’ and experts’ fees and expenses) incurred by the plaintiff in connection with the action and (v) granting such further relief as the court deems just and proper. A preliminary injunction could delay or jeopardize the completion of the Offer or the Merger, and permanent injunctive relief could indefinitely enjoin completion of the Offer or the Merger. MRV believes that the claims in the Trottier Complaint have no merit; however, the outcome of this matter is uncertain.
From time to time, MRV receives notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. Management does not believe that any of these matters will result in a material adverse outcome.
MRV and its subsidiaries have from time to time been named as a defendant in other lawsuits involving matters that management considers routine to the nature of its business. Management is of the opinion that the ultimate resolution of such outstanding matters will not have a material adverse effect on our business, operating results and financial condition.
Cost Saving Measures and Asset Impairments
During the second half of 2016, the Company initiated cost saving measures intended to optimize its cost structure. These cost saving measures included consolidating facilities in Chatsworth, California which amounted to approximately
$0.2 million
, in addition to reductions in workforce which included one-time termination benefits of approximately
$1.6 million
. The costs of implementation were reported under cost of net revenues and operating expenses in the Consolidated Statements of Operations. Substantially all cash outlays in connection with these measures occurred in the third and fourth quarter of 2016.
As of
June 30, 2017
, activities related to these measures were substantially complete.
The changes in reserves associated with these measures for 2016 consisted of the following and are included in accrued liabilities on the accompanying Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other employee related costs
|
|
Facility Closures and Asset impairments
|
|
Balance at January 1, 2017
|
|
$
|
643
|
|
|
$
|
103
|
|
|
Cash payments made
|
|
(563
|
)
|
|
(26
|
)
|
|
Balance at June 30, 2017
|
|
$
|
80
|
|
|
$
|
77
|
|
15. Share Repurchase
On March 15, 2016, the Company's Board of Directors approved a repurchase of shares of the Company's Common Stock in an amount up to
$10.0 million
under a stock repurchase program scheduled to expire on March 10, 2017. On November 2, 2016, the Company's Board of Directors approved the termination of the Company's stock repurchase program. During the year ended
December 31, 2016
, the Company repurchased a total of
264,058
shares at a total cost of approximately
$2.7 million
, excluding commissions, under this stock repurchase program, leaving remaining authority to repurchase shares up to an additional
$7.3 million
, excluding commissions, under this stock repurchase program prior to its termination.
16. Income Taxes
The following table provides details of income taxes for the
three and six months ended
June 30, 2017
and
2016
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Loss before provision for income taxes
|
|
$
|
(2,063
|
)
|
|
$
|
(1,987
|
)
|
|
$
|
(3,058
|
)
|
|
$
|
(5,822
|
)
|
|
Provision for income taxes
|
|
34
|
|
|
36
|
|
|
80
|
|
|
97
|
|
|
Effective tax rate
|
|
(2
|
)%
|
|
(2
|
)%
|
|
(3
|
)%
|
|
(2
|
)%
|
The effective tax rate fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax. The income tax expense is primarily due to state minimum income taxes that do not benefit from our state net operating loss carryforwards and to income tax in foreign jurisdictions without net operating loss carryforwards.
As of
December 31, 2016
, MRV had federal, state and foreign net operating loss ("NOL") carryforwards available of
$183.3 million
,
$112.0 million
and
$100.8 million
, respectively. For federal and state income tax purposes, the NOLs are available to offset future taxable income, begin expiring in 2017 and are available through 2036. Certain foreign NOL carryforwards and tax credits are available indefinitely. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than
50%
change in its equity ownership by value over a
three
-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carryforwards existing at that time could be limited. As of
June 30, 2017
, the federal, state and foreign NOLs had a full valuation allowance.
On January 26, 2016, the Company's Board of Directors approved the adoption of a "Rights Plan" in an effort to protect the Company from potential adverse consequences arising under the Internal Revenue Code, such adverse consequences including a significant reduction in the annual utilization of the Company’s net operating loss carryforwards and built-in losses and the impairment or loss of the NOLs and built-in losses prior to their use. On July 2, 2017, the Company entered into an amendment to the Rights Agreement. (See Note 17,
Subsequent Events
)
17. Subsequent Events
Tender Offer for MRV Common Stock by ADVA and Merger
On July 2, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ADVA NA Holdings, Inc. (“Parent”), and Golden Acquisition Corporation, a wholly-owned Subsidiary of Parent (“Merger Sub”).Concurrently with entering into the Merger Agreement, ADVA Optical Networking SE (“ADVA SE”), the German parent company of Parent, is guarantying for the benefit of the Company the payment obligations of Parent and Merger Sub under the Merger Agreement.
The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would commence a tender offer (the “Offer”) to acquire all of the issued and outstanding shares of the Company’s Common Stock, including all associated rights under the Rights Agreement, at a price per share of Common Stock of
$10.00
(the “Offer Price”). Following completion of the Offer, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Parent. The Merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the Merger. At the effective time of the Merger, each share of the Company’s Common Stock that has not been tendered and accepted for payment in the Offer (other than (a) shares that are held by the Company as treasury stock or owned by ADVA SE, Merger Sub, Parent or any subsidiary of the Company; and (b) shares held by stockholders who are entitled to, who demand appraisal of their shares and who otherwise validly exercise their appraisal rights under the Delaware General Corporation Law with respect to such shares and do not withdraw their demand or lose their right to appraisal) will be canceled and converted into the right to receive an amount in cash equal to the Offer Price, without interest and less any applicable taxes required to be withheld.
A Tender Offer Statement on Schedule TO was filed with the SEC on July 17, 2017 by Merger Sub, Parent, and ADVA SE. On the same date, MRV filed a Solicitation/Recommendation Statement on Schedule 14D-9 (as amended or supplemented from time to time, the “Schedule 14D-9”). As of the date of the filing of this Form 10-Q, the Offer remains open.
Rights Plan Amendment
In connection with the Offer and the Merger, the Company has entered into an amendment to the Rights Agreement (the “Rights Agreement Amendment”). The Rights Agreement Amendment provides that the Rights Agreement will not apply to the Offer, the Merger or any of the other transactions or agreements contemplated by the Merger Agreement.
Commitments
In the event of a change in control, the Company has an obligation to all its existing equity plan participants participating in the 2015 Long-Term Incentive Plan and 2007 Omnibus plan, whereby all outstanding equity awards will be deemed to be fully vested and will be canceled in exchange for the transaction value of
$10.00
per share of Common Stock. The Company will be required to accelerate all outstanding stock options and restricted stock awards as of the date of the change in control and recognize an expense of approximately
$3.7 million
in non-cash share-based compensation expense.
In addition, the Company has certain obligations to its named executive officers and senior management. The Company will be required to record an expense
$0.7 million
related to these potential obligations, should the change in control occur.