10-K 1 mrv-20151231x10k.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-K
_______________________
(Mark One)
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ t o _____________                                        

Commission file number: 001-11174
 
MRV COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
06-1340090
(State or other jurisdiction of
(I.R.S. employer
incorporation or organization)
identification no.)

20415 Nordhoff Street, Chatsworth, CA 91311
(Address of principal executive offices, zip code)

(818) 773-0900
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None    

Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class
Name of Each Exchange on Which Registered:
Common Stock, $0.0017 Par Value Per Share
Nasdaq Capital Market
Series A Junior Participating Preferred Stock Purchase Rights
Nasdaq Capital Market

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No x
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act of 1934. Yes o    No x
Indicate by check mark, whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark, whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files.) Yes x    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No x
The aggregate market value of the Registrant's Common Stock held by non-affiliates based upon the closing price of a share of the Registrant's Common Stock on June 30, 2015 (based upon the closing sale price of such shares on the NASDAQ on June 30, 2015) was $56,102,726. The number of shares of Common Stock, $0.0017 par value, outstanding as of March 7, 20166,984,061.

DOCUMENTS INCORPORATED BY REFERENCE
If the Registrant files a definitive Proxy Statement relating to its next Annual Meeting of Stockholders on or prior to 120 days after the end of the fiscal year for which this report relates, portions of the Proxy Statement will be incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. However, if this Proxy Statement is not filed within that time period, we will file an amendment to this Annual Report with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.




MRV Communications, Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2015

Table of Contents

 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I
Item 1.    Business.
Company Background
At MRV Communications, Inc. ("MRV" or the "Company"), we design, develop and sell products and services that enable our customers to build reliable, scalable and cost effective networks.
We develop our products and services to meet the needs of telecommunications service providers and cable operators (collectively “Service Providers”), data center operators, government entities and enterprises, including the educational, financial, healthcare and equipment manufacturing segments in North, South and Central America (“Americas”), Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”).
Our 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.
In December 2015, we sold our Network Integration business, which consisted of one business unit in Italy, Tecnonet S.p.A. ("Tecnonet") that provided end-to-end solutions including consulting, installation and support and managed services for fixed line, cable and mobile communications networks.

Our remaining reporting segment, Network Equipment includes two business units: Optical Communications Systems division ("OCS") and Appointech, Inc. ("Appointech"), a Taiwan based business that provides design and manufacturing of fiber optic modules for the fiber-optic communications industry. As of December 31, 2015, OCS had 255 employees and Appointech had 13 employees.
MRV was organized in July 1988 as MRV Technologies, Inc., a California corporation. In April 1992, we reincorporated in Delaware and changed the company name to MRV Communications, Inc. Our corporate headquarters are located in Chatsworth, California and our website address is www.mrv.com.
Strategy
We deliver highly scalable packet and optical edge solutions and network infrastructure management solutions that enable our customers to reliably grow the revenue they generate from their networks while supporting their efforts to reduce operational costs and operate more efficiently. Our strategy is to position our hardware, software and service offerings to meet the current and future needs of Service Providers, data center operators and other customers in our target vertical markets.
Strong Market Drivers
We believe the long-term growth of metro networking investments and the demand for our packet and optical products will be fueled by the increasing demand for more bandwidth capacity, higher connection speeds, and more service flexibility. The massive proliferation of video media creation and sharing, the shift to mobile and the rise of cloud-based services and remote data storage networks are collectively driving exponential growth in bandwidth consumption. As a result of ongoing bandwidth demand and network architectural changes, Service Providers are upgrading their metro network infrastructure, a trend that we expect benefits network equipment manufacturers like us. Gartner, Inc., a market research company in the telecommunications industry, in its January 27, 2016 report, forecasts a compound annual growth of 2.4% from 2013 through 2018, resulting in a $2.5 trillion market by 2018. Carrier network infrastructure and telecom operations management systems, two segments that can benefit from the MRV solution set, are the two segments with the strongest growth between 2013 and 2018. Additionally, we have seen significant growth in the number of data centers, particularly in metro areas as customers move to 100G solutions and beyond. We believe that the requirements of data center operators - high density, low power consumption, limited rack space, low latency, faster service turn-ups with embedded diagnostic tools and desire for simplicity - all favor the MRV solution set.
Credibility as a Leading Global Supplier of Network Equipment
Our customers will generally make a long-term commitment to a select few network equipment vendors; they need to be assured that their chosen vendors are credible and reliable. For more than two decades, the most demanding service providers, Fortune 1000 companies and governments worldwide have trusted MRV to provide best-in-class solutions for their mission-critical network operations. With an installed base of equipment valued at an original purchase cost exceeding $2 billion, MRV solutions are field proven.

1


Comprehensive Product Portfolio
We offer a comprehensive portfolio of packet and optical solutions enabling the access, aggregation, transport, and management of various communications traffic for fixed line, cable, content delivery, cloud-based and mobile communications networks. Our product portfolio of packet and optical platforms places us at the nexus of two important trends in networking today: the convergence of optical and packet networking and the extension of fiber-based networking technologies to connect the end user to content and interconnect data intensive cloud traffic between data centers. Our infrastructure management solutions complement our packet and optical communications products and enable focused solutions for network monitoring and lab automation for network equipment manufacturers and Service Providers. We believe that our comprehensive product portfolio gives us a strong competitive advantage as it enables us to gain multiple points of entry to reach our target customers and it also provides us with broad visibility into our customers’ networks, enabling us to gain valuable insights into our customers’ current and future networking requirements.
Building on Technology Leadership
As a pioneer and technological leader for over 25 years, we have established a reputation for high quality and innovation across a broad array of product and service offerings, including integrated packet and optical equipment and services connecting communication networks that transport digital data, voice and video across metropolitan and regional networks. Our comprehensive product portfolio for metro networks enable the delivery of next generation high-capacity services over any fiber infrastructure, facilitating network transformation and increasing efficiency, while reducing complexity and costs. We maintain three development centers covering packet, optical and software technologies and continue to invest in innovation across each of our platforms. As an example of our commitment to innovation, we recently introduced OptiPacket® (OP-X models), which leverages the field-proven technology and expertise of MRV’s existing solutions into an all-in-one, highly flexible, intelligent packet aggregation architecture. Our vision is to help our customers simplify and converge their networks, enabling them to seamlessly deliver multi-layer services over the same metro service edge. This, along with the solution’s industry-leading bandwidth capacity, port density, and power efficiency, makes it easier to manage unpredictable bandwidth demand and creates a strong foundation for Software-Defined Networking (SDN), Network Function Virtualization (NFV), and consequently enable highly beneficial metro network transformation. In 2015, we invested 23% of revenue in product development and engineering.

Partnership with our Customers

We work very closely with our customers to develop products and services to meet their specific and evolving requirements. In some cases, our own employees work and operate within our customers’ premises, which provides us with a deep appreciation for our customers’ requirements and challenges. The insights that we gain from our intimate customer partnerships informs our product roadmaps and ensures that our development efforts are focused on solving real customer issues.
Sale of Tecnonet and Positioning MRV as a “Pure Play”
On August 10, 2015, we announced that we entered into a shares purchase agreement (“the Purchase Agreement”) with Maticmind S.p.A., (the “Purchaser”), a company incorporated under the laws of Italy, for the sale of all of the shares of our wholly-owned subsidiary Tecnonet. We believe that the sale of Tecnonet enables us to focus our attention on growing our core network equipment business and will enhance the clarity and visibility of the MRV brand in the marketplace.
The sale of Tecnonet has also enabled us to strengthen our balance sheet. The consideration for the transaction included a cash payment by the Purchaser to the Company of €15.6 million (approximately $17.0 million) at closing plus a cash payment by Tecnonet to the Company of €4.1 million (approximately $4.6 million) prior to closing to repay an outstanding intercompany obligation. Tecnonet procured third party debt financing and repaid the loan in full in two payments: €1.5 million was received during the quarter ended September 30, 2015, with the remaining amount received during October 2015. The Purchaser assumed this debt at closing pursuant to the Purchase Agreement. On December 1, 2015, the sale of Tecnonet was approved by the Company's stockholders at the Company's special meeting of stockholders. On December 3, 2015, the Company completed the sale of all of the 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 Purchase Agreement also contains customary representations, warranties, covenants and indemnification obligations.

2


At the discretion of our Board of Directors, we may use a portion of our existing balances of cash and cash equivalents to provide liquidity to our shareholders through one or more special dividends or the repurchase of additional shares of our common stock, make investments in other businesses and pursue other strategic opportunities or a combination thereof.
The historical financial results of Tecnonet prior to the date of sale are reclassified as discontinued operations for all periods presented. Cash flows from discontinued operations are presented separately from the cash flows from continuing operations in the accompanying Consolidated Statements of Cash Flows. (See Note 3, Discontinued Operations)
Focused Sales and Marketing Strategy
While we serve a broad range of customers including large global service providers, small regional carriers, enterprises, educational institutions and governments, our strategy is to focus our sales and marketing efforts on servicing existing customers across our wide base while also focusing on developing new opportunities with smaller regional Service Providers and data center operators such as Carrier Neutral Providers including internet exchanges and other data center operators. We believe that recent consolidation among network equipment vendors has created an opportunity for MRV to grow its business among smaller customers who may now be overlooked.
Markets Served
MRV primarily serves the following markets:
Service Providers
Historically, Service Providers have been categorized separately as telecommunications service providers or cable operators, but in recent years, service providers have converged through acquisitions, mergers, and partnerships so we consider the providers as a group. Our telecommunications service provider customer base includes international, national and regional telecommunications carriers, both wireline and wireless. Telecommunications service providers are under increasing competitive pressure, primarily from emerging competitors that offer similar services at competitive prices. Additionally, as the Internet has become ubiquitous and consumers demand significantly more mobile, providers of content delivery and cloud-based services have been driving the need for more flexible high bandwidth applications. Our products and services enable both established and emerging telecommunications service providers to transition their existing network infrastructures to deliver a broader mix of higher bandwidth services to consumers and enterprises. We provide products that enable telecommunications service providers to support demand for video delivery, broadband data and video and wireless broadband services. Additionally, we enable these telecommunications service providers to sell wholesale services to each other thereby building wider network access for the end user.
Our cable operator customers include leading cable and multiple system operators in the United States and internationally. These customers rely upon us for a wide range of products including Carrier-grade, optical Ethernet transport and switching equipment. Our networking products allow our cable operator customers to integrate voice, video and data applications over a converged packet-optical infrastructure. This enables our customers to grow bandwidth capacity and lower the operational expense of supporting disparate networks. By enabling this network convergence, cable operators can expand their end user offerings to include high-value service bundles. Our products support key cable applications including broadcast video, Voice over Internet Protocol ("VoIP"), video on demand, broadband data services and services for enterprises.
Data Center Operators
Our customers include leading data center operators. This market segment includes a wide range of data centers, including co-location companies, Internet exchange centers, web service companies, cloud and content providers, and large enterprises. These customers are witnessing an increasing demand for flexible bandwidth between sites. Driven by the growing use of streaming video services (enterprise demand for cloud services as well as the virtualization of data center operations) data center operators are faced with the challenge of quickly connecting large campuses with very high bandwidth across metro and regional distances. The data center market is an important growth area also for traditional service providers and for enterprises that continue to transition toward cloud services. Cloud services are an important offering for service providers that enables them to retain customers and as a source of revenue in a market segment that will expand for many years to come. In light of these facts, we see this market segment as a guiding reference to the service provider market.


3


Other Markets
In addition to Service Providers and Data Center Operators, we also supply Network Equipment Manufacturers, Government Entities and Enterprises. Our network equipment manufacturer customers incorporate our infrastructure management and automation products to increase the efficiency in the test lab environment, enabling more tests in less time with fewer resources and with added flexibility. Our enterprise customers include small to large commercial organizations from every industry with IT requirements, including end users in the healthcare, financial, retail, industrial and technology industries, as well as schools and universities. Our government customers include federal, state and local agencies in the United States and internationally.

Major Customers

Revenue from one customer accounted for 19%, 11% and 5% of our consolidated revenue for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015 and 2014, amounts due from this customer accounted for 15% and 22% of our consolidated gross accounts receivables, respectively. Revenue from another customer accounted for 12%, 12% and 15% of our consolidated revenue for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015 and 2014, amounts due from this customer accounted for 5% and 1% of our consolidated gross accounts receivables, respectively.

Products and Services

Our comprehensive portfolio of field-proven packet and optical communications solutions empower digital network transformation in access and metro networks, enabling convergence of historically separate Ethernet and Optical Transport technologies to expand capacity and provide the packet-level intelligence needed to support today's services. MRV packet and optical products can be used as complete end-to-end solution for metro networks or as independent elements within a large heterogeneous network with field-proven interoperability.

Our products and services include:

Optical Transport products;
Packet/Carrier Ethernet products;
Network management products; and
Infrastructure management products
Optical Transport Products
Optical Transport refers to the transmission of data signals through a fiber optic cable. One of the more common techniques utilized for Optical Transport optimization is Wave Division Multiplexing, or WDM. Multiple wavelengths are combined, or multiplexed, utilizing different wavelengths of light as individual communications transport channels, and passed through a single optical fiber. MRV's Optical Transport portfolio addresses the rapidly increasing demand for transport capacity, multiple services and end-to-end management to the network optical edge enabling access, metro and regional long-haul optical communications. With the integration of WDM and Ethernet packet functionality, MRV is delivering advanced packet-optical transport solutions. MRV’s best-of-breed optical transport proposition provides a scalable and flexible Optical Transport solution with a robust and simplified system architecture that provides entry level access platforms to high-end solutions that can support up to 8 Tbps per fiber pair. MRV's optical transport portfolio offers a pay-as-you-grow cost-effective business model to meet the significantly increasing bandwidth demands in today’s networks.  Our products provide carriers, enterprises, data center and Internet exchange providers with a comprehensive solution that features simplicity, compact size, low latency small footprint and low power consumption.


