What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-02-28 · 172 added, 261 removed, 180 unchanged (71% of the section changed)

24 unchanged sentences

Temporary suspensions of our airtime services typically increase in the third and fourth quarters of each year as boats are placed out of service during the winter months.

Impairment Charge – KVH Media Group

The COVID-19 pandemic has impacted various aspects of our operations, and we have been monitoring the impact of this global crisis carefully throughout the year.

We have particularly monitored the operations of KVH Media Group, which depends heavily on travel and travel-related industries.

The revenues and cash flows of KVH Media Group have been significantly impacted by the global reduction in travel since the start of the pandemic.

Prior to our annual impairment test in the fourth quarter of 2020, based on our quarterly review of the impact of this global crisis on our forecasted revenues and cash flows, there was no indication of impairment to the carrying value of goodwill or other intangible assets.

However, in the fourth quarter of 2020, there were increases in the number of reported COVID-19 cases, and substantial shutdowns were reinstated in the United States, UK and Europe, which caused continued disruptions to our KVH Media Group business as the global travel and related industries remained at historically depressed levels.

In response to the impact of the pandemic, particularly with respect to our KVH Media business, during our annual budgeting and long-term planning process, we conducted detailed discussions with many of our largest customers in the KVH Media Group to validate our assumptions, which indicated further expected delays in recovery, and certain areas of the KVH Media business that may not recover completely or at all.

Accordingly, we updated our long-term revenue and cash flow forecast to reflect these most recent observations.

Based on our other long-lived asset impairment analysis and annual goodwill impairment test, we recognized an intangible asset impairment charge of $1.8 million and a goodwill impairment charge of $8.7 million for the year ended December 31, 2020 related to KVH Media Group.

Please see Note 1(k) for additional information.

COVID-19 Global Pandemic

The COVID-19 pandemic continues to disrupt businesses around the world and has resulted in a global economic downturn.

The impact of the pandemic on our operating results began in the first quarter of 2020 and continued throughout the year, particularly in areas of our business impacted by global commerce (for example, maritime shipping, travel and leisure).

We do not know how long the pandemic will continue or what the ongoing economic impact will be on our business.

The areas of our business most at risk of being negatively impacted by the prolonged continuation of this crisis include our mobile connectivity product and service sales, as commercial customers continue to delay acquiring mini-VSAT systems due to the global reduction in maritime shipping, and our media business, due to the severe restrictions on domestic and international travel.

Similarly, our inertial navigation product sales have been and may continue to be negatively impacted as domestic and foreign customers decide to conserve cash in their own businesses in the face of the prolonged continuation of the crisis.

In response to these significant uncertainties, in the second quarter of 2020 we undertook multiple steps to mitigate the impact of the pandemic on our business, including a comprehensive reduction in salaries and wages and the elimination of most discretionary expenditures, including capital expenditures.

As part of our mitigation efforts, we applied for, and received, assistance made available by the United States government through the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).

At the beginning of the fourth quarter, we restored salaries for all of our employees to 100% of the pre-reduction levels, although we continue to limit discretionary spending.

We have deferred annual salary increases for the first half of 2021.

Sale of Videotel - Discontinued Operations

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Accordingly, we have classified the results of the Videotel business as discontinued operations for all periods presented.

In December 2019, we finalized the working capital adjustment.

Please see Notes 1 and 18 for further discussion.

In December 2019, we finalized the working capital adjustment, which reduced the proceeds from the sale of Videotel to $88.4 million.

Please see Notes 1 and 18 of our consolidated financial statements for further discussion.

Inertial Navigation Segment

10 unchanged sentences

Mobile connectivity (1)

$ 119,453 $ 122,015

Inertial navigation 39,280 35,878

Net sales $ 158,733 $ 157,893

(1)- Mobile connectivity net sales for 2019 include a $1.4 million favorable adjustment to correct an immaterial prior period accounting error related to the implementation and application of ASC 606, Revenue from Contracts with Customers (ASC 606).

See Note 11 of our consolidated financial statements for more information.

