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 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
March 31, 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
March 31, 2017
, and the results of its operations and cash flows for the
three months ended
March 31, 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. The Company’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 now be capitalized, rather than expensed as incurred, which is the Company's current practice under the current guidance. In addition, the Company expects to continue recognizing product sales at a point in time and service revenue over time. While the Company 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 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 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 2016-15 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 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
March 31, 2017
and
December 31, 2016
, the Company's U.S. entities held
$16.8 million
and
$19.2 million
in cash and cash equivalents. The remaining
$4.6 million
as of
March 31, 2017
and
December 31, 2016
, 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
March 31, 2017
and
December 31, 2016
, the Company had
$0.3 million
of restricted time deposits, respectively, representing security deposits that are restricted due to their respective agreements.
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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 remeasured 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
three months ended
March 31, 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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(60
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)
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Write-offs, net of amounts recovered
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(29
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)
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Balance at end of period
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$
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178
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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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March 31, 2017
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December 31, 2016
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Raw materials
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$
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3,302
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|
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$
|
2,485
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Work-in process
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330
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|
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347
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Finished goods
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6,150
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6,825
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Total
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$
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9,782
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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
$1.0 million
and
$1.1 million
as of
March 31, 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
$81,000
and
$61,000
for the
three months ended
March 31, 2017
and
2016
, respectively.
The following table illustrates the estimated future amortization expense of intangible assets as of
March 31, 2017
(in thousands):
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Year Ending December 31,
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Estimated Amortization Expense
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2017
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$
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223
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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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983
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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
March 31, 2017
and
December 31, 2016
includes pre-paid expenses of
$1.1 million
and other receivables of
$1.2 million
and
$1.3 million
, respectively. Other current assets as of
March 31, 2017
, also includes insurance proceeds received by the Company subsequent to March 31, 2017, from its insurer in connection with the resolution of certain indemnification claims. These funds will be paid upon the satisfaction of certain conditions. (See Note 13,
Indemnification Obligations
)
As of
March 31, 2017
and
December 31, 2016
, MRV's product warranty liabilities recorded in accrued liabilities was
$0.6 million
. MRV accrues for warranty costs as part of cost of sales based on associated material product costs, technical support labor costs and associated overhead. The products sold are generally covered by a warranty for periods of
90
days to
three
years.
The following table summarizes the activity related to the product warranty liability during the
three months ended
March 31, 2017
(in thousands):
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Balance at beginning of the period
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$
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587
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Reversed to expense
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(14
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)
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Cost of warranty claims
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2
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Balance at end of the period
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$
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575
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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
March 31, 2017
also includes the 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 subsequent to March 31, 2017, 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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March 31
|
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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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(1,041
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)
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$
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(3,896
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)
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Denominator
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Basic weighted average common shares outstanding
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6,802
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|
|
6,981
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Effect of dilutive securities
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—
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|
|
—
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Diluted weighted average common shares outstanding
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|
6,802
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|
|
6,981
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|
|
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Net loss per common share
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Basic
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$
|
(0.15
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)
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$
|
(0.56
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)
|
Diluted
|
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$
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(0.15
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)
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$
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(0.56
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)
|
Outstanding stock options to purchase
583,806
and
386,729
shares of Common Stock were excluded from the computation of dilutive loss per shares for the
three months ended
March 31, 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 months ended
March 31, 2017
and
2016
(in thousands):
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|
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Three months ended
|
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|
March 31,
|
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2017
|
|
2016
|
Cost of goods sold
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$
|
15
|
|
|
$
|
42
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|
Product development and engineering
|
|
59
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|
|
76
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|
Selling, general and administrative
|
|
341
|
|
|
229
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|
Total share-based compensation expense
(1)
|
|
$
|
415
|
|
|
$
|
347
|
|
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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.
|
No stock options or restricted shares were granted during the
three months ended
March 31, 2017
and
2016
.
As of
March 31, 2017
, the total unrecognized share-based compensation balance for unvested options, net of expected forfeitures, was
$2.0 million
and is expected to be amortized over a weighted-average period of
1.6 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.
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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.