4


OptiDriver® is the most recent addition to MRV’s comprehensive family of advanced optical transport network elements. Designed to offer the industry’s highest density 10Gbps and 100Gbps transport, with more than 80 wavelengths in only 10RU, OptiDriver is engineered to support the latest advances in optical technologies, including intelligent optical automated ROADM networks and 100Gbps transport. OptiDriver is designed from the ground up to reduce the capital costs and operational expenses of our customers. A flexible shelf and component architecture dramatically lowers initial and ongoing hardware costs, simplifies operations, and minimizes power and space requirements. Multifunction hardware allows a minimum number of components to serve the maximum variety of applications, including Ethernet, OTN, TDM, Fibre Channel, ESCON/FICON, Infiniband, and others. Built-in testing and rapid turn up features lower operational and costs of installation and significantly decrease time to revenue. OptiDriver is fully integrated into MRV’s advanced Pro-Vision® service provisioning and management software, which operates seamlessly in a mixed network of MRV’s Optical and Carrier Ethernet systems.

The Fiber Driver® optical multi-service access product line provides a full range of services including demarcation, media conversion, signal repeating and fiber-optimization solutions. The Fiber Driver line includes several families of products with the flexibility for any type of optical or copper technology, covering virtually every protocol in use in networking today.
 
Packet/Carrier Ethernet Products

Carrier Ethernet service growth is driven by the fact that many Service Providers and other customers seek to reduce their network costs and improve their service flexibility. Customers and service providers get a better per-bit cost for Ethernet services and enjoy the scalability over fiber optic networks. The maturity of carrier Ethernet technology and massive infrastructure changes from legacy to next generation packet network requires highly intelligent demarcation and first mile aggregation equipment to serve both wireline and wireless/mobile services.

The OptiSwitch® Carrier Ethernet service demarcation and first-mile aggregation series delivers best-of-breed capabilities that enable carriers and service providers to deliver assured SLA services that create new revenue streams with an attractive return on investment for our customers. Major Tier-1 service providers have deployed OptiSwitch in their networks and will benefit from the new standardized Carrier Ethernet 2.0 features, including multi class of service, interconnect and manageability. These features are critical for enabling high-revenue services like LTE 4G mobile backhaul, business Ethernet services and cloud access services. An integral part of the OptiSwitch CE 2.0 solution is MRV's Pro-Vision®, an industry recognized and award-wining Service Provisioning and Management software, that enables carriers to simplify Ethernet service delivery, accelerate time-to-market for new applications and provides centralized service visibility, intelligence along with substantial OPEX reductions.

OptiPacket® is the most recent addition to MRV’s comprehensive portfolio. Metro networks continue to expand and require more intelligent high-density aggregation with a focus on 10G and 100G packet switched services. This product opens new market segments in Metro Service Edge that enables a broader solution to our customers' needs while providing more strategic value with end-to-end solutions for smaller service providers and carriers. OptiPacket upgrades our solution from the metro access market to the metro service edge market. Our strategy is to combine a broader metro solution that extends from OptiSwitch in the access domain to OptiPacket in the metro service aggregation domain to OptiDriver in the optical transport domain, all manageable and operable with our Pro-Vision® service delivery software. The OptiPacket series is a carrier-class, high capacity provider edge aggregator with a packet-optical roadmap positioned for multi-layer service convergence, intelligence, and high capacity aggregation needed for next-gen Metro networks. The new OptiPacket® (OP-X models) combines the field-proven technology and expertise of MRV’s optical and packet product families into an all-in-one, highly flexible, intelligent architecture. Our vision is to help service providers simplify and converge their networks. By optimizing the platform for new dynamic services and integration with our optical products, MRV is enabling service providers to seamlessly deliver multi-layer services over the same metro service edge. This, along with the solution’s industry-leading bandwidth capacity, port density, and power efficiency makes it easier for service providers to manage unpredictable bandwidth demand and create a strong foundation for Software-Defined Networking (SDN), Network Function Virtualization (NFV), and consequently enable highly beneficial metro network transformation.


5


Capitalizing on the latest innovations in packet and virtualized technologies, the new OptiPacket® platform offers outstanding efficiency and intelligence to support ultra-high-density 10Gbps and 100 Gbps services. Service providers are able to deploy the OptiPacket® platform as a packet-optimized solution in high-capacity mega POPs for metro aggregation applications, or utilize it as an access platform for 100G Carrier Ethernet demarcation services. The flexibility of the OptiPacket® platform is fully maximized when used as a converged packet-optical solution with MRV's optical transport products and combined under the same management and provisioning software, Pro-Vision® according to a service provider’s network demands.

Network Management

Pro-Vision® is designed to improve operational efficiency by unifying the management of packet switching and optical transport equipment. Pro-Vision is the orchestration software overlay that enables convergence of the packet and optical layers into a robust network capable of efficiently supporting new and existing services. Pro-Vision® is MRV's service orchestration platform that gives service providers the automated tools to design, provision, manage, diagnose, visualize and optimize both packet and optical access networks. It seamlessly automates the provisioning, orchestration and management of thousands of network elements and millions of services. Pro-Vision's packet and optical tools bring a new level of service control to networks and provide a suite of applications for automated service provisioning, assurance, monitoring, reporting, inventory and maintenance. It is a centralized carrier-class, web based platform that uses intuitive GUI based displays and offers powerful methods to reduce operational expense and paves the way for the software defined network of the future.

Infrastructure Management Products

MRV's physical layer switches are scalable, OSI layer 1 switches that allows users to connect any port to any other port within the system using a non-blocking matrix. The Media Cross Connect is an optical/electrical/optical (OEO) switch used for data rates and media up to 10Gbps. The Optical Cross Connect is an all optical (OOO) switch for single mode fiber rates up to 100Gbps. Deploying these switches in a lab environment allows test commitments to be met without compromising quality or responsiveness, or increasing capital or operational expenses.

Out-of-band LX Series

An out-of-band network leveraging our LX product line provides secure remote service port access and remote power control to devices in an organization's networks and infrastructures, including data centers, remote sites, and test labs. Rich security and management features are supported, in addition to distributed clustering, sophisticated automation capabilities, very strong encryption, and security certifications.
Worldwide Sales and Marketing
As of December 31, 2015, our worldwide sales and marketing organization consisted of 70 employees, including sales representatives, pre- & post- sales technical support, product line management, technical marketing, marketing communications and management. We have field sales personnel in more than nine countries involved in the sales and distribution of our products, as well as providing pre- & post- sales technical support to end users of our products. We sell and service our products both directly and through channel partners including distributors, value-added resellers and system integrators.
We employ various methods, such as public relations, advertising, and trade shows, in an effort to build awareness of our products and to establish our corporate MRV brand name. We conduct our public relations activities both internally and through relationships with outside agencies. We focus on major public relations activities concentrated around new product introductions, corporate partnerships and other events of interest to the market. We supplement our public relations through media advertising programs, including electronic media and attendance at various trade shows worldwide throughout the year.
Competition
The communications equipment industry is intensely competitive. We compete directly with a number of established and emerging networking companies.
Our direct competitors in networking products, switches, routers and media converters generally include: Adtran, ADVA Optical Networking, BATM Advanced Communications, Ciena Corporation, Cisco Systems, Inc., Coriant, ECI Telecom Ltd., Ekinops, Ericsson, Fujitsu Limited, Huawei Technologies Ltd., Infinera Corporation, Juniper Networks, Nokia Siemens Networks BV, and RAD Data Communications, Ltd..

6



Many of our larger competitors offer customers a broader product line, which provides a more comprehensive networking solution than we provide. Accordingly, in certain markets, we have collaborated with other vendors in order to provide a comprehensive solution to customers.

We believe the principal competitive factors in the markets in which we compete include:
Product performance, features, quality and price;
A comprehensive range of complementary products and services;
Customer service and technical support;
Lead and delivery times;
Timeliness of new product introductions;
Global presence, including distribution network;
Conformance to standards; and
Brand name recognition.
Product Development and Engineering
We believe that in order to maintain our technological competitiveness and to serve our customers better, we must continually enhance our existing products and continue to develop new products. Accordingly, we focus a significant amount of resources on product development and engineering. Product development and engineering expenses were $20.4 million, $20.8 million, and $19.4 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Global Operations
We outsource the manufacturing of our network equipment products to world class contract manufacturers. These products include: switches and optical transport platforms, remote device management products and networking physical infrastructure equipment. Outsourcing allows us to react more quickly to market demand; avoid the significant capital investment required to establish automated manufacturing and assembly facilities; and allocate resources on product design and development. Our Operations personnel primarily perform: supply chain management, commodity management, quality compliance and assurance, supplier engineering, test software development, and NPI Program Management. Our processes and procedures are ISO 9001 certified and so are those of our electronic manufacturing service providers.
Intellectual Property
To date, we have relied principally on a combination of patents, copyrights and trade secrets to protect proprietary technology. We have 17 U.S. patents and two foreign patents which expire through 2026. In addition, we have four U.S. patent applications and one foreign patent application pending. Our products rely principally on a combination of industry standard technology, our trade secrets, and software copyrights. Generally, we enter into confidentiality agreements with our employees and key suppliers and otherwise seek to limit access to and distribution of the source code to our software and other proprietary information. These steps may not be adequate to prevent misappropriation of our technologies, or a third party may independently develop technologies similar or superior to any that we possess.
Employees
As of December 31, 2015, MRV employed 268 employees. Of these employees, 102 were in product development and engineering, 59 were in manufacturing, and 107 were in sales, marketing and general administration. Of these employees, 129 work in locations outside the United States.
We believe our employee relationships are satisfactory. We believe that our long-term success depends in part on our continued ability to recruit and retain qualified personnel. The risks associated with dependence on qualified personnel are more fully discussed under the heading "The loss of key management could negatively affect our business" in the "Risk Factors" section contained in Item 1A of this Form 10-K.
Revenue by Segment and Geography
We currently have one reporting segment: Network Equipment. Until the third quarter of 2015, we operated as two segments. Please refer to Note 13 "Geographic Information" for further information.


7


Financial information for revenue, total assets and breakdown by geographic region is included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8 "Financial Statements and Supplemental Data" of this Form 10-K.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available on our website, free of charge, reports that we electronically file with or furnish to the SEC. We make the reports available on our website as soon as reasonably practicable after filing or furnishing such reports to the SEC. These reports include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are also available directly through the SEC's website at www.sec.gov.

Item 1A.    Risk Factors.
The following risk factors and other information included in this Form 10-K should be carefully considered. The Company is subject to numerous risks and uncertainties, the outcome of which may impact future results of operations and the Company's financial condition. The risks and uncertainties described below are not all encompassing and should be considered carefully together with the other information contained in this report and in the other reports and materials filed by us with the Securities and Exchange Commission (“SEC”), as well as news releases and other information we publicly disseminate from time to time. Additional risks and uncertainties not presently known to us or which we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected and the trading price of our Common Stock could decline.
We did not achieve profitability on a consolidated basis for the years ended December 31, 2015 and 2014, and may not achieve profitability in the future.
We did not achieve profitability for the years ended December 31, 2015 and 2014 on a consolidated basis, and we expect to continue to incur significant product development, sales and marketing and general and administrative expenses, and costs related to improving efficiency in the near term. As a result, we will need to continue our efforts to contain expense levels and increase revenue levels in an effort to achieve profitability in the future. We may not be successful in our efforts to contain expense levels and increase revenue levels, and we may not attain profitability on a sustained basis or at all.

Our operating results may be adversely impacted by worldwide economic and political uncertainties and specific conditions in the markets we address, including the cyclical nature of and volatility in the network equipment industry.

Our Network Equipment business is a global business with a significant presence in Europe which is experiencing difficult economic conditions. Such conditions are characterized by decreases in product demand, excess customer inventories, and accelerated price erosion, and may be interspersed with, or followed by, significant and temporary increased demand in products. Further, these markets are cyclical and subject to rapid change and evolving industry standards. These factors could cause substantial fluctuations in our revenue, gross margins and results of operations, and may cause difficulty in predicting demand and short-term production needs. In addition, during downturns some competitors become more aggressive in their pricing practices, which, if we follow their actions, could adversely impact our product gross margins. Any downturns in the network equipment markets may be severe and prolonged or intermittent, and any failure to fully recover from downturns of these industries or the markets in which we operate could seriously impact our revenue and harm our business, financial condition and results of operations. The network equipment industries also periodically experience increased demand and production capacity constraints, which may affect our ability to ship products in a timely manner and may cause delivery penalties. Accordingly, our operating results may vary significantly as a result of the general conditions in the network equipment industries, which could cause large fluctuations in our stock price.
 