Product sales within the mobile connectivity segment accounted for 20% of our consolidated net sales for both 2019 and 2018 .

Product sales within the mobile connectivity segment accounted for 18% and 20% of our consolidated net sales for 2020 and 2019, respectively.

Sales of mini-VSAT Broadband airtime service accounted for 51% and 48% of our consolidated net sales for 2020 and 2019, respectively.

Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems accounted for 16% and 17% of our consolidated net sales for 2019 and 2018 , respectively.

Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems accounted for 16% of our consolidated net sales for both 2020 and 2019.

No other single product class accounted for 10% or more of consolidated net sales.

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Year Ended December 31,

2020 2019 (1)

Product 40.7 % 39.2 %

Service 59.3 60.8

Net sales 100.0 100.0

Costs and expenses:

4 unchanged sentences

General and administrative 15.4 16.1

Goodwill impairment charge 5.5 —

Intangible asset impairment charge 1.1 —

Total costs and expenses 114.5 113.4

3 unchanged sentences

Other income, net 0.1 0.1

Loss from continuing operations before income taxes (benefit) expense

Income tax (benefit) expense from continuing operations (1)

Loss from continuing operations before income taxes expense (benefit) (13.8) (12.6)

Income tax expense (benefit) from continuing operations 0.1 (2.5)

Net loss from continuing operations (13.9) % (10.1) %

The Company’s product sales, costs of product sales, sales, marketing and support expense, income tax benefit and net loss from continuing operations for 2019 presented as a percentage of net sales include adjustments to correct immaterial prior period accounting errors related to the implementation and application of ASC 606.

(1) Our product sales, costs of product sales, sales, marketing and support expense, income tax benefit and net loss from continuing operations for 2019 presented as a percentage of net sales include adjustments to correct immaterial prior period accounting errors related to the implementation and application of ASC 606.

See Note 11 of our consolidated financial statements for more information.

Years ended December 31, 2020 and 2019

As discussed further under the heading "Segment Discussion" below, product sales decreased $1.4 million , or 2% , to $61.9 million in 2019 from $63.3 million in 2018 , due to a decrease in inertial navigation product sales of $1.6 million , partially offset by an increase in mobile connectivity product sales of $0.3 million .

Service sales for 2019 increased $6.2 million , or 7% , to $96.0 million from $89.8 million in 2018 due to an increase of $5.8 million in mobile connectivity service sales and an increase in inertial navigation service sales of $0.4 million .

In 2020, we expect that net sales will increase for both our mobile connectivity and internal navigation segments primarily due to an increase in mini-VSAT airtime sales, TACNAV and FOG product sales.

As discussed further under the heading "Segment Discussion" below, product sales increased $2.7 million, or 4%, to $64.6 million in 2020 from $61.9 million in 2019, primarily due to an increase in inertial navigation product sales of $6.5 million, partially offset by a decrease in mobile connectivity product sales of $3.8 million.

Service sales for 2020 decreased $1.9 million, or 2%, to $94.1 million from $96.0 million in 2019 primarily due to a decrease in inertial navigation service sales of $3.1 million, partially offset by an increase in mobile connectivity service sales of $1.2 million.

Costs of Sales

Costs of sales consists of costs of product sales and costs of service sales.

Costs of sales increased in 2019 to $104.1 million from $95.0 million in 2018 .

The increase in costs of sales was driven by an increase of $5.8 million in costs of service sales and a $3.4 million increase in costs of product sales, of which $1.6 million was attributable to the correction of an immaterial prior period accounting error.

Costs of sales decreased in 2020 to $101.1 million from $104.1 million in 2019.

The decrease in costs of sales was primarily driven by a $1.7 million decrease in costs of service sales and a $1.3 million decrease in costs of product sales.

As a percentage of net sales, costs of sales was 64% and 66% for 2020 and 2019, respectively.

Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products.

For 2019 , costs of product sales increased by $3.4 million , or 9% , to $42.9 million from $39.5 million in 2018 .

For 2020, costs of product sales decreased by $1.3 million, or 3%, to $41.6 million from $42.9 million in 2019.

