Commitments and Contingencies

Lease Commitments

MRV leases certain facilities and equipment under non-cancelable lease agreements expiring in various years through 2020. Following are the aggregate minimum annual lease payments under leases in effect as of December 31, 2016 (in thousands):



Year ending December 31:	Operating leases
2017	$	984
2018	607
2019	400
2020	251
Total	$	2,242

Rental expense under non-cancelable operating lease agreements for the years ended December 31, 2016, 2015 and 2014, was $1.2 million, $1.0 million and $1.3 million, respectively.

On June 30, 2005, the Company entered into a lease amendment as successor-in-interest to Luminent, Inc. for the lease of office and warehouse space located in Chatsworth, CA (Los Angeles area). In February 2017, the Company extended its current lease through March 31, 2019, with no option to extend the lease term. The remaining lease payments will approximate $0.6 million. (See Note 16, Subsequent Events)

On October 8, 1996, the Company entered into a lease amendment for the lease of office space located in Chatsworth, CA (Los Angeles area). The current term of the lease is for 10 years through April 1, 2017, with no option to extend the lease term. Pursuant to the amendment, the Company was granted an improvement allowance of $70,000 which is being amortized as a reduction to rent expense over the life of the lease. In August 2016, the Company vacated this facility in an effort to consolidate its two existing Chatsworth facilities. The remaining lease obligation of $33 thousand is recorded in accrued liabilities on the Consolidated Balance Sheets as of December 31, 2016. In January 2017, the Company accelerated the termination date of this lease amendment to January 31, 2017. (See Note 16, Subsequent Events)

On December 16, 2009, the Company entered into a lease amendment with Chelmsford Associates, LLC for the lease of office space located in Chelmsford, MA (Boston area). In April 2015, the Company extended the terms of its existing lease for five years, six months through August 31, 2020, with an option to extend the lease term for a five year period. The remaining lease payments over the current term will approximate $1.2 million. Pursuant to the lease, the Company was granted rent abatement of $214,067, which is being amortized as a reduction to rent expense over the life of the lease.

On August 9 2007, the Company entered into a lease with Mirobin Ltd. for the lease of office space located in Yokneam, Israel (Haifa area) through December 31, 2017, with no option to extend the lease term. The remaining lease payments over the current term will approximate $0.4 million.

Purchase Commitments with Outsourcing Partners and Component Suppliers

We utilize several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of December 31, 2016, the Company had outstanding minimum future commitments for manufacturing and component purchases totaled $14.2 million.

The Company records a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of its future demand forecasts. As of December 31, 2016 and December 31, 2015, the liability for these purchase commitments was $0.4 million and $0.2 million, respectively, and is included in accounts payable on the consolidated balance sheets.

Royalty Commitment

Certain of MRV's Israeli subsidiaries are obligated to the Office of the Chief Scientist of the Government of Israel ("Chief Scientist") with respect to the government's participation in research and development expenses for certain products. The royalty to the Chief Scientist is recorded in cost of goods sold, and is calculated at a rate of 2.0% to 5.0% of sales of such products developed with the participation, up to the cost of such participation. We have reserved approximately $243,000 against a disputed claim that was raised in 2005, though the last correspondence with the Chief Scientist on the matter occurred in 2008. Amounts received from the participation of the Chief Scientist are offset against the related research and development expenses incurred. MRV did not receive participation from the Chief Scientist for the years ended December 31, 2016, 2015, and 2014.

Indemnification Obligations

In connection with the sale by MRV of SPI in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. Most of the indemnification obligations have expired; however, indemnifications 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 notified its insurer of the potential claim. 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 to the respective buyers.

In connection with the sale of CES, MRV agreed to indemnify the buyer for the representations and warranties made in the sale purchase agreement and purchased an insurance policy to protect against any claims of indemnification related to the representations and warranties.

In addition, the Company has indemnification obligations to its current and former officers and directors as set forth in the Company's bylaws. We have agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we retain directors and officers insurance that reduces our exposure and enables us to recover portions of amounts paid. As a result of our insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.

Accordingly, no liabilities have been recorded for these indemnification agreements as of December 31, 2016 and 2015.

In the normal course of business to facilitate sales of its products, MRV indemnifies other parties, including customers, lessors and parties to other transactions with us, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representation or covenants, for intellectual property infringement, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.

We cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these obligations. Over the last decade, the Company has not incurred any significant expense as a result of obligations of this type. Accordingly, the Company has not accrued any amounts for such indemnification obligations. However, there can be no assurances that expenses will not be incurred under these indemnification provisions in the future.

Litigation

We are subject to legal claims and litigation in the ordinary course of business, including but not limited to product liability, employment and intellectual property claims. The outcome of any such matters is currently not determinable. In addition, we were party to the litigation set forth below.

Nhan T. Vo, individually and on behalf of other aggrieved employees vs. MRV Communications, Inc., Superior Court of California, County of Los Angeles. On June 27, 2013, the plaintiff in this matter filed a lawsuit against the Company alleging claims for failure to properly pay overtime or provide meal and rest breaks to its non-exempt employees in California, among other things. The complaint seeks an unspecified amount of damages and penalties under provisions of the Labor Code, including the Labor Code Private Attorneys General Act. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. Management believes it has accrued adequate reserves for this matter and does not expect the matter to have a material adverse effect on its business or financial condition. However, depending on the actual outcome of this case, further provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.

In connection with the sale by MRV of SPI in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. The Company has received a notice from SPI, advising the Company of a tax audit for periods including tax returns filed prior to the acquisition of SPI by the buyer. Management believes that it has meritorious defenses to the extent a formal indemnification claim is asserted and has notified its insurer of the potential claim. MRV intends to vigorously contest any claim; however, no formal legal proceeding has been commenced, and MRV can provide no assurance that such claim would not have a material adverse effect on its business, operating results or financial condition.

From time to time, MRV receives notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. Management does not believe that any of these matters will result in a material adverse outcome.

MRV and its subsidiaries have from time to time been named as a defendant in other lawsuits involving matters that management considers routine to the nature of its business. Management is of the opinion that the ultimate resolution of such outstanding matters will not have a material adverse effect on our business, operating results and financial condition.

Cost Saving Measures and Asset Impairments

During the second half of fiscal 2016, the Company initiated cost saving measures intended to optimize its cost structure. These cost saving measures included consolidating facilities in Chatsworth, California which amounted to approximately $0.2 million, in addition to reductions in workforce which included one-time termination benefits of approximately $1.6 million. The costs of implementation were reported under cost of net revenues and operating expenses in the Consolidated Statements of Operations. Substantially all cash outlays in connection with these measures occurred in the third and fourth quarter of fiscal 2016.

As of December 31, 2016, activities related to these measures were substantially complete.

The changes in reserves associated with these measures for fiscal 2016 consisted of the following and are included in accrued liabilities on the accompanying Consolidated Balance Sheets (in thousands):



	Severance and Other employee related costs			Facility Closures and Asset impairments
Balance at January 1, 2016	$	—		$	—
Provision for cost saving measures	1,557			166
Cash payments made	(914		)	(63		)
Balance at December 31, 2016	$	643		$	103