8


Many other factors have the potential to significantly impact our business, such as concerns about inflation and deflation, deterioration in credit availability due to economic downturns or instability on a local or global level, volatility in energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the communications markets, reduced availability of insurance coverage or reduced ability to pay claims by insurance carriers, international conflicts and terrorist and military activity, and the impact of natural disasters and public health emergencies. These conditions may make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to reduce spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers may face issues gaining timely access to sufficient credit or could even need to file for bankruptcy. Either of these circumstances could result in an impairment of their ability to make timely payments to us. If these circumstances were to occur, we may be required to increase our allowance for doubtful accounts. Historically, a portion of our business has not come from the end customer directly, and we have experienced growth patterns that are different than what the end customer demand might be, particularly during periods of high volatility. This can manifest itself in periods of growth in excess of our customers' growth followed by periods of under-shipment before the volatility abates as our customers adjust their inventory levels. Given recent economic conditions it is possible that any correlation will continue to be less predictable and will result in increased volatility in our operating results and stock price. We cannot predict the timing, strength or duration of any economic slowdown or recovery, worldwide, in the network equipment industry or in the markets in which we operate. If the economy or the markets in which we operate deviate from present levels or deteriorate, we may record additional charges related to restructuring costs and the impairment of goodwill and long-lived assets, and our business, financial condition and results of operations may be materially and adversely affected. The impact of market volatility is not limited to revenue but may also affect our product gross margins and other financial metrics.

A few customers account for a substantial portion of our sales, increasing both our dependence on a few revenue sources and the risk that our operations will suffer materially if a significant customer stops ordering from us or substantially reduces its business with us.

Revenue from two customers accounted for 31%, 23% and 20% of our consolidated revenues for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015 and 2014, amounts due from one of those customers accounted for 15% and 22% of our consolidated gross accounts receivables, respectively. While our financial performance benefited from substantial sales to these customers, because of the magnitude of sales to these customers, our results would suffer if we were to lose their business. Additionally, if those customers, or other significant customers, made substantial reductions in order volume or stopped paying their invoices when due, our results of operations would suffer unless we were able to replace the orders or collect on the payments due. Both customers are major telecom companies, one operating in Australia and one in North America.


9


Our quarterly operating results are subject to significant fluctuations, and you should not rely on them as an indication of our future performance. Our operating results could fluctuate significantly from quarter to quarter and year to year.

Our operating results for a particular quarter are difficult to predict. Our revenue, gross margins and operating results could fluctuate substantially from quarter to quarter and from year to year as a whole. This could result from any one or a combination of factors such as:

the cancellation or postponement of orders from one period to the next;
the timing and amount of significant orders;
the mix in any period of higher and lower margin products and services;
software, hardware or other errors in the products we sell requiring replacements or increased warranty reserves;
charges for excess or obsolete inventory;
our annual reviews of other intangibles that may lead to impairment charges;
the ability of our suppliers to produce and deliver components and parts, including sole or limited source components, in a timely manner, in the quantity and quality desired and at the prices we have budgeted;
political stability in the areas of the world in which we operate;
price reductions that we make, such as marketing decisions that we have made in the past to reduce the price for our products in an effort to secure new customers or to provide competitive bulk discounts;
decreases in average selling prices of our products which result from factors such as overcapacity and market conditions, the introduction of new and more technologically advanced products, and increased sales discounts;
the relative success of our efforts to continually reduce product manufacturing costs;
our introduction of new products, with initial sales at relatively small volumes with resulting higher production costs, and the rate of market acceptance of the products;
delays or reductions in customer purchases of our products in anticipation of the introduction of new and enhanced products by us or our competitors;
the timing of capital spending of our customers;
currency fluctuations;
the ability of our customers to pay for our products;
general economic conditions; and
changes in conditions specific to our business.

Moreover, the volume and timing of orders we receive during a quarter are difficult to forecast. Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products. This customer evaluation and qualification process frequently results in a lengthy initial sales cycle of up to one year or more. We may also expend significant management effort and order long lead-time components or materials prior to receiving an order. Further, our customers encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below these forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from us even after acceptance of orders. We do not recognize revenue until a product has been shipped to a customer, all significant vendor obligations have been performed, and collection is considered reasonably assured. Our expense levels during any particular period are based, in part, on expectations of future sales. If sales in a particular quarter do not meet expectations, our operating results could be materially adversely affected.
We expect revenue and gross margins generally and for specific products and services to continue to fluctuate from quarter to quarter and year to year. Changes in service gross margin may result from various factors such as changes in the mix between technical support services and advanced services, as well as the timing of support service contract initiations and renewals. It is possible that, in future periods, our results of operations will be below the expectations of public market analysts and investors. This failure to meet expectations could cause the trading price of our Common Stock to decline. Similarly, the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could, by association, cause our stock price to decline.


10


Changes in the seasonality of our business could cause our operating results to fluctuate.
Sales of our products are subject to seasonality. However, the current global economic environment may impact typical seasonal trends, making it more difficult for us to forecast our business. Changes in the product or channel mix of our business can also impact seasonal patterns, adding to complexity in forecasting demand. If our forecasts are inaccurate, we may lose market share or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and operating results. Changes in seasonality may also lead to greater volatility in our stock price.

We are making significant investments in engineering and product and software development. These investments will negatively affect our short-term operating results, and may achieve delayed, or lower than expected, benefits which could harm our long-term operating results.
While we intend to focus on managing our costs and expenses, the investments in engineering and development will impact our short-term operating results, as we are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our long-term operating results may be adversely affected.
 
Competition is ever increasing, and we face additional challenges when entering into new markets which could reduce our revenue and gross margins or cause us to lose market share.
The network equipment industry is intensely competitive, and we must continually compete against new products from larger, better capitalized global competitors while we must also compete against aggressive pricing from low-cost producers in Asia and elsewhere.
Many of our competitors have significantly greater financial, technical, marketing, distribution, sales and customer support organizations and other resources and larger installed customer bases than we have. Our competitors continually introduce new competitive products, and may be able to devote greater resources to the development, promotion, sale and support of their products. Moreover, recent consolidation in our markets may enhance these competitive advantages of some of our competitors. They may also be able to leverage their buying power with vendors to give them preferential treatment in delivery of high-demand products in times of supply constraint. Many of our larger competitors offer customers broader product lines, which provide a more comprehensive networking solution than we provide. These companies can leverage their customer bases and broader product offerings and adopt aggressive pricing policies to gain market share. In addition, several of our competitors have large market capitalizations, have substantially larger cash reserves, and are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines and give them a strategic advantage. Accordingly, in certain regional markets we have collaborated with other vendors in an effort to enhance our overall capability in providing products and services, and we focus on consolidating our purchasing programs globally to improve purchasing power with vendors.
Additional competitors may enter the market from regions of the world, including China, which offer lower labor costs as well as government incentives that may not be available to MRV. As a result of such advantages, such companies may threaten our business with products that are more competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented, and may be able to react more quickly to changing customer requirements and expectations. There is also the risk that other network system vendors may enter or re-enter the subsystem market and begin to manufacture in-house the networking subsystems incorporated into their network systems. We also expect to encounter potential customers that, because of existing relationships with our competitors, are committed to the products offered by these competitors. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced or negative margins or loss of market share in our markets.

11


Our markets are subject to rapid technological change, and to compete effectively, we must continually introduce new products that achieve market acceptance.

The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. We expect that new technologies will emerge as competition and the need for higher and more cost effective transmission capacity, or bandwidth, increases. Our future performance will depend on the successful development of new and enhanced products that address these changes and other customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. We have in the past experienced delays in product development and these delays may occur in the future. Therefore, to the extent that customers defer or cancel orders in the expectation of a new product release or there is any delay in development or introduction of our new products or enhancements of our products, our operating results could suffer.

During the years ended December 31, 2015 and 2014, product development and engineering expenses accounted for 23% and 24% of revenue, respectively. In 2016, we are investing further in our engineering staff and the development of our product lines, and expect this expense to increase. Introduction of new products and product enhancements will require that we effectively transfer production processes from development to manufacturing and coordinate our efforts with those of our manufacturers and suppliers to achieve volume production rapidly. If we fail to transfer production processes effectively, develop product enhancements or introduce new products in sufficient quantities to meet the needs of our customers as scheduled, our net sales may be reduced and our business may be harmed. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:

changing product specifications and customer requirements;
difficulties in hiring and retaining necessary technical personnel;
difficulties in reallocating engineering resources and overcoming resource limitations;
difficulties with contract manufacturers;
changing market or competitive product requirements; and
unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. In order to compete, we must be able to deliver to customers products that are highly reliable, operate with their existing equipment, lower their costs of acquisition, installation and maintenance, and provide an overall cost-effective solution. We may not be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, our new products may not gain market acceptance or we may not be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Our failure to respond effectively to technological changes could significantly harm our business.
Our products are deployed in large and complex systems and may contain defects that are not detected until after our products have been installed, which may cause us to incur significant costs, divert our attention from product development efforts, or damage our reputation and cause us to lose customers.
Our products are complex and undergo internal quality testing and qualification as well as formal qualification by our customers. However, defects may be found from time to time. Our customers' testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, including the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. We have experienced such failures in the past and will continue to face this risk going forward, as our products are widely deployed throughout the world in multiple demanding environments and applications. In addition, we may in certain circumstances honor warranty claims after the warranty period has expired or for problems not covered by warranty in order to maintain customer relationships. We believe that our warranty reserves adequately address our potential exposure to liability for warranty claims. Our warranty reserves are based on historical return rates, and our average material costs incurred to repair items, including labor costs. The warranty reserves are evaluated and adjusted based on actual experience.


12


In addition, certain of our networking products are typically embedded in, or deployed in conjunction with, our customers' products, which incorporate a variety of components and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts, cause significant customer relation problems or loss of customers, and harm our reputation and brand, any of which could materially and adversely affect our business.

Our customers may adopt alternate technologies for which we do not produce products or for which our products are not adaptable.

The market for our products is characterized by rapidly changing technology, evolving industry standards and new product introductions, which may minimize the demand for our existing products or render them obsolete. Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new products that address such changes in technology and standards and respond to our customers' potential desire to adopt such technologies in place of those supported by our current product offerings. The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends as well as precise technological execution. Further, the development cycle for products integrating new technologies or technologies with which we are not as familiar may be longer and more costly than our current product development process. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products, and the new products may not be successfully commercialized. These costs and delays may prevent us from being able to establish a market position with respect to such new technologies and industry standards or be as responsive as we would like to be in meeting our customers' demands for such products, thus adversely affecting our results of operations and our customer relationships.

We do not have many long-term volume purchase contracts with our customers, so our customers may increase, decrease, cancel or delay their purchasing levels at any time with minimal advance notice to us, which may significantly harm our business.

Our customers typically purchase our products pursuant to individual purchase orders. While our customers generally provide us with their demand forecasts, in most cases they are not contractually committed to buy any quantity of products beyond firm purchase orders. Our customers may increase, decrease, cancel or delay purchase orders already in place. If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of such orders may cause us to fail to achieve our short- and long-term financial and operating goals. Lead times for components and materials that we order vary significantly and depend on factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. For substantial increases in our sales levels, some of our suppliers may need significant lead time. In the past, during periods of market downturns, certain of our largest customers canceled or delayed significant orders with us and with our competitors, which resulted in losses of sales and excess and obsolete inventory. Similarly, decreases or deferrals of purchases by our customers may significantly harm our industry and specifically our business in these and in additional unforeseen ways, particularly if they are not anticipated.

We may suffer losses as a result of entering into fixed price contracts.

From time to time we enter into contracts with certain customers in which the price we charge for particular products is fixed. Although our estimated production costs for these products are used to compute fixed sales prices, if actual production costs exceed the estimated production costs because of our inability to obtain needed components timely, or at all, or we cannot continue to cut costs in production and have incrementally decreased future fixed prices, we may incur a loss on the sale. Sales of material amounts of products on a fixed price basis, for which we have not accurately forecast the production costs, could have a material adverse effect on our results of operations.



13


There are a limited number of potential source suppliers for certain components, which makes us susceptible to supply shortages.

We currently purchase several key components from single or limited sources. Moreover, we depend on the quality of the products supplied to us, over which we have limited control. We have encountered shortages and delays in obtaining components in the past and expect to encounter shortages and delays in the future. Sudden significant increases in demand for products that we purchase may cause delays in delivery of subcomponents, which may cause delay in delivery of our products. Larger competitors may be able to demand more rapid delivery of components parts in comparison to us. If we cannot supply products due to a lack of certain components or are unable to redesign products with other components in a timely manner, our business will be significantly harmed.

We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify new component suppliers. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality problems, reduced control over product pricing, reliability and performance. We may have difficulty in identifying and qualifying another supplier in a timely manner. We have in the past had to change suppliers, which, in some instances, resulted in delays in product development and manufacturing until another supplier was found and qualified. Any such delays in the future may limit our ability to respond to changes in customer and market demands. During the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations.

We rely substantially upon a limited number of contract manufacturing partners, and if these contract manufacturers fail to meet our short- and long-term needs and contractual obligations, our business may be negatively impacted.

We rely to a significant extent on a limited number of contract manufacturers to, manufacture, assemble, test and in certain cases ship our products to our customers directly. The qualification and set up of these independent manufacturers under quality assurance standards is an expensive and time-consuming process. Our reliance upon third party manufacturers could expose us to increased risks related to lead times, continuity of supply, on-time delivery, quality assurance, and compliance with environmental standards and other regulations. Reliance upon third party manufacturers also exposes us to significant risks related to their operations, financial position, business continuity, sourcing relationships and labor relationships that may affect their manufacturing of our products including their continued viability. Product manufacturing with our contract manufacturing partners principally takes place in the United States, Israel and Canada. Significant disruptions in these and other countries where our products or key components are manufactured, including natural disasters, epidemics, acts of war or terrorism, social or political unrest or work stoppages, could affect the cost, availability or allocation of supply and manufacturing capacity and negatively affect our business and results of operations. As a result, we may lose existing or potential customers or orders and our business may be negatively impacted.