As a percentage of product sales, costs of product sales were 64% and 69% for 2020 and 2019, respectively.

Mobile connectivity costs of product sales increased by $4.6 million , or 22% , primarily due to a $2.3 million inventory reserve for TracPhone V-IP products as we decided to no longer promote sales of these products and to instead focus our efforts on migrating customers to our HTS network and products and a $1.6 million adjustment to correct an immaterial error related to the implementation and application of ASC 606 to sales-type leases.

Mobile connectivity costs of product sales decreased by $4.4 million, or 17%, primarily due to a $3.8 million decrease in our marine mobile connectivity cost of product sales and a $0.6 million decrease in our land mobile connectivity costs of product sales.

Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 77% and 82% for 2020 and 2019, respectively.

Inertial navigation costs of product sales decreased by $1.2 million , or 7% , primarily due to a $3.4 million decrease in our FOG costs of product sales, largely offset by a $1.9 million decrease in absorption of factory overhead due to a decrease in the volume of production and an increase in scrap and other manufacturing period costs.

Inertial navigation costs of product sales increased by $3.1 million, or 18%, primarily due to a $1.7 million increase in our TACNAV costs of product sales, a $0.7 million increase in FOG and OEM costs of product sales and a $0.7 million increase in expensed material and other manufacturing period costs.

Inertial navigation costs of product sales as a percentage of inertial navigation product sales was 55% and 56% for 2020 and 2019, respectively.

Our costs of service sales consist primarily of satellite service capacity, depreciation, service network overhead expense associated with our mini-VSAT Broadband network infrastructure, direct network service labor, Inmarsat service costs, product installation costs, engineering and related direct costs associated with customer-funded research and development, media materials and distribution costs, and service repair materials.

For 2019 , costs of service sales increased by $5.8 million , or 10% , to $61.3 million from $55.4 million in 2018 .

For 2020, costs of service sales decreased by $1.7 million, or 3%, to $59.5 million from $61.3 million in 2019.

As a percentage of service sales, costs of service sales were 63% and 64% for 2020 and 2019, respectively.

Mobile connectivity costs of service sales increased by $5.3 million , or 10% , primarily due to a $4.5 million increase in mini-VSAT airtime costs of service sales, including increased HTS network capacity costs, legacy network revenue share minimums and AgilePlans depreciation costs.

In addition, there was a $0.8 million increase in costs associated with contract engineering service revenue.

Mobile connectivity costs of service sales decreased by $1.0 million, or 2%, primarily due to a $0.9 million decrease in costs of service sales for service activations, along with a $0.8 million decrease in costs associated with contract engineering service revenue.

These decreases were partially offset by a $0.6 million increase in mini-VSAT airtime costs of service sales.

Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales were 62% and 63% for 2020 and 2019, respectively.

Inertial navigation costs of service sales increased by $0.5 million , or 16% , primarily due to an increase in contract engineering service revenues.

Inertial navigation costs of service sales decreased by $0.8 million, or 20%, primarily due to a decrease in contract engineering service revenues.

Inertial navigation costs of service sales as a percentage of inertial navigation service sales was 124% and 70% for 2020 and 2019, respectively.

In 2020, we expect that our costs of sales will generally increase in correlation with our expected growth in our mobile connectivity and inertial navigation net sales.

To the extent that customers continue to subscribe to our AgilePlans program, we expect a corresponding decrease in product sales and increase in depreciation expense for AgilePlans equipment.

The increase in costs of inertial navigation service sales was due to additional costs relating to an engineering and services development contract from a major U.S.

defense contractor.

Operating Expenses

Research and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internally funded product development and product sustaining engineering activities.

Research and development expense for 2019 increased by $1.0 million , or 7% , to $15.9 million from $15.0 million in 2018 .

The primary reason for the increase in research and development expense was a $0.8 million increase in salaries and employee benefits, a $0.7 million increase in expensed materials, and a $0.4 million increase in consulting fees, partially offset by a $1.3 million increase in funded engineering expenses (which are reflected in costs of service sales rather than research and development expense).

