Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
1.
|
Organization and Summary of significant accounting policies
|
Organization and nature of operations
MRV Communications, Inc. ("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’s technologies, platforms and expertise enable our customers to overcome the challenge of orchestrating the ever-increasing need for capacity while improving service delivery and lowering network costs for critical applications such as high-capacity business services, mobile backhaul and data center connectivity. 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 includes 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 year-end condensed consolidated balance sheet was derived from 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
September 30, 2016
, (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, 2015
, (the “
2015
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
September 30, 2016
, and the results of its operations and comprehensive loss, and cash flows for the
three and nine months ended
September 30, 2016
and
2015
. 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.
Reclassification
Prior Period Reclassifications.
On December 3, 2015, the Company completed the sale of Tecnonet. The results of operations for Tecnonet have been reclassified and presented as discontinued operations in this Form 10-Q for all periods presented. Cash flows from discontinued operations are presented separately from the cash flows from continuing operations in the accompanying Statement of Cash Flows. (See Note 15, Discontinued Operations)
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"). 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. ASU 2014-09 was originally effective for interim and annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date to annual reporting periods beginning after December 15, 2017. Early application is permitted after December 15, 2016. Management is currently evaluating the potential impact that adopting ASU 2014-09 will have on its condensed consolidated financial statements and footnote disclosures. Management anticipates concluding its evaluation by March 31, 2017 and plans to adopt ASU 2014-09 on January 1, 2018.
In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" ("ASU 2014-15"). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 will become effective for the Company for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2014-15 will have on its condensed consolidated financial statements and footnote disclosures.
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. ASU 2015-11 will become effective for the Company for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2015-11 will have on its condensed consolidated financial statements and footnote disclosures.
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. ASU 2015-17 will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2015-17 will have on its condensed consolidated financial statements and footnote disclosures.
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. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations. ASU 2016-08 will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently evaluating the potential impact that adopting ASU 2016-08 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. ASU 2016-09 will become effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-09 will have on its condensed consolidated financial statements and footnote disclosures and plans to adopt ASU 2016-09 on January 1, 2017.
In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The amendments in ASU 2016-10 provide more detailed guidance in the following key areas: identifying performance obligations and licenses of intellectual property. ASU 2016-10 will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently evaluating the potential impact that adopting ASU 2016-10 will have on its condensed consolidated financial statements and footnote disclosures.
In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 660): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The amendments in ASU 2016-12 clarify certain narrow aspects of Topic 660 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition, and technical correction. ASU 2016-12 will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently evaluating the potential impact that adopting ASU 2016-12 will have on its condensed consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No. 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 reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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.
|
|
2.
|
Cash and Cash Equivalents and Restricted Time Deposits
|
MRV accounts for highly liquid investments with an original maturity of
90 days
or less as cash equivalents. Investments with maturities of less than one year are considered short-term and are included on the balance sheet 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
September 30, 2016
and
December 31, 2015
, the Company's U.S. entities held
$15.8 million
and
$21.6 million
in cash and cash equivalents. The remaining
$5.1 million
and
$4.6 million
, respectively, were 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 because the funds are invested in certificates of deposit. As of
September 30, 2016
and
December 31, 2015
, the Company held
$5.3 million
and
$5.2 million
of restricted time deposits, respectively;
$5.0 million
of which represents a certificate of deposit with a highly rated financial institution and matures in December 2016. The remaining
$0.3 million
and
$0.2 million
of restricted time deposits held as of
September 30, 2016
and
December 31, 2015
, respectively, represent security deposits that are restricted due to their respective agreements.
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3.
|
Fair Value Measurement
|
MRV's financial instruments, including cash and cash equivalents, restricted time deposits, accounts receivable, other receivables and accounts payable are carried at cost, which approximates their fair value. The fair values of accounts receivable, other receivables 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.
As of
September 30, 2016
and
December 31, 2015
, the Company had cash equivalents consisting of money market funds of
$0
and
$1.8 million
, respectively that were classified as Level 1 investments and were quoted at market price. Cash equivalents included in the condensed consolidated balance sheets are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
Cost
|
|
Fair Value
|
September 30, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2015
|
|
$
|
1,807
|
|
|
$
|
1,807
|
|
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 and accounts receivable due from customers.