If we fail to forecast component and material requirements accurately, we could incur additional costs or experience manufacturing delays.

We use rolling forecasts based on anticipated product orders to determine our component and material requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. For substantial increases in production levels, some suppliers may need six months or more lead time. If we overestimate our component and material requirements, we may have excess or obsolete inventory, which may not get used or have to be discounted to eliminate. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences could negatively impact our business.


14


Changes in key management and loss of highly qualified personnel could negatively affect our business.

Our ability to run our operations, develop, manufacture and market our products, and compete with our current and future competitors depends in large part on our ability to attract and retain qualified personnel. The loss or unavailability of any of our key personnel, which includes our executive officers, could have an adverse effect on the Company’s financial condition and results of operations. We have had a succession of chief executive officers and other executive management in the recent past, and maintaining consistency and providing structure and reliability to the Company's employees and our customers and vendors will be important for the Company's ability to produce reliable financial results. We are dependent upon our management team, especially in places where personal relationships are a significant part of a business transaction. We do not have succession plans in every key position, and the loss of the services of these officers could have a material adverse effect on our operations. Further, competition for highly-qualified engineers in the network equipment and integration industries is intense, and we will be required to compete for those personnel with companies having substantially greater financial and other resources than we do. If we do not attract and retain necessary team members to operate our business and build our products, our business could be materially adversely affected.

Our business and future operating results are subject to a wide range of uncertainties arising out of the international nature of our operations and facilities that could adversely affect our results of operations.

External revenues from foreign subsidiaries accounted for 24%, 26% and 28% of revenue for the years ended December 31, 2015, 2014, and 2013, respectively.

We have offices and facilities in, and conduct a significant portion of our operations in Israel. We are, therefore, influenced by the political and economic conditions affecting that country. Risks we face from international sales and our use of facilities and suppliers overseas for manufacturing include:

ensuring compliance with local regulations and laws in each country and locality in which we do business;
greater difficulty in accounts receivable collection and longer collection periods;
the impact of recessions in economies outside the United States;
changes in regulatory requirements;
seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe;
difficulties in managing operations across disparate geographic areas;
difficulties associated with enforcing agreements through foreign legal systems;
the payment of operating expenses in local currencies, which exposes us to risks of currency exchange rate fluctuations;
higher credit risks requiring cash in advance or letters of credit;
potentially adverse tax consequences, increasing taxes, and heightened efforts by officials of foreign countries to increase revenue from tax collection;
unavailability or delays in delivery of equipment, raw materials or key components;
trade restrictions, tariff increases and increasing import-export duties;
shipping delays;
limited protection of intellectual property rights;
tightening immigration controls that may adversely affect our ability to hire new non-U.S. employees in our U.S. facilities; and
increasing foreign environmental regulation or unforeseen environmental problems.

Our business and operations are also subject to general geopolitical conditions, such as terrorism, political and economic instability, changes in the costs of key resources such as crude oil and changes in diplomatic or trade relationships. Economic conditions in several countries and markets outside the United States in which we have offices, personnel, facilities or sales represent significant risks to us. Instability in the Middle East, China or the European Union could have a negative impact on our sales and operations in these regions, and unstable conditions could have a material adverse effect on our business and results of operations. In addition to the effect of global economic instability on our operations or facilities on sales to customers outside the United States, sales to domestic customers could be negatively impacted by these conditions.



15


Our ability to utilize our NOLs and certain other tax attributes may be limited.

As of December 31, 2015, MRV had net operating losses ("NOLs") of $182.5 million, $97.1 million and $97.4 million, for federal, state and foreign income tax purposes, respectively. During the year ended December 31, 2015, the Company utilized capital loss carryforwards of $11.7 million and $3.0 million for federal and state tax purposes, respectively, primarily to offset the gains realized on the sale of Tecnonet. The unutilized capital loss carryforwards of $98.8 million and $21.0 million for federal and state income tax purposes, respectively, expired on December 31, 2015. 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 equity ownership 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 December 31, 2015, the US federal and state NOLs had a full valuation allowance.

Our business and future operating results may be adversely affected by events outside of our control.

We use our facilities in California, Massachusetts and Israel for major product design and development and customer support, and we manufacture products through third-party manufacturers in California, Israel, Taiwan and Canada. The risk of earthquakes in Southern California is significant because of the proximity of these manufacturing facilities to major earthquake fault lines. In January 1994, major earthquakes near Chatsworth, California affected our facilities, causing power and communications outages and disruptions that impaired production capacity. While our facility did not suffer material damage and our business was not materially disrupted by this earthquake, the occurrence of an earthquake or other natural disaster could result in the disruption of our manufacturing facilities. Any disruption in our manufacturing facilities arising from earthquakes, other natural disasters or other catastrophic events including fire, excessive rain, terrorist attacks and wars, could disrupt our manufacturing ability, which could harm our operations and financial results, and could cause significant delays in the production or shipment of our products until we are able to shift production to different facilities or arrange for third parties to manufacture our products. We may not be able to obtain alternate capacity on favorable terms or at all. The location of our manufacturing facilities subjects us to increased risk that a natural disaster could disrupt our operations.

Although we believe our insurance coverage is adequate to address the variety of potential liabilities we face, our insurance coverage is subject to deductibles and coverage limits. Upon an occurrence of a significant natural disaster, or manmade problems such as computer viruses, civil war, terrorism, blackout or disruptions to the economies of the United States and other countries, such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. In the event of a major earthquake or other disaster affecting one or more of our facilities, our operations could be significantly disrupted, delayed or prevented for the time required to transfer production, repair, rebuild or replace the affected manufacturing facilities. This time frame could be lengthy, and result in significant expenses for repair and related costs. In addition, concerns about an outbreak of epidemic diseases such as avian or swine influenza or severe acute respiratory syndrome, could have a negative effect on travel and our business operations, and result in adverse consequences to our business and results of operations.

Environmental regulations applicable to our manufacturing operations could limit our ability to expand or subject us to substantial costs. Compliance with current and future environmental regulations may be costly which could impact our future operating results.

We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our development processes, as are the third parties who manufacture our products. Further, we are subject to other safety, labeling and training regulations as required by foreign, local, state and federal law. We believe we are compliant in all material respects with applicable environmental regulations in the United States, Taiwan and Israel. However, any failure by us or our contract manufacturers to comply with present and future regulations could subject us to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities and we may need to acquire costly equipment or incur other significant expenses to comply with environmental regulations. We cannot provide assurance that legal requirements will not be imposed on us that would require additional capital expenditures or the satisfaction of other requirements. If we fail to obtain required permits or make adequate reporting submissions, or otherwise fail to operate within current or future legal requirements, including those applicable to us in the countries in which we manufacture our products, we may be required to pay substantial penalties, suspend our operations, or make costly changes to our development processes or facilities.

16



In addition, we could face significant costs and liabilities in connection with legislation which enables customers to return a product at the end of its useful life and charges us with financial and other responsibility for environmentally safe collection, recycling, treatment and disposal. We also face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products, and disclosure related to the origin of certain raw materials used in our products. This includes the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union and the PRC. Many of our customers have adopted this approach and have required our full compliance. Even though we have devoted a significant amount of resources and effort planning and executing our compliance program and believe that we are in compliance with such legislation, it is possible that some of our products might be incompatible with such regulations. In such event, we could experience loss of revenue, damaged reputation, diversion of resources, monetary penalties and legal action. Other environmental regulations may require us to re-engineer our products to utilize components that are more environmentally compatible. Such re-engineering and component substitution may result in additional costs to us. Although we currently do not anticipate any material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on us.

Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect the Company’s consolidated financial statements.

The Company’s consolidated financial statements are subject to the application of generally accepted accounting principles ("GAAP"), which is periodically revised and/or expanded. Accordingly, the Company is required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB. It is possible that future changes the Company is required to adopt could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material effect on the Company’s financial condition and results of operations.

New regulations related to conflict-free minerals may force us to incur additional expenses.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012, the Securities and Exchange Commission adopted disclosure rules regarding a companys use of conflict minerals in their products, with substantial supply chain verification requirements in the event that the conflict minerals come from, or could have come from the DRC or adjoining countries. These rules and verification requirements will impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict-free, we may face challenges with customers, which could place us at a competitive disadvantage and could harm our reputation.

Our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls.

We rely upon a number of internal business processes and information systems to support key business functions and the efficient operation of these processes and systems is critical to our business. We implemented an enterprise resource planning (ERP) system in 2013 that allows the financial and other business functions to interact and scale to support the growth of our business. The continued integration of the ERP system into our business can be costly and imposes substantial demands on management's time, and may be disruptive to our operations. Further, it may require changes in our other information systems, modification of internal control procedures and training of employees or third party resources. Our information technology systems, and those of third party providers, may also be vulnerable to damage or disruption caused by circumstances beyond our control. These include catastrophic events, power anomalies or outages, natural disasters, computer system or network failures, viruses or malware, physical or electronic break-ins, unauthorized access and cyber-attacks affecting our systems or those of third party business partners. Any material disruption, malfunction or similar challenges with our business processes or information systems, or disruptions or challenges relating to the transition to new processes, systems or providers, could have a material adverse effect on the operation of our business and our results of operations.


17


If we fail to protect our intellectual property, we may not be able to compete.

We rely on a combination of trade secret laws and restrictions on disclosure and patents, copyrights and trademarks to protect our intellectual property rights. We cannot be sure that our pending patent and trademark applications will be approved, that any patents or trademarks that may be issued will protect our intellectual property or that third parties will not challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Specifically there is a risk of poor enforcement of intellectual property rights in China, where the validity, enforceability and scope of protection of intellectual property is uncertain and still evolving. Policing unauthorized use of proprietary technology is difficult and expensive. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable competitors, especially in the China, to benefit from our technologies without paying us any royalties. Enforcing our intellectual property rights or resolving intellectual property disputes may involve litigation. Any of this kind of litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any of this kind of litigation could seriously harm our business.

We are involved in intellectual property disputes from time to time as part of doing business in the network equipment industry, which could divert management's attention, cause us to incur significant costs, and prevent us from selling or using the challenged technology.

Participants in the network equipment markets in which we sell our products have experienced litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors. From time to time, we have become aware of the possibility or have been notified that we may be infringing certain patents or other intellectual property rights of others, and we have been involved in litigation matters regarding intellectual property right claims of others in the past. In addition, we may be a party to litigation to protect our intellectual property. These claims and any resulting lawsuits, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights, and there can be no assurance that we will be successful in our defense and, even if we are successful, we may incur substantial legal fees and other costs in defending such lawsuits. Any lawsuit that we may become party to, regardless of its success, may be time-consuming and expensive to resolve and divert technical and management time and attention. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products, we could be required to obtain licenses to the infringing technology, to pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products, or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties either on commercially reasonable terms or at all.

Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.
 
In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual property and proprietary or confidential business information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. We believe that companies in the technology industry have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. Our network and storage applications may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. In some cases, it is difficult to anticipate or immediately detect such incidents and the damage caused thereby. These data breaches and any unauthorized access or disclosure of our information, could compromise our intellectual property and expose sensitive business information. Cyber-attacks could also cause us to incur significant remediation costs, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense, or cause significant harm to our reputation.


18


We are involved in other lawsuits and legal proceedings, which, if determined against us, could require us to pay substantial damages, fines and/or penalties.

We are involved in various lawsuits, disputes and claims arising in the ordinary course of business. These suits or actions may raise complex factual and legal issues and are subject to uncertainties. Actions filed against us could include product liability, commercial, intellectual property, customer, employment and securities related claims, including class action lawsuits. Plaintiffs (or defendants who counterclaim) may seek unspecified damages or injunctive relief, or both. Although we carry product liability and other insurance, and believe such coverage is adequate based on the historical rate and nature of customer product quality claims or complaints, we cannot provide assurance that this insurance would adequately cover our costs arising from any significant defects in our products. Adverse results to any lawsuits, disputes or claims may harm our business and have material adverse effects on our results of operations, liquidity or financial position, any or all of which could adversely affect our stock price.

Failure to achieve and maintain internal controls in accordance with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.

We have examined and evaluated our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and identified no material weaknesses. We previously identified two material weaknesses during the year ended December 31, 2014, which were remediated in 2015.

We cannot assure you that we will not discover other material weaknesses in the future. If we fail to maintain the internal controls we implemented, or fail to implement required new or improved controls, as such control standards are modified, supplemented or amended from time to time, or as our business changes, we may fail to meet our annual or periodic reporting obligations and there may be material misstatements in our financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud. If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors may lose further confidence in our reported financial information, there could be investigations or sanctions by regulatory authorities or litigation and there could be a material adverse effect on our stock price.

The Company's disclosure controls and procedures may not prevent or detect all acts of fraud.

The Company’s disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s management believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and the Company cannot ensure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be detected.


19


Failure to comply with the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act could subject us to penalties and other adverse consequences. We could suffer losses from corrupt or fraudulent business practices.

We are subject to the U.S. Foreign Corrupt Practices Act ("FCPA"), and potentially the U.K. Bribery Act, each of which generally prohibits companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. We have implemented and maintained preventative measures and policies, but cannot assure that our employees or other agents will not engage in such conduct and render us responsible under the FCPA. If our employees or other agents are found to have engaged in these practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Our Rights Plan, Delaware law and our ability to issue additional preferred stock may have anti-takeover effects that could prevent a change in control, which may cause our stock price to decline.