Research and development expense for 2020 decreased by $0.1 million, or 1%, to $15.8 million from $15.9 million in 2019.

The primary reason for the decrease in research and development expense was a $0.5 million decrease in expensed materials, a $0.4 million decrease in consulting fees, a $0.2 million decrease in travel expenses and a $0.2 million decrease in depreciation and amortization expense, partially offset by a $1.4 million decrease in funded engineering expenses (which are reflected in costs of service sales rather than research and development expense).

As a percentage of net sales, research and development expense was 10% in both 2020 and 2019.

We expect that research and development expense will grow year-over-year in 2020 as we invest in developing new technologies and continue to fund planned strategic investments in the development of our photonic chip and enhancement of our IoT platforms.

Research and development costs in 2020 may represent a larger percentage of net sales due in part to a decrease in funded engineering costs.

Sales, marketing, and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in-house and third-party representatives, costs related to the co-development of certain content, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and support costs, warranty-related costs and bad debt expense.

Sales, marketing and support expense also includes the operating expenses of our sales office subsidiaries in Denmark, Singapore, Brazil, and Japan.

Sales, marketing, and support expense increased by $2.9 million , or 9% , to $33.4 million in 2019 from $30.6 million in 2018 .

The increase in sales, marketing and support expense resulted primarily from a $2.4 million increase in salaries and employee benefits and a $0.5 million increase in marketing expenses, partially offset by a $0.6 million decrease in bad debt expense.

Sales, marketing, and support expense decreased by $3.6 million, or 11%, to $29.8 million in 2020 from $33.4 million in 2019.

The decrease in sales, marketing and support expense resulted primarily from a $1.2 million decrease in travel expenses, a $1.1 million decrease in warranty expenses, a $1.0 million decrease in marketing expenses, a $0.9 million decrease in external commission expenses and a $0.4 million decrease in salaries and associated compensation, partially offset by a $0.5 million increase in bad debt and a $0.3 million decrease in funded expenses.

A portion of these cost savings were attributable to pandemic-related travel restrictions and other measures, and we expect that these expenses will begin to normalize as the pandemic recovery progresses.

As a percentage of net sales, sales, marketing and support expense was 19% and 21% in 2020 and 2019, respectively.

We expect that our sales, marketing, and support expense will increase year-over-year in 2020 primarily driven by increased personnel, marketing and technology investments to support product sales and launches.

Further, we expect higher sales and marketing expenses in 2020 as we continue to invest in the ongoing success of our AgilePlan offerings.

General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources, certain outside professional services, and other administrative costs.

General and administrative expense for 2019 increased by $2.3 million , or 10% , to $25.5 million from $23.2 million for 2018 .

The increase in general and administrative expense resulted primarily from a $2.1 million increase in salaries and associated compensation and a $0.4 million increase in computer expenses, partially offset by a $0.2 million decrease in legal and professional fees.

General and administrative expense for 2020 decreased by $1.0 million, or 4%, to $24.4 million from $25.5 million for 2019.

The decrease in general and administrative expense resulted primarily from a $0.5 million decrease in salaries and associated compensation, a $0.2 million decrease in bank fees, a $0.2 million decrease in dues and subscriptions and a $0.2 million decrease in travel expenses, partially offset by a $0.2 million increase in legal and professional fees.

As a percentage of net sales, general and administrative expense was 15% and 16% for 2020 and 2019, respectively.

We expect general and administrative expenses to increase year-over-year in 2020, primarily driven by increased personnel costs.

Interest and Other Income, Net

Interest income relates to interest earned on our cash and cash equivalents, as well as from investments.

Interest income increased by $1.4 million to $2.0 million from $0.6 million for 2018 .

The increase was primarily due to the interest related to the note receivable from Oakley Capital in connection with our sale of Videotel and interest related to our marketable securities.

Interest expense for 2019 decreased by $0.8 million , or 43% , to $1.0 million from $1.8 million for 2018 primarily as a result of our repayment of all of our debt obligations during 2019.