The Network Equipment segment designs, manufactures, distributes and services optical networking solutions and Internet infrastructure products. Network Equipment revenue primarily consists of optical communication systems that include metro ethernet equipment, optical transport equipment, lab automation equipment, out-of-band network equipment, 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
March 31, 2017
and
2016
(in thousands):
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|
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|
|
|
|
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Three months ended March 31:
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2017
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|
% of revenue
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2016
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|
% of revenue
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Revenue:
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|
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United States
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$
|
11,271
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|
|
53
|
%
|
|
$
|
9,041
|
|
|
48
|
%
|
Americas (Excluding U.S.)
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|
2,403
|
|
|
11
|
%
|
|
1,290
|
|
|
7
|
%
|
Europe
|
|
3,593
|
|
|
17
|
%
|
|
3,197
|
|
|
17
|
%
|
Asia Pacific
|
|
3,908
|
|
|
19
|
%
|
|
5,354
|
|
|
28
|
%
|
Total
|
|
$
|
21,175
|
|
|
100
|
%
|
|
$
|
18,882
|
|
|
100
|
%
|
A significant percentage of the revenues generated in the Asia Pacific region are derived from Australia and accounted for
17%
and
25%
of our consolidated revenue for the
three months ended
March 31, 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
March 31, 2017
and
2016
.
Significant Customers:
Revenue from one customer accounted for
17%
of our consolidated revenue for both the
three months ended
March 31, 2017
and
2016
. As of
March 31, 2017
and
December 31, 2016
, amounts due from this customer accounted for
16%
and
11%
of our consolidated gross accounts receivables, respectively.
Revenue from another customer accounted for
14%
of our consolidated revenue for both the
three months ended
March 31, 2017
and
2016
. As of
March 31, 2017
and
December 31, 2016
, amounts due from this customer accounted for
17%
and
11%
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):
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|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
United States
|
|
$
|
2,065
|
|
|
$
|
2,336
|
|
Europe
(1)
|
|
876
|
|
|
782
|
|
Asia Pacific
|
|
11
|
|
|
12
|
|
Total
|
|
$
|
2,952
|
|
|
$
|
3,130
|
|
(1) Includes Long-lived Assets held in Israel of
$0.9 million
and
$0.8 million
as March 31, 2016 and 2017, 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. MRV does not anticipate any further material impacts upon its business, operating results or financial condition related to this matter. (See Note 17,
Subsequent Events
)
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.
No
liabilities have been recorded for these indemnification agreements as of
March 31, 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.
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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
March 31, 2017
and
December 31, 2016
, the Company had outstanding minimum future commitments for manufacturing and component purchases which totaled
$15.4 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
March 31, 2017
and
December 31, 2016
, the liability for these purchase commitments was
$0.5 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.
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
March 31, 2017
, activities related to these measures were substantially complete.
The changes in reserves associated with these measures for fiscal 2016 consisted of the following and are included in accrued liabilities on the accompanying Consolidated Balance Sheets (in thousands):
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Severance and Other employee related costs
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|
Facility Closures and Asset impairments
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Balance at January 1, 2017
|
|
$
|
643
|
|
|
$
|
103
|
|
Cash payments made
|
|
(392
|
)
|
|
(26
|
)
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Balance at March 31, 2017
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|
$
|
251
|
|
|
$
|
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 months ended
March 31, 2017
and
2016
(in thousands, except percentages):
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Three months ended
|
|
|
March 31,
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2017
|
|
2016
|
Loss before provision for income taxes
|
|
$
|
(995
|
)
|
|
$
|
(3,835
|
)
|
Provision for income taxes
|
|
46
|
|
|
61
|
|
Effective tax rate
|
|
(5
|
)%
|
|
(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
March 31, 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.
17. Subsequent Events
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. In April 2017, this matter was resolved and the Company recorded insurance proceeds received subsequent to March 31, 2017, in other current assets with a corresponding liability recorded in other current liabilities on the March 31, 2017, Condensed Consolidated Balance Sheet. All legal and other fees related to this matter were expensed as incurred, and MRV has recorded no provision for recovery of costs on this matter. MRV does not anticipate any further material impacts upon its business, operating results or financial condition related to this matter.