On January 26, 2016, the Board 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. While the Rights Plan is intended to reduce the risk of an “ownership change” within the meaning of Section 382, and thereby preserve the current ability of the Company to utilize NOLs, the Rights Plan could have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group acquiring 4.99% or more of our outstanding common stock on terms not approved by the Board.

We are authorized to issue up to 1,000,000 shares of Preferred Stock. This Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board of Directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of the holders of our Common Stock, and therefore reduce the value of our Common Stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management. We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder unless the business combination is approved in the manner prescribed under Section 203. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us, which may cause the market price of our Common Stock to decline.

Our largest stockholder may be able to exert significant influence over key corporate actions requiring a stockholder vote.
At March 3, 2016, the Company’s largest stockholder, Raging Capital, beneficially owned approximately 31% of the Company’s outstanding common stock and had two representatives - Kenneth H. Traub and Brian J. Bellinger - on the Board of Directors. Raging Capital's significant ownership of the Company and its representation on the Board of Directors may allow Raging Capital to exert significant influence over corporate actions requiring stockholder approval, including the following actions:
to elect or defeat the election of the Company’s directors;
to amend or prevent amendment of the Company’s Certificate of Incorporation or Bylaws;
to effect or prevent a merger, sale of assets or other corporate transaction; and
to control the outcome of any other matter submitted to the Company’s stockholders for vote.

Raging Capital's ownership may also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce the Company’s stock price or prevent the Company’s stockholders from realizing a premium over the Company’s stock price.

20


Because this Form 10-K contains forward-looking statements, it may not prove to be accurate.

This Form 10-K and other Company releases and filings with the SEC may contain forward-looking statements. Words such as "anticipate," "appear," "believe," "estimate," "expect," "intend," "may," "should," "plan," "project," "contemplate," "target," "foresee," "goal," "likely," "will," and "would" or variations of such words and similar expressions, are intended to identify such forward-looking statements which are not statements of historical facts. These forward-looking statements are not guarantees of future performance nor guarantees that the events anticipated will occur or expected conditions will remain the same or improve. These statements involve certain risks, uncertainties and assumptions, the likelihood of which are difficult to assess and may not occur, including risks that each of its business units may not make the expected progress in its respective market, or that management's long-term strategy may not achieve the expected results. Therefore, actual outcomes, performance and results may differ from what is expressed or forecast in such forward-looking statements, and such differences may vary materially from current expectations. We do not undertake to update any forward-looking statements or risk factors to reflect future events or circumstances.

Item 1B.    Unresolved Staff Comments.
None.

Item 2.    Properties.
Our properties consist of leased facilities for product development, sales, support, and administrative operations. Our largest offices are located in Chatsworth, CA (Los Angeles area) and Chelmsford, MA (Boston Area) in the United States and in Yokneam, Israel (Haifa area). We believe that our existing properties are in good condition and suitable for the conduct of our business. Should the need arise; we believe that suitable replacement and additional space will be available in the future on commercially reasonable terms subject to force majeure conditions. For additional information regarding obligations under operating leases, see Note 9 to the Consolidated Financial Statements located in Item 8 of this Form 10-K.

Item 3.    Legal Proceedings.
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 May 2014, a former customer of Tecnonet, filed a claim in an Italian civil court alleging that Tecnonet, and two of its third-party subcontractors, breached certain supply agreements with the customer and that Tecnonet was aware of a conflict of interest involving the subcontractors. The plaintiff claimed damages and restitution from Tecnonet and the subcontractors, jointly and severally, of approximately $3.0 million in the aggregate, plus costs. On July 21, 2015, Tecnonet and the plaintiff entered into an agreement to settle the lawsuit for a one-time cash payment, which had been accrued and included in discontinued operations for the year ended December 31, 2015. The settlement for this litigation was paid during the quarter ended September 30, 2015. Accordingly, we now consider this matter to be closed.
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. 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.

21


From time to time, MRV has received 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 matters will not have a material adverse effect on our business, operating results and financial condition.
Item 4.    Mine Safety Disclosures.
Not applicable.


22


PART II
Item 5.    Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our Common Stock is traded on the NASDAQ Capital Market under the symbol "MRVC". The high and low sales prices (by quarter) during the last two comparable twelve month periods are as follows:
 
 
High
 
Low
Year Ended December 31, 2015
 
 
 
 
First quarter ending March 31
 
$
11.65

 
$
6.38

Second quarter ending June 30
 
$
12.35

 
$
7.25

Third quarter ending September 30
 
$
21.50

 
$
11.03

Fourth quarter ending December 31
 
$
15.20

 
$
12.01

Year Ended December 31, 2014
 
 
 
 
First quarter ending March 31
 
$
15.98

 
$
10.80

Second quarter ending June 30
 
$
15.31

 
$
10.51

Third quarter ending September 30
 
$
14.55

 
$
11.76

Fourth quarter ending December 31
 
$
12.80

 
$
9.11

As of March 4, 2016 the closing price of our Common Stock was $11.69 per share, and there were approximately 1,190 stockholders of record.
Dividends
The payment of dividends on the Company's Common Stock is within the discretion of the Company's Board of Directors. The Board of Directors did not declare cash dividends during the years ended December 31, 2015 and 2014. The Board of Directors regularly evaluates its capital position to consider the return of cash to stockholders. The Board of Directors does not currently have plans to begin paying a regular dividend.
Equity Compensation Plans
The table below sets forth information with respect to shares of Common Stock that may be issued under our stock option plans as of December 31, 2015.
Plan Category
 
Number of securities
issuable upon
exercise of
outstanding options
 
Weighted
average
exercise price
of outstanding
options
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders (1)
 
449,488

 
$
13.89

 
995,363

Equity compensation plans not approved by security holders
 
14,425

 
$
52.95

 

Total 
 
463,913

 
$
15.10

 
995,363

(1) Includes shares underlying options granted under the 2007 Omnibus Incentive Plan, as amended, (the "Omnibus Plan") and the 2015 Long Term Incentive Plan.
In May 2015, MRV's stockholders approved the 2015 Long Term Incentive Plan (LTIP) to replace MRV's outstanding equity compensation plan, the Omnibus Plan. Upon adoption of the Long Term Incentive Plan, no further shares were available for future grants of options or warrants under its predecessor plans including shares that became and become available as a consequence of the cancellation or forfeiture of outstanding options granted under such plans.

23


Performance Graph
The chart below compares the five-year cumulative total return, assuming the reinvestment of dividends, on MRV's Common Stock with that of the NASDAQ Composite Index, and the RDG SmallCap Technology Index. The graph assumes $100 was invested on December 31, 2010, in our Common Stock and the companies in each of the NASDAQ Composite Index, and the RDG SmallCap Technology Index. It should be noted that this graph represents historical stock price performance and should not be considered indicative of potential future stock price performance.
 
 
Cumulative Total Return
 
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
MRV Communications, Inc. 
 
100.00

 
73.44

 
71.75

 
74.68

 
69.17

 
85.13

NASDAQ Composite
 
100.00

 
100.53

 
116.92

 
166.19

 
188.78

 
199.95

RDG SmallCap Technology
 
100.00

 
77.67

 
73.84

 
102.73

 
87.90

 
73.20


Item 6.    Selected Financial Data.
The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto, in Items 7 and 8, respectively, of this Annual Report on Form 10-K in order to fully understand factors that may affect the comparability of the financial data.
On December 3, 2015, we sold all of the issued and outstanding capital stock of Tecnonet, which was the last business unit in our Network Integration segment. We have reclassified the historical financial results of Tecnonet as discontinued operations in all periods presented. The historical results do not necessarily indicate results expected for any future period. (See Note 3, Discontinued Operations)


24


The following selected balance sheet data as of December 31, 2015 and 2014 and selected statement of operations data for each of the three years in the period ended December 31, 2015, 2014 and 2013 are derived from our audited financial statements included in Item 8 of this Annual Report on Form 10-K. The selected balance sheet data as of December 31, 2013, 2012 and 2011 and selected statement of operations data for the years ended December 31, 2012 and 2011 are derived from the selected financial data contained in Item 6 of MRV's 2014 Annual Report on Form 10-K after giving effect to the discontinued operations of Tecnonet.
 
 
Year ended December 31,
(in thousands, except per share amounts)
 
2015
 
2014
 
2013
 
2012
 
2011
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
88,199

 
$
86,538

 
$
90,564

 
$
79,241

 
$
80,632

Cost of sales
 
42,619

 
43,937

 
43,496

 
35,916

 
31,624

Gross profit
 
45,580

 
42,601


47,068


43,325


49,008

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Product development and engineering
 
20,448

 
20,833

 
19,381

 
15,344

 
14,486

Selling, general and administrative
 
28,966

 
35,080

 
36,696

 
42,338

 
44,281

Total operating expenses
 
49,414

 
55,913


56,077


57,682


58,767

Operating loss
 
(3,834
)
 
(13,312
)

(9,009
)

(14,357
)

(9,759
)
Interest and other income (expense), net
 
(103
)
 
647

 
(383
)
 
2,330

 
232

loss from continuing operations before income taxes
 
(3,937
)
 
(12,665
)
 
(9,392
)
 
(12,027
)
 
(9,527
)
Provision (benefit) for income taxes
 
2,871

 
1,873

 
(34
)
 
(2,549
)
 
(3,289
)
Loss from continuing operations
 
(6,808
)
 
(14,538
)
 
(9,358
)
 
(9,478
)
 
(6,238
)
Income (loss) from discontinued operations, net of tax
 
(371
)
 
2,383

 
2,536

 
15,142

 
(588
)
Net loss
 
$
(7,179
)
 
$
(12,155
)
 
$
(6,822
)
 
$
5,664

 
$
(6,826
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share — basic:
 
 
 
 
 
 
 
 
 
 
From continuing operations
 
$
(0.97
)
 
$
(1.98
)
 
$
(1.25
)
 
$
(1.21
)
 
$
(0.79
)
From discontinued operations
 
(0.05
)
 
0.32

 
0.34

 
1.94

 
(0.07
)
Net income (loss) per share — basic
 
$
(1.02
)
 
$
(1.66
)
 
$
(0.91
)
 
$
0.72

 
$
(0.87
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share — diluted:
 
 
 
 
 
 
 
 
 
 
From continuing operations
 
$
(0.97
)
 
$
(1.98
)
 
$
(1.25
)
 
$
(1.21
)
 
$
(0.79
)
From discontinued operations
 
(0.05
)
 
0.32

 
0.34

 
1.94

 
(0.07
)
Net income (loss) per share — diluted
 
$
(1.02
)
 
$
(1.66
)
 
$
(0.91
)
 
$
0.72

 
$
(0.87
)
Basic weighted average shares
 
7,019

 
7,344

 
7,484

 
7,813

 
7,878

Diluted weighted average shares
 
7,019

 
7,344

 
7,484

 
7,817

 
7,878

 
 
 
 
 
 
 
 
 
 
 
Cash dividend declared per share
 
$

 
$

 
$

 
$
7.40

 
$
9.60


    



25


 
 
December 31,
(in thousands)
 
2015
 
2014
 
2013
 
2012
 
2011
Selected Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
26,169

 
$
16,142

 
$
26,028

 
$
39,824

 
$
56,850

Working capital
 
39,481

 
47,081

 
58,249

 
69,111

 
116,420

Total assets
 
69,084

 
114,572

 
127,947

 
128,565

 
230,689

Total long-term liabilities
 
3,846

 
5,271

 
5,236

 
5,184

 
6,676

Additional paid-in capital
 
1,285,787

 
1,284,483

 
1,281,883

 
1,281,170

 
1,337,935

Accumulated deficit
 
(1,227,671
)
 
(1,220,492
)
 
(1,208,337
)
 
(1,201,515
)
 
(1,207,178
)
Total stockholders' equity
 
$
41,446

 
$
50,970

 
$
63,790

 
$
72,901

 
$
142,214


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K. In addition to historical information, the discussion in this Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements. We assume no obligation to update any of the forward-looking statements after the date of this Annual Report on Form 10-K. The following discussion and analysis is organized as follows:
Overview
Critical Accounting Policies
Recently Issued Accounting Standards
Currency Rate Fluctuations
Results of Operations
Liquidity and Capital Resources
Off Balance Sheet Arrangements
Overview
At MRV, we design, develop and sell products and services that enable our customers to build reliable, scalable and cost effective networks.
We develop our products and services to meet the needs of telecommunications service providers and cable operators (collectively “Service Providers”), data center operators, government entities and enterprises, including the education, financial, healthcare and equipment manufacturing segments in the Americas, EMEA and APAC.
Our 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.
Until the Third quarter of 2015, we operated our business along two principal segments: Network Equipment and Network Integration. Our Network Integration segment, which consisted of Tecnonet as its sole business unit, operated primarily in Italy, servicing Tier One service providers, regional carriers, large enterprises, and government institutions. Tecnonet is a supplier of a wide range of communications equipment from leading global manufacturers, as well as telecommunications solutions and services, including network infrastructure, unified communications, mobility and wireless, network security, cloud computing services, managed call center services, network integration, and optimization. On December 3, 2015, the Company completed the sale of all of the shares of Tecnonet.