Other income, net for 2019 decreased to $0.1 million from other income, net of $0.7 million for 2018 primarily due to a decreased in foreign exchange gains from our UK operations.

Income Tax (Benefit) Expense

Income tax benefit was $4.0 million for 2019 and income tax expense was $0.3 million for 2018 .

This change was primarily attributed to the recognition of the tax benefit sustained from losses on continuing operations in the U.S.

Interest income relates to interest earned on our cash and cash equivalents, as well as from investments and our sale-type lease receivables.

Interest income decreased by $1.0 million to $1.0 million from $2.0 million for 2019.

The decrease was primarily due to the interest received from Oakley Capital in connection with our sale of Videotel in 2019.

Interest expense for 2020 decreased to less than $0.1 million from $1.0 million for 2019 primarily as a result of our repayment of all of our interest-bearing debt obligations during 2019.

Other income, net for 2020 increased to $0.2 million from other income, net of $0.1 million for 2019 primarily due to a decrease in foreign exchange losses from our UK operations.

Income Tax Expense (Benefit)

Income tax expense for 2020 was $0.2 million due to taxes related to income earned in foreign jurisdictions and no associated tax benefit related to losses incurred in the U.S.

due to a full valuation allowance on our related deferred tax assets.

Income tax benefit for 2019 was $4.0 million which was primarily attributed to the recognition of the tax benefit sustained from losses on continuing operations in the U.S.

which was required to negate the tax expense incurred under discontinued operations.

The effective tax rate for 2020 was (0.8)%.

The primary driver of the difference between our effective tax rate as compared to the United States federal statutory rate was the impact of recording a net valuation reserve on the current year tax benefit generated on U.S.

The primary driver of the difference between our effective tax rate as compared to the United States federal statutory rate was the impact of recording the valuation reserve against the U.S.

deferred tax assets, which was partially offset by income taxed at lower foreign tax rates.

The effective income tax rate of 20.0% for 2019 differs from the U.S.

federal statutory rate due to the impact of recording a net valuation reserve on the tax benefit generated on U.S.

net operating losses and tax credits, as well as the income from discontinued operations.

This impact was offset by income taxed at lower foreign tax rates.

The effective income tax rate of (3.1)% for 2018 differs from the U.S.

federal statutory rate principally as a result of recording the valuation reserve against the U.S.

deferred tax assets, which was partially offset by income taxed at lower foreign tax rates.

Discontinued Operations

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Our net sales by segment for 2020 and 2019 were as follows:

For the year ended December 31,

For the year ended December 31, 2020 vs.

2020 2019 $ %

(dollars in thousands)

Mobile connectivity sales

$ 27,863 $ 31,623 $ (3,760) (12) %

Service 91,590 90,392 1,198 1 %

Net sales $ 119,453 $ 122,015 $ (2,562) (2) %

Inertial navigation sales

Product $ 36,756 $ 30,302 $ 6,454 21 %

Service 2,524 5,576 (3,052) (55) %

Net sales $ 39,280 $ 35,878 $ 3,402 9 %

(1) Mobile connectivity product sales for 2019 include a $1.4 million favorable adjustment to correct an immaterial prior period accounting error related to the implementation and application of ASC 606.

1 unchanged sentence

Operating (loss) income by segment for 2020 and 2019 were as follows:

For the year ended December 31,

For the year ended December 31, 2020 vs.

2020 2019 $ %

(dollars in thousands)

Mobile connectivity (1)(2)

$ (10,071) $ (5,569) $ (4,502) (81) %

Inertial navigation 4,799 2,961 1,838 62 %

$ (5,272) $ (2,608) $ (2,664) (102) %

Unallocated (17,665) (18,488) 823 4 %

Loss from operations $ (22,937) $ (21,096) $ (1,841) (9) %

1 unchanged sentence

See Note 11 of our consolidated financial statements for more information.

(2) Mobile connectivity loss from operations for 2020 includes a $10.5 million goodwill and intangible asset impairment charge.

See Note 1(k) and Note 9 for more information.