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
nine months ended
September 30, 2016
(in thousands):
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,060
|
|
(Reversed) to expense
|
|
(25
|
)
|
Write-offs, net of amounts recovered
|
|
(100
|
)
|
Foreign currency translation adjustment
|
|
10
|
|
Balance at end of period
|
|
$
|
945
|
|
Inventories are stated at the lower of cost or market and consist of materials, labor and overhead. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis.
Inventories, net of reserves, consisted of the following at
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials
|
|
$
|
2,928
|
|
|
$
|
3,132
|
|
Work-in process
|
|
911
|
|
|
839
|
|
Finished goods
|
|
6,346
|
|
|
6,255
|
|
Total
|
|
$
|
10,185
|
|
|
$
|
10,226
|
|
Intangible assets, net of amortization, consisted of intellectual property such as license agreements and totaled
$1.1 million
and
$1.2 million
as of
September 30, 2016
and
December 31, 2015
, 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
$183,000
and
$150,000
for the
nine months ended
September 30, 2016
and
2015
, respectively. As of
September 30, 2016
, intangible assets not yet placed into service totaled approximately
$0.5 million
.
The following table illustrates the estimated future amortization expense of intangible assets as of
September 30, 2016
(in thousands):
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|
|
|
|
|
Fiscal Year Ending December 31,
|
|
Estimated Amortization Expense
|
2016 - remainder of the year
|
|
$
|
82
|
|
2017
|
|
295
|
|
2018
|
|
234
|
|
2019
|
|
234
|
|
2020
|
|
136
|
|
Thereafter
|
|
86
|
|
Total
|
|
$
|
1,067
|
|
As of
September 30, 2016
, and
December 31, 2015
, MRV's product warranty liabilities recorded in accrued liabilities were
$0.5 million
and
$0.6 million
, respectively. 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
nine months ended
September 30, 2016
(in thousands):
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
593
|
|
Cost of warranty claims
|
|
(73
|
)
|
Accruals for product warranties
|
|
29
|
|
Balance at end of the period
|
|
$
|
549
|
|
|
|
8.
|
Net Income (Loss) Per Share
|
Basic net income (loss) per share is computed using the weighted average number of shares of 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 income (loss) per share. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and dilutive potential 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 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 income (loss) per common share – basic and diluted (in thousands, except per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30
|
|
September 30
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,113
|
)
|
|
$
|
886
|
|
|
$
|
(9,032
|
)
|
|
$
|
(463
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
6,868
|
|
|
6,978
|
|
|
6,912
|
|
|
7,032
|
|
Effect of dilutive securities
|
|
—
|
|
|
36
|
|
|
—
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
6,868
|
|
|
7,014
|
|
|
6,912
|
|
|
7,032
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.45
|
)
|
|
$
|
0.13
|
|
|
$
|
(1.31
|
)
|
|
$
|
(0.07
|
)
|
Diluted
|
|
$
|
(0.45
|
)
|
|
$
|
0.13
|
|
|
$
|
(1.31
|
)
|
|
$
|
(0.07
|
)
|
Outstanding stock options to purchase
414,174
and
290,974
shares of common stock were excluded from the computation of dilutive income (loss) per shares for the
three months ended
September 30, 2016
and
2015
, respectively, as they were anti-dilutive. Outstanding stock options to purchase
436,037
and
407,480
shares of common stock were excluded from the computation of dilutive loss per shares for the
nine months ended
September 30, 2016
and
2015
, respectively, as they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.