26


The sale of Tecnonet is reported as discontinued operations requiring retrospective restatement of prior periods to classify the results of operations for Tecnonet as discontinued operations in this Form 10-K for all periods presented. We have also reclassified the related assets and liabilities transferred as "assets of discontinued operations" and "liabilities of discontinued operations" on the Consolidated Balance Sheet as of December 31, 2014. Cash flows from discontinued operations are presented separately from the cash flows from continuing operations in the accompanying Statement of Cash Flows. (See Note 3, Discontinued Operations)

Our business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries; including Argentina, Australia, Canada, Denmark, Germany, Israel, Italy, Netherlands, Philippines, Poland, Russia, Taiwan, Thailand, and the United Kingdom. For the years ended December 31, 2015, 2014 and 2013, external revenues from foreign subsidiaries accounted for 24%, 26% and 28%, respectively, of our total revenue. The majority of our foreign sales are to customers located in the European region, with remaining foreign sales primarily to customers in the Asia Pacific region.

In 2015, we saw significant improvement in Asia Pacific and the Americas but witnessed contraction in the United States and Europe and were not materially impacted by exchange rate fluctuations. In 2014, we witnessed improvement in Asia Pacific and experienced contraction in the United States, Americas and Europe and were not materially impacted by exchange rate fluctuations.

As of December 31, 2015, the Company had $26.2 million in cash and cash equivalents and $5.2 million in restricted time deposits.

On December 16, 2014, the Company's Board of Directors approved a repurchase of shares of the Company's Common Stock in an amount up to $8.0 million under a share repurchase plan which expired in accordance with its terms on November 13, 2015. During the year ended December 31, 2015, the Company repurchased 502,077 shares at a total cost of approximately $4.9 million, excluding commission, under this share repurchase plan.

Critical Accounting Policies

Our discussion and analysis of the Company's financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Prior Period Reclassifications. The sale of Tecnonet is reported as discontinued operations requiring retrospective restatement of prior periods to classify the results of operations for Tecnonet as discontinued operations in this Form 10-K for all periods presented. We have also reclassified the related assets and liabilities transferred as "assets of discontinued operations" and "liabilities of discontinued operations" on the Consolidated Balance Sheet as of December 31, 2014. Cash flows from discontinued operations are presented separately from the cash flows from continuing operations in the accompanying Statement of Cash Flows. (See Note 3, Discontinued Operations)

Certain reclassifications have been made to 2014 amounts to conform to the 2015 presentation. These reclassifications did not impact previously reported operating results or the Company's previously reported financial position. The reclassification is to conform Rule 5-03 of Regulation S-X, which requires that costs of sales for both product and service revenue be disclosed separately on the condensed consolidated statement of operations.


27


Revenue Recognition. Our major revenue-generating products consist of switches and routers, console management, physical layer products, and fiber optic components. We recognize product revenue, net of sales discounts, returns and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered reasonably assured. Products are generally shipped "FOB shipping point," with no right of return and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company we use to deliver the product to the customer. Sales of services and system support are deferred and recognized ratably over the contract period. Sales to end customers with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are infrequent and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue when product is sold to the distributor rather than when the product is sold by the distributor to the end user. In certain circumstances, distributors have limited rights of return, including stock rotation rights, and/or are entitled to price protection, where a rebate credit may be provided to the customer if we lower our price on products held in the distributor's inventory. We estimate and establish allowances for expected future product returns and credits. We record a reduction in revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenue is recognized, and for future credits to be issued in relation to price protection at the time we make changes to our distributor price book. We monitor product returns and potential price adjustments on an ongoing basis and estimate future returns and credits based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition.

We generally warrant our products against defects in materials and workmanship for 90 days to three year periods. The estimated costs of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

Accounting for Multiple-Element Arrangements entered into prior to January 1, 2011. Arrangements with customers may include multiple deliverables involving combinations of equipment, services and software. In accordance with ASC 605-25 Multiple-Element Arrangements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element is met. Fair value for each element is established based on the sales price charged when the same element is sold separately. If multiple element arrangements include software or software-related elements, we apply the provisions of ASC 985-605 Software to the software and software-related elements, or to the entire arrangement if the software is essential to the functionality of the non-software elements.

Accounting for Multiple-Element Arrangements entered into or materially altered after January 1, 2011. We allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. The selling price we use for each deliverable is based on (a) vendor-specific objective evidence if available; (b) third-party evidence if vendor-specific objective evidence is not available; or (c) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. We allocate discounts in the arrangement proportionally on the basis of the selling price of each deliverable.

Allowance for Doubtful Accounts. We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot precisely predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers deteriorates, resulting in their inability to make payments, a larger reserve may be required. In the event we determine that a change in the allowance is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we make such a determination.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from customers. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses.


28


Inventory.   We make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record an adjustment to the cost basis equal to the difference between the cost of the inventory and the estimated net realizable market value. This adjustment is recorded as a charge to cost of goods sold, and includes estimates for excess quantities and obsolete inventory. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below previous estimates, we would make further adjustments in the period in which we make such a determination and record a charge to cost of goods sold. At the time of recording the adjustment, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration of, or increase in, that newly established cost basis.

Intangibles. We make judgments about the recoverability of intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Our ongoing consideration of all the factors described previously could result in additional impairment charges in the future, which could adversely affect our net income.
  
Software Development Costs. Development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility occurs when a working model is completed or a detail program design exists. After technological feasibility is established, additional costs are capitalized. We believe that our process for internally developed software is essentially completed concurrent with the establishment of technological feasibility, and, accordingly, no software development costs for internally developed software have been capitalized to date.

Internal Use Software Development. Any software that we acquire, internally develop, or modify solely to meet our internal needs, and for which we have no substantive plan to market the software externally, is capitalized. During the year ended December 31, 2013, we implemented a new enterprise-wide software for which we capitalized the development costs. These costs were capitalized and included in property and equipment on the Consolidated Balance Sheets.

Income Taxes. As part of the process of preparing our annual financial statements, we estimate the income taxes in each of the jurisdictions in which we operate based on the estimated annual effective tax rate by jurisdiction. This process involves estimating the current income tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included in our Consolidated Balance Sheets. We assess the likelihood that our deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the income tax provision in the Consolidated Statements of Operations.

We utilize significant management judgment to determine the provision for income taxes, deferred income tax assets and liabilities, including uncertain tax positions, and any valuation allowance recorded against net deferred income tax assets. Management periodically evaluates the deferred income tax assets as to whether it is likely that the deferred income tax assets will be realized. We establish a valuation allowance on the deferred income tax asset at the time we determine the asset is not likely to be realized. If we later determine that it is more-likely-than-not that a deferred tax asset will be realized, we release the valuation allowance and record a credit within the Consolidated Statements of Operations.

Share-Based Compensation.   We determine the fair value of stock options using the Black-Scholes valuation model. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and the related income tax impact. (See Note 12 “Share-Based Compensation” to the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion.)


29


Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant portion of our business in foreign currencies, the Israeli new shekel and to a substantially lesser extent, the Taiwan dollar. For the year ended December 31, 2015 and 2014, 24% and 26% of external revenue, respectively, and 36% and 34% of operating expenses, were incurred at foreign subsidiaries. For the year ended December 31, 2015, the exchange rates for these currencies weakened against the U.S. dollar compared to the year ended December 31, 2014, so revenue and expenses in these currencies translated into slightly fewer dollars than they would have in the prior period. The Israeli new shekel and Taiwan dollar weakened 8% and 5% respectively, against the U.S. dollar for the year ended December 31, 2015, compared to the year ended December 31, 2014. Additional discussion of foreign currency risk and other market risks is included in Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-K.

Results of Operations

The following table sets forth, for the periods indicated, certain consolidated statements of operations data (in thousands):
 
 
For the Years Ended December 30,
 
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
Product revenue
 
$
77,553

 
$
76,828

 
$
80,816

Service revenue
 
10,646

 
9,710

 
9,748

Total revenue
 
88,199

 
86,538

 
90,564

Cost of Revenue:
 
 
 
 
 
 
Cost of product
 
38,496

 
39,705

 
38,510

Cost of services
 
4,123

 
4,232

 
4,986

Total cost of revenue
 
42,619

 
43,937

 
43,496

Gross profit
 
45,580

 
42,601

 
47,068

Operating expenses:
 
 
 
 
 
 
Product development and engineering
 
20,448

 
20,833

 
19,381

Selling, general and administrative
 
28,966

 
35,080

 
36,696

Total operating expenses
 
49,414

 
55,913

 
56,077

Operating loss
 
(3,834
)
 
(13,312
)
 
(9,009
)
Interest expense
 
(55
)
 
(24
)
 
(169
)
Other income (expense), net
 
(48
)
 
671

 
(214
)
Loss from continuing operations before provision for income taxes
 
(3,937
)
 
(12,665
)
 
(9,392
)
Provision (benefit) for income taxes
 
2,871

 
1,873

 
(34
)
Loss from continuing operations
 
(6,808
)
 
(14,538
)
 
(9,358
)
Income (loss) from discontinued operations, net of income taxes of $1,311, $2,430 and $1,542, respectively
 
(371
)
 
2,383

 
2,536

Net loss
 
$
(7,179
)
 
$
(12,155
)
 
$
(6,822
)

Discontinued Operations
On August 10, 2015, we announced that we entered into a shares purchase agreement (“the Purchase Agreement”) with Maticmind S.p.A., (the “Purchaser”), a company incorporated under the laws of Italy, for the sale of all of the shares of our wholly-owned subsidiary Tecnonet. We believe that the sale of Tecnonet enables us to focus our attention on growing our core network equipment business and will enhance the clarity and visibility of the MRV brand in the marketplace.
 


30


The sale of Tecnonet has also enabled us to strengthen our balance sheet. The consideration for the transaction included a cash payment by the Purchaser to the Company of €15.6 million (approximately $17.0 million) at closing plus a cash payment by Tecnonet to the Company of €4.1 million (approximately $4.6 million) prior to closing to repay an outstanding intercompany obligation. Tecnonet procured third party debt financing and repaid the loan in full in two payments: €1.5 million was received during the quarter ended September 30, 2015, with the remaining amount received during October 2015. The Purchaser assumed this debt at closing pursuant to the Purchase Agreement. On December 1, 2015, the sale of Tecnonet was approved by the Company's stockholders at the Company's special meeting of stockholders. On December 3, 2015, the Company completed the sale of all of the 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 Purchase Agreement also contains customary representations, warranties, covenants and indemnification obligations.
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.
In 2015, the Company reported an after-tax gain on the sale of Tecnonet in the amount of $0.2 million. In addition, the Company recorded a cumulative translation loss of $2.2 million and $0.8 million in transaction costs related to the sale, all of which are recorded within discontinued operations in 2015. The $2.2 million of foreign currency related losses included $1.0 million of historical translation related adjustments previously included in accumulated other comprehensive income on the consolidated balance sheet and $1.2 million recognized loss on the intercompany obligation that was settled as part of the transaction.
The results of operations of Tecnonet for the years ended December 31, 2015, 2014 and 2013 that are reflected in consolidated statements of operations as discontinued operations consist of the following (in thousands):
Year Ended December 31:
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
Product revenue
 
$
32,315

 
$
47,649

 
$
38,095

Service revenue
 
30,274

 
37,869

 
37,541

Total revenue
 
62,589

 
85,518

 
75,636

Cost of Revenue:
 
 
 
 
 
 
Cost of product
 
28,472

 
42,883

 
35,575

Cost of services
 
24,181

 
29,458

 
29,138

Total cost of revenue
 
52,653

 
72,341

 
64,713

Gross profit
 
9,936

 
13,177

 
10,923

Selling, general and administrative (1) 
 
6,574

 
7,615

 
6,297

Operating income
 
3,362

 
5,562

 
4,626

Interest expense
 
(124
)
 
(305
)
 
(355
)
Cumulative translation loss recognized upon sale of Tecnonet
 
(2,180
)
 

 

Other expense, net
 
(307
)
 
(444
)
 
(193
)
Income from discontinued operations before income taxes
 
751

 
4,813

 
4,078

Provision for income taxes
 
1,311

 
2,430

 
1,542

Income from discontinued operations, net of tax
 
(560
)
 
2,383

 
2,536

Gain on sale of Tecnonet, net of tax
 
189

 

 

Net income (loss) from discontinued operations, net of income taxes
 
$
(371
)
 
$
2,383

 
$
2,536

(1) Includes Transaction costs of $0.8 million in 2015.

31


The assets and liabilities of Tecnonet that are reflected in the consolidated balance sheet as of December 31, 2015 and 2014 consisted of (in thousands):
Year Ended December 31:
 
2015
 
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$

 
$
6,280

Accounts receivable, net
 

 
25,981

Other receivables
 

 
10,458

Inventories, net
 

 
9,873

Other current assets
 

 
3,823

Total current assets
 

 
56,415

Property and equipment, net
 

 
358

Other assets
 

 
89

Total assets
 
$

 
$
56,862

 
 
 
 
 
Liabilities
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
 
$

 
$
5,402

Accounts payable
 

 
17,173

Accrued liabilities
 

 
3,988

Deferred revenue
 

 
4,816

Total current liabilities
 

 
31,379

Other long-term liabilities (1)
 

 
952

Total Liabilities
 
$

 
$
32,331


(1) Excludes intercompany obligation of $5.0 million that was eliminated upon consolidation.
The assets and liabilities of Tecnonet were removed from our consolidated balance sheet as of the date of the divestiture.