Mobile Connectivity Segment

Net sales in the mobile connectivity segment increased by $6.1 million , or 5% , in 2019 as compared to 2018 .

Mobile connectivity product sales increased by $0.3 million , or 1% , to $31.6 million in 2019 from $31.4 million in 2018 .

The increase in mobile connectivity product sales reflects a $1.4 million correction of an immaterial accounting error in lease-type mobile connectivity product sales and a $0.5 million increase in marine accessories sales, partially offset by a $1.0 million decrease in TracVison product sales and a $0.5 million decrease in land mobile product sales.

Net sales in the mobile connectivity segment decreased by $2.6 million, or 2%, in 2020 as compared to 2019.

Mobile connectivity product sales decreased by $3.8 million, or 12%, to $27.9 million in 2020 from $31.6 million in 2019.

The decrease was primarily the result of a $3.0 million decrease in TracVision product sales, a $0.8 million decrease in land mobile product sales and a $0.3 million decrease in product sales of accessories.

This was partially offset by a $0.4 million increase in mini-VSAT product sales.

Mobile connectivity service sales increased by $1.2 million, or 1%, to $91.6 million in 2020 from $90.4 million in 2019.

The increase was primarily due to a $6.6 million increase in mini-VSAT service sales, driven by an 11% increase in subscribers, partially as a result of the introduction of AgilePlans.

Partially offsetting this increase was a $1.2 million decrease in our content service sales, which resulted primarily from a decrease in subscribers.

We expect that our mini-VSAT service sales will continue to grow year-over-year, primarily through the continued expansion of our mini-VSAT Broadband customer base and the availability of our AgilePlans subscription service model.

We expect that mini-VSAT product sales will decline to the extent that customers select the AgilePlans subscription service model.

The increase was primarily due to a $5.0 million increase in mini-VSAT service sales, driven by a 4% increase in subscribers, primarily as a result of AgilePlans, and a $0.9 million one-time amount relating to a favorable resolution of a contractual matter with a particular customer.

Offsetting this increase was a $2.7 million decrease in our content service sales, which resulted primarily from service suspensions during the pandemic, a $0.7 million decrease in contracted engineering service revenue and a $0.4 million decrease in service repair revenue.

Operating earnings for the mobile connectivity segment decreased $4.5 million in 2020 as compared to 2019.

This decrease was primarily the result of a decrease in sales less associated costs of $3.8 million , which includes a $2.3 million inventory reserve related to our TracPhone V-IP products, a $0.3 million unfavorable adjustment to correct an immaterial prior period accounting error related to the implementation and application of ASC 606 and an increase in airtime network costs due to the operation of both our HTS network and our legacy network.

In addition, mobile connectivity operating expenses increased in 2019 due to a $2.2 million increase in employee salaries and benefits, a $0.4 million increase in consulting and a $0.4 million increase in marketing expenses, partially offset by a $0.5 million decrease in bad debt expense.

This decrease was primarily due to the impairment of goodwill and other intangible assets of $10.5 million in 2020 in KVH Media Group.

This decrease was partially offset by an increase in sales less associated costs of $2.8 million, combined with a decrease in mobile connectivity operating expenses, excluding impairment, of $3.2 million in 2020.

The decrease in operating expenses was due to a $1.1 million decrease in travel expenses, a $0.9 million decrease in employee salaries and benefits, a $0.9 million decrease in marketing expenses, a $0.8 million decrease in warranty expenses and a $0.3 million decrease in expensed materials, partially offset by a $0.6 million increase in bad debt expense.

Inertial Navigation Segment

Net sales in the inertial navigation segment decreased $1.2 million , or 3% , in 2019 as compared to 2018 .

Inertial navigation product sales decreased $1.6 million , or 5% , to $30.3 million in 2019 from $31.9 million in 2018 .

Specifically, sales of our FOG and OEM products decreased $2.0 million , or 7% , partially offset by a $0.4 million , or 9% , increase in TACNAV products.

Inertial navigation service sales increased $0.4 million , or 8% , to $5.6 million in 2019 from $5.2 million in 2018 .