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9.
|
Share-Based Compensation
|
MRV records share-based compensation expense at fair value. The following table summarizes the impact on MRV's results of operations of recording share-based compensation for the
three and nine months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of goods sold
|
|
$
|
39
|
|
|
$
|
35
|
|
|
$
|
109
|
|
|
$
|
90
|
|
Product development and engineering
|
|
24
|
|
|
68
|
|
|
163
|
|
|
161
|
|
Selling, general and administrative
|
|
346
|
|
|
213
|
|
|
834
|
|
|
507
|
|
Total share-based compensation expense
(1)
|
|
$
|
409
|
|
|
$
|
316
|
|
|
$
|
1,106
|
|
|
$
|
758
|
|
|
|
(1)
|
Income tax benefits realized from stock option exercises and similar awards were immaterial in all periods.
|
No stock options or restricted shares were granted during the
three months ended
September 30, 2016
. During the
nine months ended
September 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
$10.95
per share.
During the
three months ended
September 30, 2015
, the Company granted
31,000
stock options with a related fair value of
$5.28
per option and
11,000
restricted shares with a related fair value of
$12.12
per share. During the
nine months ended
September 30, 2015
, the Company granted
228,848
stock options with a related fair value of
$4.31
per option and
82,872
restricted shares with a related fair value of
$9.96
per share.
As of
September 30, 2016
, the total unrecognized share-based compensation balance for unvested options, net of expected forfeitures, was
$2.4 million
and is expected to be amortized over a weighted-average period of
2.0 years
.
Valuation Assumptions
MRV uses the Black-Scholes option pricing model to estimate the fair value of stock option awards or related modifications. 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.
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|
|
|
|
|
Nine months ended September 30,
|
2016
|
2015
|
Risk-free interest rate
|
1.4
|
%
|
1.7
|
%
|
Dividend yield
(1)
|
—
|
|
—
|
|
Volatility
|
46
|
%
|
43
|
%
|
Expected life (in years)
|
5.9
|
|
6.0
|
|
|
|
(1)
|
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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|
10.
|
Geographic Information
|
Following the completion of the sale of the Tecnonet business unit on December 3, 2015, MRV now has only
one
reportable segment: Network Equipment.
The 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.
Revenues:
The following table summarizes external revenue by geographic region for the
three months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30:
|
|
2016
|
|
% of revenue
|
|
2015
|
|
% of revenue
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,207
|
|
|
49
|
%
|
|
$
|
10,369
|
|
|
45
|
%
|
Americas (Excluding U.S.)
|
|
1,878
|
|
|
10
|
%
|
|
1,297
|
|
|
6
|
%
|
Europe
|
|
3,125
|
|
|
16
|
%
|
|
5,202
|
|
|
23
|
%
|
Asia Pacific
|
|
4,737
|
|
|
25
|
%
|
|
6,065
|
|
|
26
|
%
|
Total
|
|
$
|
18,947
|
|
|
100
|
%
|
|
$
|
22,933
|
|
|
100
|
%
|
A significant percentage of the revenues generated in the Asia Pacific region are derived from Australia and accounted for
22%
and
25%
of our consolidated revenue for the
three months ended
September 30, 2016
and
2015
, respectively. Revenues generated in Europe and the Americas (excluding U.S.) did not reflect any significant individual country concentration for the three months ended
September 30, 2016
and
2015
.
The following table summarizes external revenue by geographic region for the
nine months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30:
|
|
2016
|
|
% of revenue
|
|
2015
|
|
% of revenue
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
30,164
|
|
|
51
|
%
|
|
$
|
34,233
|
|
|
49
|
%
|
Americas (Excluding the U.S.)
|
|
5,833
|
|
|
10
|
%
|
|
5,917
|
|
|
9
|
%
|
Europe
|
|
10,573
|
|
|
18
|
%
|
|
14,731
|
|
|
21
|
%
|
Asia Pacific
|
|
12,843
|
|
|
21
|
%
|
|
14,756
|
|
|
21
|
%
|
Total
|
|
$
|
59,413
|
|
|
100
|
%
|
|
$
|
69,637
|
|
|
100
|
%
|
A significant percentage of the revenues generated in the Asia Pacific region are derived from Australia and accounted for
20%
and
19%
of our consolidated revenue for the
nine months ended
September 30, 2016
and
2015
, respectively. Revenues generated in Europe and the Americas(excluding U.S.) did not reflect any significant individual country concentration for the
nine months ended
September 30, 2016
and
2015
.