32


Year ended December 31, 2015 Compared to the Year ended December 31, 2014

Year Ended December 31:
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Product revenue
 
$
77,553

 
$
76,828

 
$
725

 
1
 %
Service revenue
 
10,646

 
9,710

 
936

 
10
 %
Total revenue
 
88,199

 
86,538

 
1,661

 
2
 %
Cost of Revenue:
 
 
 
 
 
 
 
 
Cost of product
 
38,496

 
39,705

 
(1,209
)
 
(3
)%
Cost of services
 
4,123

 
4,232

 
(109
)
 
(3
)%
Total cost of revenue
 
42,619

 
43,937

 
(1,318
)
 
(3
)%
Gross profit
 
45,580

 
42,601

 
2,979

 
7
 %
Operating expenses:
 
 
 
 
 
 
 
 
Product development and engineering
 
20,448

 
20,833

 
(385
)
 
(2
)%
Selling, general and administrative
 
28,966

 
35,080

 
(6,114
)
 
(17
)%
Total operating expenses
 
49,414

 
55,913

 
(6,499
)
 
(12
)%
Operating loss
 
(3,834
)
 
(13,312
)
 
9,478

 
(71
)%
Interest expense
 
(55
)
 
(24
)
 
(31
)
 
129
 %
Other income (expense), net
 
(48
)
 
671

 
(719
)
 
(107
)%
Loss from continuing operations before provision for income taxes
 
(3,937
)
 
(12,665
)
 
8,728

 
(69
)%
Provision for income taxes
 
2,871

 
1,873

 
998

 
53
 %
Loss from continuing operations
 
(6,808
)
 
(14,538
)
 
(7,730
)
 
53
 %
Income (loss) from discontinued operations, net of income taxes of $1,311 and $2,430, respectively
 
(371
)
 
2,383

 
2,754

 
116
 %
Net loss
 
$
(7,179
)
 
$
(12,155
)
 
$
(4,976
)
 
41
 %

Revenue

Revenue increased $1.7 million, or 2% for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a $0.9 million, or 10%, increase in service revenue and $0.7 million, or 1%, increase in product revenue. The $0.9 million improvement in service revenue was primarily driven by better penetration rates, along with engineering fees related to deployment of our end-to-end solutions. Revenue for our optical transport and carrier Ethernet products increased during the year ended December 31, 2015 compared to the year ended December 30, 2014, offset by a decrease in network and infrastructure management products. Geographically, the increase in revenues was mainly attributable to higher sales in Latin America and Asia Pacific. Sales in Asia Pacific increased $5.5 million in the year ended December 31, 2015 when compared to December 31, 2014 as there was increased order volume over the same period in the prior year from a Tier One carrier. Sales in Latin America experienced increased order volume from one of our larger South American customers in Chile. Sales in the United States decreased $8.1 million in the year ended December 31, 2015 when compared to the year ended December 31, 2014, primarily driven by timing of bookings from two of the region’s top customers. Sales in Europe decreased $1.0 million in the year ended December 31, 2015 when compared to the year ended December 31, 2014 as a result of a decrease in channel partner order volume.






33



The following table summarizes revenue by geographic region (in thousands):

 
 
 
 
 
 
Favorable/(Unfavorable)
Year ended December 31:
 
2015
 
2014
 
$ Change
 
% Change
Revenue:
 
 
 
 
 
 
 
 
United States
 
$
42,933

 
$
51,036

 
$
(8,103
)
 
(16
)%
Americas (Excluding the U.S.)
 
6,828

 
1,507

 
5,321

 
353
 %
Europe
 
19,463

 
20,478

 
(1,015
)
 
(5
)%
Asia Pacific
 
18,975

 
13,517

 
5,458

 
40
 %
Total revenue
 
$
88,199

 
$
86,538

 
$
1,661

 
2
 %

Gross Profit

The Company's cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated significantly due to product mix, manufacturing yields and sales volumes, and inventory and specific product warranty charges.

Consolidated gross profit increased $3.0 million, or 7%, for the year ended December 31, 2015, compared to the year ended December 31, 2014, principally due to a $1.9 million, or 5%, increase in product revenue gross profit and the $1.1 million or 19% increase in service revenue gross profit. The combined gross profit margin for product and service revenues increased 2.5 percentage points to 51.7% for the year ended December 31, 2015, compared to 49.2% for the year ended December 31, 2014. The gross profit margin for service revenues increased 4.9 percentage points to 61.3% for the year ended December 31, 2015, compared to 56.4% for the year ended December 31, 2014, while the gross profit margin for product revenues increased 2.1 percentage points to 50.4% for the year ended December 31, 2015, compared to 48.3% for the year ended December 31, 2014. The 2.5 percentage point improvement in combined gross profit margin was primarily a result of the revenue mix shift toward products that generally have higher margins, in addition to improvements made in our supply chain related to a re-alignment of outsourcing and contract manufacturing efforts that have afforded us savings in our internal overhead.
 
Operating Expenses

Consolidated operating expenses were $49.4 million, or 56% of revenue, for the year ended December 31, 2015, compared to $55.9 million, or 65% of revenue, for the year ended December 31, 2014.

Operating expenses decreased $6.5 million, or 12% for the year ended December 31, 2015, compared to the year ended December 31, 2014. The decrease was primarily comprised of a $2.5 million decrease in salaries and wages, a $1.0 million decrease in travel and advertising related expenses, a $1.8 million decrease in legal, consulting and accounting fees and a $1.2 million decrease in other general and administrative charges.

Operating Loss

The Company improved its operating results $9.5 million or 71% during the year ended December 31, 2015 compared to the year ended December 31, 2014. The improvement in operating results was primarily the result of $3.0 million, or 7%, increase in gross profit along with the $6.5 million, or 12% planned decrease in operating expenses. Our operating margin improved to (4)% for the year ended December 31, 2015 compared to (15)% operating margin for the year ended December 31, 2014. Operating loss included share-based compensation expense of $1.1 million and $0.9 million for the years ended December 31, 2015 and 2014, respectively.



34


Provision for Income Taxes

The tax provision for the year ended December 31, 2015 was $2.9 million compared to $1.9 million for the year ended December 31, 2014. The increase in income tax expense in 2015, is primarily attributable to an increase in the valuation allowance of $2.6 million related to our foreign subsidiaries, compared to an increase in the valuation allowance of $1.9 million recorded in 2014, related to our German subsidiary. Our income tax provision fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax.
 
Tax Loss Carryforwards

As of December 31, 2015, MRV had federal, state, and foreign net operating loss ("NOL") carryforwards available of $182.5 million, $97.1 million and $97.4 million, respectively. During the year ended December 31, 2015, the Company utilized $11.7 million and $3.0 million of federal and state tax capital loss carryforwards, respectively. The Company's remaining unutilized capital loss carryforwards of $98.8 million and $21.0 million for federal and state tax purposes, respectively, expired on December 31, 2015. 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 December 31, 2015, the US federal and state 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. (See Note 11, Stockholders' Equity and Note 16, Subsequent Events)

Discontinued Operations

The Company reported a $0.4 million loss from discontinued operations for the year ended December 31, 2015, compared to income from discontinued operations of $2.4 million for the year ended December 31, 2014. The tax provision for discontinued operations was $1.3 million and $2.4 million for the years ended December 31, 2015 and 2014, respectively. The effective income tax rate of our discontinued operations increased from 50% in 2014 to 175% in 2015 due to nondeductible transaction costs and the cumulative translation loss recognized in 2015. The effective tax rate for 2014 also includes the settlement of prior Italy tax examinations. The Company completed the sale of Tecnonet on December 3, 2015. Please see Note 3, "Discontinued Operations" for further discussion.


35


Summarized financial information of discontinued operations is shown below (for the periods prior to divestiture):
Year Ended December 31:
 
2015
 
2014
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Product revenue
 
$
32,315

 
$
47,649

 
$
(15,334
)
 
(32
)%
Service revenue
 
30,274

 
37,869

 
(7,595
)
 
(20
)%
Total revenue
 
62,589

 
85,518

 
(22,929
)
 
(27
)%
Cost of Revenue:
 
 
 
 
 
 
 
 
Cost of product
 
28,472

 
42,883

 
(14,411
)
 
(34
)%
Cost of services
 
24,181

 
29,458

 
(5,277
)
 
(18
)%
Total cost of revenue
 
52,653

 
72,341

 
(19,688
)
 
(27
)%
Gross profit
 
9,936

 
13,177

 
(3,241
)
 
(25
)%
Selling, general and administrative (1) 
 
6,574

 
7,615

 
(1,041
)
 
(14
)%
Operating income
 
3,362

 
5,562

 
(2,200
)
 
(40
)%
Interest expense
 
(124
)
 
(305
)
 
181

 
(59
)%
Cumulative translation loss recognized upon sale of Tecnonet
 
(2,180
)
 

 
(2,180
)
 
 %
Other expense, net
 
(307
)
 
(444
)
 
137

 
(31
)%
Income from discontinued operations before income taxes
 
751

 
4,813

 
(4,062
)
 
(84
)%
Provision for income taxes
 
1,311

 
2,430

 
(1,119
)
 
(46
)%
Income (loss) from discontinued operations, net of tax
 
(560
)
 
2,383

 
2,943

 
123
 %
Gain on sale of Tecnonet, net of tax
 
189

 

 
(189
)
 
 %
Net income (loss) from discontinued operations, net of income taxes
 
$
(371
)
 
$
2,383

 
$
2,754

 
116
 %
(1) Includes Transaction costs of $0.8 million in 2015.
Revenue from discontinued operations decreased $22.9 million, or 27%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to the $15.3 million, or 32%, decrease in product revenue primarily driven by the foreign exchange impact, a general slowdown in the Italian economy and certain delays experienced with our larger customers. Revenue from discontinued operation would have been $12.6 million, or 20%, higher for the year ended December 31, 2015 had foreign exchange rates remained the same as they were in the year ended December 31, 2014. Additionally there was one less month of activity in 2015, as Tecnonet was divested on December 3, 2015.

Gross profit from discontinued operations decreased $3.2 million, or 25% for the year ended December 31, 2015, compared to the year ended December 31, 2014, principally due to the $15.3 million or 32% decrease in revenue. Gross margin for the year ended December 31, 2015 was 15.9% an increase of 0.5% percentage point from 15.4% for the year ended December 31, 2014, primarily due to an improvement in product revenue gross margins. Gross profit from discontinued operation would have been $2 million, or 20% higher for the year ended December 31, 2015 had foreign exchange rates remained the same as they were in the year ended December 31, 2014. Additionally there was one less month of activity in 2015, as Tecnonet was divested on December 3, 2015.

Selling, general and administrative expenses from discontinued operations decreased $1.0 million, or 14%, for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to the decrease $1.4 million decrease in sales labor and commission costs, $0.3 million decrease in travel and advertising expenses, and $0.2 million in other general and administrative charges, offset by an increase in transactions costs of $0.8 million in 2015. Selling, general and administrative expenses from discontinued operation would have been $1.4 million, or 21%, higher for the year ended December 31, 2015 had foreign exchange rates remained the same as they were in the year ended December 31, 2014. Additionally there was one less month of activity in 2015, as Tecnonet was divested on December 3, 2015.


36


Operating income from discontinued operations decreased $2.2 million, or 40%, for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to the $3.2 million decrease in gross profit, offset by the $1.0 million decrease in selling, general and administrative expenses. Operating income from discontinued operation would have been $0.6 million, or 19%, higher for the year ended December 31, 2015 had foreign exchange rates remained the same as they were in the year ended December 31, 2014. Additionally there was one less month of activity in 2015, as Tecnonet was divested on December 3, 2015.

Year ended December 31, 2014 Compared To Year ended December 31, 2013

Year Ended December 31:
 
2014
 
2013
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Product revenue
 
$
76,828

 
$
80,816

 
$
(3,988
)
 
(5
)%
Service revenue
 
9,710

 
9,748

 
(38
)
 
 %
Total revenue
 
86,538

 
90,564

 
(4,026
)
 
(4
)%
Cost of Revenue:
 
 
 
 
 
 
 
 
Cost of product
 
39,705

 
38,510

 
1,195

 
3
 %
Cost of services
 
4,232

 
4,986

 
(754
)
 
(15
)%
Total cost of revenue
 
43,937

 
43,496

 
441

 
1
 %
Gross profit
 
42,601

 
47,068

 
(4,467
)
 
(9
)%
Operating expenses:
 
 
 
 
 
 
 
 
Product development and engineering
 
20,833

 
19,381

 
1,452

 
7
 %
Selling, general and administrative
 
35,080

 
36,696

 
(1,616
)
 
(4
)%
Total operating expenses
 
55,913

 
56,077

 
(164
)
 
 %
Operating loss
 
(13,312
)
 
(9,009
)
 
(4,303
)
 
48
 %
Interest expense
 
(24
)
 
(169
)
 
145

 
(86
)%
Other income (expense), net
 
671

 
(214
)
 
885

 
(414
)%
Loss from continuing operations before provision for income taxes
 
(12,665
)
 
(9,392
)
 
(3,273
)
 
35
 %
Provision (benefit) for income taxes
 
1,873

 
(34
)
 
1,907

 
(5,609
)%
Loss from continuing operations
 
(14,538
)
 
(9,358
)
 
5,180

 
(55
)%
Income from discontinued operations, net of income taxes of $2,430 and $1,542, respectively
 
2,383

 
2,536

 
153

 
6
 %
Net loss
 
$
(12,155
)
 
$
(6,822
)
 
$
5,333

 
(78
)%

Revenue

Revenue decreased $4.0 million, or 4% for the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily due to a $4.0 million, or 5% decrease in product revenues. Revenue for our Optical Transport, Infrastructure Management and Network Management products decreased during the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily due to the end-of-life stage on certain products not yet fully replaced by new products. Decreases were offset in part by an increase in carrier Ethernet networking and out of band products of $2.8 million. Service revenues were down less than 0.5% for the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily due to the roll off of older deferred service contracts that related to revenues scheduled for recognition prior to January 1, 2011. Geographically, Asia Pacific revenues increased $5.4 million, primarily due growth in sales for a Tier 1 customer, partially offset by a $9.5 million decrease in the Americas and Europe. The decrease in the Americas was primarily due to revenue declines related to end-of-life products, partially offset by modest revenue growth in certain new products. European revenues declined due to overall challenging economic conditions.