The primary reason for the increase was a $0.6 million, or 13%, increase in contracted engineering services for an engineering and services development contract from a major U.S.

defense contractor, which began in the fourth quarter of 2018 and is expected to continue through the third quarter of 2021.

Operating earnings for the inertial navigation segment decreased $2.0 million in 2019 as compared to 2018 .

This decrease was primarily due to the decrease in sales less associated costs of $0.5 million , a $0.5 million increase in salaries and associated compensation, a $0.4 million increase in external commissions and a $0.2 million increase in professional fees.

Net sales in the inertial navigation segment increased $3.4 million, or 9%, in 2020 as compared to 2019.

Inertial navigation product sales increased $6.5 million, or 21%, to $36.8 million in 2020 from $30.3 million in 2019.

The primary driver of the increase was a $6.1 million, or 125%, increase in TACNAV product sales, along with an increase of $0.3 million, or 1%, of sales of our FOG and OEM products.

Inertial navigation service sales decreased $3.1 million, or 55%, to $2.5 million in 2020 from $5.6 million in 2019.

The primary reason for the decrease was a $3.1 million, or 61%, decrease in contracted engineering service revenues.

Operating earnings for the inertial navigation segment increased $1.8 million in 2020 as compared to 2019.

This increase was primarily due to the increase in sales less associated costs of $1.1 million, a $0.7 million decrease in external commissions, a $0.4 million decrease in travel expenses and a $0.3 million decrease in warranty expenses.

This was partially offset by a $0.6 million increase in salaries and associated compensation and a $0.5 million decrease in funded engineering expenses.

Certain corporate-level costs have not been allocated because they are not attributable to either segment.

These costs primarily consist of broad corporate functions, including executive, legal, finance, information technology, and costs associated with corporate actions.

Unallocated operating loss increased $2.2 million , or 14% , in 2019 compared to 2018 .

The increase in unallocated operating loss was primarily the result of an increase in salaries and associated compensation.

Unallocated operating loss decreased $0.8 million, or 4%, in 2020 compared to 2019.

The decrease in unallocated operating loss was primarily the result of a $0.5 million decrease in salaries and associated compensation and a $0.3 million decrease in bank fees.

Critical Accounting Policies and Significant Estimates

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Our significant accounting policies are summarized in Note 1 to our consolidated financial statements.

The significant accounting policies that we believe are the most critical in understanding and evaluating our reported financial results include the following:

Revenue Recognition

We adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.

The adoption of ASC 606 represents a change in accounting principle that was intended to more closely align revenue recognition with the delivery of our products and services and to provide enhanced disclosures.

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products and services.

The amount of revenue recognized reflects the consideration which we expect to be entitled to receive in exchange for these products and services.

To achieve this core principle, we apply the following five steps:

1) Identify the contract with a customer

2) Identify the performance obligations in the contract

3) Determine the transaction price

4) Allocate the transaction price to performance obligations in the contract

5) Recognize revenue when or as we satisfy a performance obligation

Product sales

Revenue from product sales is recognized when control of the goods is transferred to the customer, which generally occurs at our plant or warehouse upon delivery to the carrier for shipment.

Revenue related to shipping and handling is recognized when the products are shipped and the associated costs are accrued for based on our election to account for shipping and handling activities as a fulfillment of the promise to transfer the products and not as a combined promise.

For certain inertial navigation product sales, customer acceptance or inspection may be required before control of the goods is transferred to the customer.

For those sales, revenue is recognized after notification of customer acceptance and the goods have been delivered to the carrier for shipment.

In certain circumstances customers may request a bill-and-hold arrangement.

Under these bill-and-hold arrangements, revenue is recognized when we have fulfilled all of our performance obligations, we have received notification of customer acceptance of the goods, the units are segregated for the specific customer only, and the goods are ready for physical transfer to the customer in accordance with its defined contract delivery schedule.

Our standard payment terms are generally Net 30.

Under certain limited conditions, we, at our sole discretion, provide for the return of goods.