Significant Customers:
Revenue from one customer accounted for
21%
and
25%
of our consolidated revenue for the
three months ended
September 30, 2016
and
2015
, respectively, and
16%
and
19%
of our consolidated revenue for the
nine months ended
September 30, 2016
, and
2015
, respectively. As of
September 30, 2016
and
December 31, 2015
, amounts due from this customer accounted for
17%
and
15%
of our consolidated gross accounts receivables, respectively.
Revenue from another customer accounted for
11%
and
13%
of our consolidated revenue for the
three months ended
September 30, 2016
and
2015
, respectively, and
13%
of our consolidated revenue for the
nine months ended
September 30, 2016
, and
2015
. As of
September 30, 2016
and
December 31, 2015
, amounts due from this customer accounted for
14%
and
5%
of our consolidated gross accounts receivables, respectively.
Long-lived Assets:
The following table summarizes long-lived assets, consisting of property and equipment, by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Americas
|
|
$
|
2,331
|
|
|
$
|
2,808
|
|
Europe
|
|
950
|
|
|
1,223
|
|
Asia Pacific
|
|
14
|
|
|
19
|
|
Total
|
|
$
|
3,295
|
|
|
$
|
4,050
|
|
11. 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 any indemnification obligations related to intellectual property extend until the third anniversary of the closing, while 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. MRV believes that it has meritorious defenses to the extent a formal indemnification claim is asserted and has submitted the potential claim to its insurer. MRV intends to vigorously contest any claim; however, no formal legal proceeding has been commenced, and MRV can provide no assurance that such claim would not have a material adverse effect on its business, operating results or financial condition.
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 running 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 and purchase agreement and purchased an insurance policy to protect against any claims of indemnification related to the representations and warranties.
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.
In addition, the Company has indemnification obligations to its current and certain former officers, directors, employees and agents, as set forth in the Company's bylaws.
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 that were not otherwise covered by our insurance policies. 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.
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. Accordingly,
no
liabilities have been recorded for these agreements as of
September 30, 2016
and
December 31, 2015
.
|
|
12.
|
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
September 30, 2016
and
December 31, 2015
, the Company had outstanding minimum future commitments for manufacturing and component purchases which totaled
$13.6 million
and
$11.9 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
September 30, 2016
and
December 31, 2015
, the liability for these purchase commitments was
$0.4 million
and
$0.2 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. the Company, 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 connection with the sale by MRV of SPI in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. 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. Management believes that it has meritorious defenses to the extent a formal indemnification claim is asserted and has submitted the potential claim to its insurer. MRV intends to vigorously contest any claim; however, no formal legal proceeding has been commenced, and MRV can provide no assurance that such claim would not have a material adverse effect on its business, operating results or financial condition.
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.
13. 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 that expires on March 10, 2017. Through
September 30, 2016
, the Company repurchased
232,284
shares at a total cost of approximately
$2.4 million
, excluding commissions, under this stock repurchase program. As of
September 30, 2016
, the Company had remaining authority to repurchase shares up to an additional
$7.6 million
, excluding commissions, under this stock repurchase program prior to its expiration. Through November 2, 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 expiration. On November 2, 2016, the Company's Board of Directors approved the termination of the Company's stock repurchase program. (See Note 16, Subsequent Events)
14. Income Taxes
The following table provides details of income taxes for the
three and nine months ended
September 30, 2016
and
2015
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income (loss) before provision (benefit) for income taxes
|
|
$
|
(3,082
|
)
|
|
$
|
109
|
|
|
$
|
(8,904
|
)
|
|
$
|
(2,189
|
)
|
Provision (benefit) for income taxes
|
|
31
|
|
|
(39
|
)
|
|
128
|
|
|
88
|
|
Effective tax rate
|
|
(1
|
)%
|
|
(36
|
)%
|
|
(1
|
)%
|
|
(4
|
)%
|
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, 2015
, MRV had federal, state and foreign net operating loss ("NOL") carryforwards available of
$169.3 million
,
$102.2 million
and
$98.5 million
, respectively. 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
September 30, 2016
, the deferred tax assets related our federal, state and foreign NOLs had a full valuation allowance.