37


The following table summarizes revenue by geographic region (in thousands):

 
 
 
 
 
 
Favorable/(Unfavorable)
Year ended December 31:
 
2014
 
2013
 
$ Change
 
% Change
Revenue:
 
 
 
 
 
 
 
 
United States
 
$
51,036

 
$
55,070

 
$
(4,034
)
 
(7
)%
Americas (Excluding the U.S.)
 
1,507

 
4,200

 
(2,693
)
 
(64
)%
Europe
 
20,478

 
23,207

 
(2,729
)
 
(12
)
Asia Pacific
 
13,517

 
8,087

 
5,430

 
67

Total revenue
 
$
86,538

 
$
90,564

 
$
(4,026
)
 
(4
)%

Gross Profit

Consolidated gross profit decreased $4.5 million, or 9%, for the year ended December 31, 2014, compared to the year ended December 31, 2013, principally due to a shift in the mix of product revenue toward our lower margin products and a negative effect on costs from lower production volumes. These effects were partially offset by lower production labor and overhead arising from cost saving initiatives implemented during the fourth quarter of 2013. Gross margin for the year ended December 31, 2014, was 49.2%, a decline of 2.7 percentage points from 52% for the year ended December 31, 2013, principally caused by variances in material costs due to the under-absorption of material overhead due to lower material purchases than planned and due to the out-of-period adjustment of $0.2 million related to the elimination of intercompany profit in inventory, which resulted in a 3.3 percentage point increase in material costs on product revenues. This was partially offset by strong sales of our new OptiDriver product to a Tier 1 customer in Asia Pacific, which have a higher gross margin.

Operating Expenses

Consolidated operating expenses for the year ended December 31, 2014 were $55.9 million, or 65% of revenue, compared to $56.1 million or 62% of revenue for the year ended December 31, 2013.

Operating expenses decreased $0.2 million, or 0.3%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in operating expenses was primarily the result of $1.0 million in lower labor and consulting fees incurred during the 2013 ERP system conversion, a decrease in general and administrative overhead of $1.5 million of costs in 2013 related to the implementation of our Oracle ERP system, and $0.8 million in lower auditing fees and accounting support fees, offset by the $0.7 million increase in general and administrative costs and $1.5 million in additional costs related to the planned investment in engineering and product development to drive future new products, and an increase in sales and back office support costs of $0.9 million. Additionally, the year ended December 31, 2013 was also burdened by $1.3 million in legal fees arising from the derivative litigation that was settled in June 2013 and costs for an investigation of claims by a former employee that were partially offset by $1.0 million in insurance recovery for legal fees incurred during the derivative litigation that was settled in June 2013.

Operating Loss

The $4.5 million, or 9%, decrease in gross profit primarily gave rise to a $4.3 million or 48% increase in operating loss, also representing a decline in operating margin to (15)% for the year ended December 31, 2014 compared to (10)% operating margin for the year ended December 31, 2013. Operating loss included share-based compensation expense of $0.9 million and $0.7 million for the years ended December 31, 2014 and 2013, respectively. The $4.3 million, or 48% increase in operating loss for the year ended December 31, 2014 when compared to the year ended December 31, 2013, was primarily due to the planned increase in operating expenses and also due to the $4.5 million decrease in gross profit offset by the $0.2 million decrease in operating expenses.

38



Provision for Income Taxes

The Company reported a tax provision from continuing operations for the year ended December 31, 2014 in the amount of $1.9 million compared to a tax benefit from continuing operations in the amount of $0.03 million for the year ended December 31, 2013. The increase in income tax expense for 2014 is primarily attributable to the increase in the valuation allowance of $1.9 million in 2014 related to our German subsidiary. Income tax expense fluctuates based on the amount of per-tax income generated in the various jurisdictions where we conduct operations and pay income tax. The difference in provision for income taxes was also caused by deferred tax asset adjustments in certain foreign jurisdictions.

Discontinued Operations

Income from discontinued operations resulting from the sale of Tecnonet for the year ended December 31, 2014, was $2.4 million compared to $2.5 million for the year ended December 31, 2013. The tax provision for discontinued operations was $2.4 million and $1.5 million for the years ended December 31, 2014 and 2013, respectively. The effective income tax rate of our discontinued operations increased from 38% in 2013 to 50% in 2014 due to the settlement of prior Italy tax examinations in 2014. The Company completed the sale of Tecnonet on December 3, 2015. Please see Note 3, "Discontinued Operations" for further discussion.

Summarized financial information of discontinued operations is shown below (for the periods prior to divestiture):
Years Ended December 31:
 
2014
 
2013
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Product revenue
 
$
47,649

 
$
38,095

 
$
9,554

 
25
 %
Service revenue
 
37,869

 
37,541

 
328

 
1
 %
Total revenue
 
85,518

 
75,636

 
9,882

 
13
 %
Cost of Revenue:
 
 
 
 
 
 
 
 
Cost of product
 
42,883

 
35,575

 
7,308

 
21
 %
Cost of services
 
29,458

 
29,138

 
320

 
1
 %
Total cost of revenue
 
72,341

 
64,713

 
7,628

 
12
 %
Gross profit
 
13,177

 
10,923

 
2,254

 
21
 %
Selling, general and administrative
 
7,615

 
6,297

 
1,318

 
21
 %
Operating income
 
5,562

 
4,626

 
936

 
20
 %
Interest expense
 
(305
)
 
(355
)
 
50

 
(14
)%
Other expense, net
 
(444
)
 
(193
)
 
(251
)
 
130
 %
Income from discontinued operations before income taxes
 
4,813

 
4,078

 
735

 
18
 %
Provision for income taxes
 
2,430

 
1,542

 
888

 
58
 %
Income from discontinued operations, net of tax
 
$
2,383

 
$
2,536

 
$
153

 
6
 %

Revenue from discontinued operations increased $9.9 million, or 13%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the $9.6 million, or 25%, increase in product revenue as a result of increased product revenue order volume. Total revenue from discontinued operations would have been $0.2 million, or 0.3%, higher for the year ended December 31, 2014 had foreign currency exchange rates remained the same as they were for the year ended December 31, 2013.

Gross profit from discontinued operations increased $2.3 million, or 21% for the year ended December 31, 2014, compared to the year ended December 31, 2013, principally due to the $9.9 million or 13% increase in revenue. Gross margin for the year ended December 31, 2014 was 15.4% an increase of 1.0% percentage point from 14.4% for the year ended December 31, 2013, primarily due to an improvement in product revenue gross margins. In 2014, the effect of foreign currency exchange rates on discontinued operations gross profit was immaterial.


39


Selling, general and administrative expenses from discontinued operations increased $1.3 million, or 21%, for the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily due to $0.7 million in additional sales costs for labor and commissions and administrative costs of $0.6 million principally for audit related services and legal fees. In 2014, the effect of foreign currency exchange rates on discontinued operations operating expenses was immaterial.

Operating income from discontinued operations increased $0.9 million, or 20%, for the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily due to the $9.9 million or 13% increase in revenue along with the $2.3 million increase in gross profit offset by the $1.3 million increase in selling, general and administrative expenses. In 2014, the effect of foreign currency exchange rates on discontinued operations operating income was immaterial.

Liquidity and Capital Resources

During the year ended December 31, 2015, the Company's cash increased $10.1 million to $26.2 million from $16.1 million. There were net cash inflows from working capital of approximately $1.3 million, including a $0.7 million decrease in deferred revenue as a result of the timing of shipments, a $2.7 million decrease in accounts receivable due to timing of cash receipts, offset by cash outflows including a $1.4 million decrease in accounts payable due to a decrease in materials purchased, a $2.0 million increase in other assets, a $0.8 million decrease in accrued liabilities due to timing of payments of accrued expenses, along with other individually insignificant cash outflows totaling $0.5 million. Net cash from investing activities included $8.7 million in proceeds from the sale of the Tecnonet net of cash divested and transaction costs (See Note 3, Discontinued Operations). Net cash used in financing activities included $4.9 million in treasury share repurchases (See Note 11 Stockholders' Equity), offset by $0.1 million in proceeds from stock option exercises.

We periodically review our capital position and consider returning capital to stockholders through special dividends or share repurchases when cash on hand exceeds our foreseeable cash needs. We also periodically review the capital needs of our business units. We plan to invest approximately $1.5 million over the next 12 months to upgrade our infrastructure and equipment needed to support the Company's growth objectives in the carrier Ethernet and optical transport markets among others. We believe that cash on hand and existing financing will be sufficient to satisfy current operating needs, capital expenditures, and product development and engineering requirements for at least the next 12 months. We may seek to obtain additional debt or equity financing if we believe it appropriate. We may limit our ability to use available NOLs and capital loss carryforwards if we seek financing through issuance of additional equity securities.

Working Capital

The following table summarizes our working capital position at December 31, (in thousands):
 
 
2015
 
2014
Current assets
 
$
63,273

 
$
105,412

Less: Current assets of discontinued operations
 

 
(56,415
)
Current assets from continuing operations
 
63,273

 
48,997

Current liabilities
 
23,792

 
58,331

Less: Current liabilities from discontinued operations
 

 
(31,379
)
Current liabilities from continuing operations
 
23,792

 
26,952

Working capital from continuing operations
 
$
39,481

 
$
22,045

Current ratio (1)
 
2.7
 
1.8

(1) Determined by dividing total current assets by total current liabilities.

Off-Balance Sheet Arrangements

We do not have transactions, arrangements or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, engaged in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financials.

40



Indemnification

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, 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 purchase agreement and purchased an insurance policy to protect against any claims of indemnification related to the representations and warranties.

We also 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 indemnification agreements as of December 31, 2015, and 2014.

Contractual Obligations

The following table illustrates our contractual obligations as of December 31, 2015 (in thousands):
Contractual Obligations
 
Total
 
Less than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
After 5 Years
Operating leases
 
$
3,418

 
$
1,409

 
$
1,432

 
$
577

 
$

Purchase commitments with suppliers and contract manufacturers
 
11,942

 
11,924

 
18

 

 

Deferred consideration payable
 
233

 

 
233

 

 

Total contractual obligations
 
$
15,593

 
$
13,333

 
$
1,683

 
$
577

 
$


We expect to have sufficient cash and cash flow to meet our short-term and long-term obligations shown in the table above. Our operating leases consist primarily of leases for buildings worldwide from which we conduct our business. Purchase commitments consist primarily of purchase orders for components used to build finished goods inventory.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or hyperlink, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC's website at www.sec.gov.


41


Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the risk of loss that may impact our Consolidated Financial Statements through adverse changes in financial market prices and rates and inflation. Our market risk exposure results primarily from fluctuations in foreign exchange and interest rates. We manage our exposure to these market risks through our regular operating and financing activities and, in certain instances, through the use of derivative financial instruments. These derivative instruments are used to manage risks of volatility in interest and foreign exchange rate movements on certain assets, liabilities or anticipated transactions and create a relationship in which gains or losses on derivative instruments are expected to counter-balance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. As of December 31, 2015, we did not have any such derivative financial instruments outstanding.

Interest Rates.    Our investments expose us to interest rate fluctuations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits.

Foreign Exchange Rates.    We operate on an international basis with revenues and expenses transacted in currencies other than the U.S. dollar. Fluctuation in the value of these foreign currencies affects our results and will cause U.S. dollar translation of such currencies to vary from one period to another. We cannot predict the effect of exchange rate fluctuations upon future operating results. However, because we have revenues and expenses in each of these foreign currencies, the effect on our results of operations from currency fluctuations is reduced.

Certain assets and liabilities, including certain bank accounts, accounts receivables, and accounts payables of some of our business units, exist in currencies other than the functional currency of the related business units and are sensitive to foreign currency exchange rate fluctuations. These currencies principally include the U.S. dollar, the Taiwan dollar, and the Israeli new shekel. When these transactions are settled in a currency other than the functional currency, we recognize a foreign currency transaction gain or loss.

When we translate the financial position or results of operations of subsidiaries with functional currencies other than the U.S. dollar, we recognize a foreign currency translation gain or loss as a component of other comprehensive income (loss). Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant portion of our business in foreign currencies, the Israeli new shekel and the Taiwan dollar. For the year ended December 31, 2015 and 2014, 24% and 26% of external revenue, respectively, and 36% and 34% of operating expenses, were incurred at foreign subsidiaries. For the year ended December 31, 2015, the exchange rates for these currencies weakened against the U.S. dollar compared to the year ended December 31, 2014, so revenue and expenses in these currencies translated into slightly fewer dollars than they would have in the prior period. The Israeli new shekel and Taiwan dollar weakened 8% and 5% respectively, against the U.S. dollar for the year ended December 31, 2015, compared to the year ended December 31, 2014.

Fluctuations in currency exchange rates of foreign currencies have an impact on the U.S. dollar equivalent of such currencies included in cash and cash equivalents reported in our financial statements. The following table summarizes cash and cash equivalents held in various currencies and translated into U.S. dollars (in thousands).
December 31
 
2015
 
2014
U.S. dollars
 
$
23,461

 
$
14,030

Euros
 
171

 
154

Taiwan dollars
 
141