NOL Rights Plan
On January 26, 2016, in an effort to protect the Company from potential adverse consequences arising from an ownership change under the Internal Revenue Code, including a significant reduction in the annual utilization of the Company’s net operating loss carryforwards, built-in losses and the impairment or loss of the NOLs and built-in losses prior to their use, the Company's Board of Directors approved the adoption of the Rights Agreement with American Stock Transfer & Trust Company, LLC, ("Rights Plan"). Pursuant to the Rights Plan, the Company declared a dividend distribution of one preferred stock purchase right (each a “Right” and collectively, the "Rights") for each outstanding share of the Company’s common stock to stockholders of record as of the close of business on February 10, 2016 (the Record Date"). Except in certain circumstances set forth in the Rights Plan, each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock,
$0.01
par value, of the Company (“Preferred Stock”) at a price of
$68.64
, subject to adjustment. The NOL Rights Plan was ratified by the Company's stockholders on June 15, 2016, at the Company's annual meeting of stockholders.
The Rights initially trade together with the common stock and are not exercisable. Subject to certain exceptions specified in the Rights Plan, the Rights will separate from the common stock and become exercisable following the earlier to of (i) the tenth calendar day after a public announcement or filing that a person or group has become an “Acquiring Person,” which is defined as a person who has acquired, or obtained the right to acquire, beneficial ownership of
4.99%
or more of the common stock then outstanding, subject to certain exceptions, or (ii) the tenth calendar day (or such later date as may be determined by the Board of Directors) after any person or group commences a tender or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. If a person or group becomes an Acquiring Person, each Right will entitle its holders (other than such Acquiring Person) to purchase one share at a price of
$68.64
, subject to adjustment. At any time after a person becomes an Acquiring Person, the Board of Directors may exchange all or part of the outstanding Rights (other than those held by an Acquiring Person) for shares of common stock at an exchange rate of
one
share of common stock for each Right. The Company will promptly give public notice of any exchange (although failure to give notice will not affect the validity of the exchange).
The Rights will expire upon certain events described in the Rights Plan, including the time at which the Rights are redeemed in accordance with the Agreement, the time at which the Rights are exchanged in accordance with the Agreement, or the time at which the Board Directors determines that the NOLs are fully utilized or no longer available under Section 382 of the Code. However, in no event will the Rights Plan expire later than the close of business on January 26, 2019. Until the close of business on the tenth calendar day after the day a public announcement or a filing is made indicating that a person or group has become an Acquiring Person, the Company may in its sole and absolute discretion amend the Rights or the Rights Plan without the approval of any holders of the Rights or shares of common stock in any manner, including without limitation, amendments that increase or decrease the purchase price or redemption price or accelerate or extend the final expiration date or the period in which the Rights may be redeemed. The Company may also amend the Rights Plan after the close of business on the tenth calendar day after the day such public announcement or filing is made to cure ambiguities, to correct defective or inconsistent provisions, to shorten or lengthen time periods under the Rights Plan or in any other manner that does not adversely affect the interests of holders of the Rights. No amendment of the Rights Plan may extend its expiration date.
15. Discontinued Operations
On December 3, 2015, the Company completed the sale of all of its shares of Tecnonet. 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. The Company included the
$4.8 million
receivable representing the post-closing purchase price adjustment on its consolidated balance sheet within other current assets as of
December 31, 2015
. Prior to its disposition, Tecnonet was the last remaining business unit in our Network Integration segment. The historical financial results of Tecnonet, prior to its sale, have been reclassified as discontinued operations for all periods presented. The Company reported net income of
$0.7 million
and
$1.8 million
from discontinued operations, net of income tax expense, for the
three and nine months ended
September 30, 2015
, respectively, related to Tecnonet.
16. Subsequent Events
On November 2, 2016, the Company's Board of Directors approved the termination of the Company's stock repurchase program.