No product is accepted for return and no credit is allowed on any returned product unless we have granted and confirmed prior written permission by means of appropriate authorization.

We establish reserves for potential sales returns, credits, and allowances, and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and expectations for the future.

Contracts with multiple performance obligations

We sell products and services through arrangements that in certain instances bundle VSAT equipment, satellite connectivity and other services.

For these arrangements, we have determined that the performance obligations are not distinct in the context of the contracts with certain customers.

We will recognize product revenue under these arrangements over the estimated satellite connectivity customer life, which is estimated to be five years based on historical evidence.

Satellite connectivity and media content service sales

Directly sold and re-sold satellite connectivity service for voice, data and Internet is recognized monthly based upon minutes or megabytes of traffic processed or contracted fixed fee schedules.

AgilePlans subscribers make only a one-month service commitment, and other subscribers typically enter into a one-year minimum service agreement.

We have evaluated whether we obtain control of the services that are being transferred to the customer in assessing gross revenue reporting as principal verse net revenue reporting as agent for our satellite connectivity service sales and our payments to the applicable service providers.

Based on our assessment of the indicators, we have determined that gross revenue reporting as a principal is appropriate.

The applicable indicators of gross revenue reporting included, but were not limited to, the following:

We are the primary obligor in our arrangements with our subscribers.

We manage all interactions with the subscribers, while satellite connectivity service providers do not interact with the subscribers.

In addition, we assume the entire performance risk under our arrangements with the subscribers and in the event of a performance issue, we may incur reductions in fees without regard for any recourse that we may have with the applicable satellite connective service providers.

We have discretion in establishing pricing, as the pricing under our arrangements with the subscribers is negotiated through a contracting process.

We then separately negotiate the fees with the applicable satellite service providers.

We have complete discretion in determining which satellite service providers we will contract with.

As a result, we have determined that we earn revenue (as a principal) from the delivery of satellite connectivity services to our subscribers and record all satellite connectivity service sales to subscribers as gross sales.

All associated regulatory service fees and costs are recorded net in the consolidated financial statements.

We sell prepaid airtime services in the form of prepaid cards.

A liability is established upon purchase equal to the cash paid for the prepaid card.

We recognize revenue from the prepaid services upon the use of the prepaid card by the customer.

We do not offer refunds for unused prepaid services.

Prepaid airtime services have not been a significant portion of our total sales.

Media content sales include our distribution of commercially licensed news, sports, movies and music content for commercial and leisure customers in the maritime, hotel, and retail markets.

We typically recognize revenue from media content sales ratably over the period of the service contract.

The accounting estimates related to the recognition of satellite connectivity and media content service sales require us to make assumptions about future billing adjustments for disputes with subscribers as well as unauthorized usage.

We recognize the monthly subscription fee as service revenue over the service delivery period.

Under AgilePlans, we retain ownership of the hardware that we provide to these customers, who must return the hardware if they decide to terminate the service.

As we do not sell the hardware under AgilePlans, we do not recognize any product revenue when the hardware is deployed to an AgilePlans customer.

Inertial navigation service sales

We engage in contracts for development, production, and services activities related to standard product modification or enhancement.

We consider the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract.

Customer and government-agency contracted engineering service and sales under development contracts are recognized primarily during the periods in which we perform the service or development efforts in accordance with the agreement.

Services performed under these types of contracts include engineering studies, surveys, building construction, prototype development, and program management.

Performance is determined principally by comparing the accumulated labor hours incurred to date with management’s estimate of the total labor hours to complete the contracted work.

Incurred labor hours represent work performed, which corresponds with and best depicts the transfer of control to the customer.

This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.

We establish billing terms at the time project deliverables and milestones are agreed.

Unbilled revenue recognized in excess of the amounts invoiced to clients are classified within the accompanying consolidated balance sheets as “accounts receivable” as our right to consideration is unconditional.

Product service sales

Product service sales other than under development contracts are recognized when completed services are delivered to the customer.

We also sell extended warranty contracts on mobile connectivity and inertial navigation products.

Sales under these contracts are recognized ratably over the contract term.

Product service sales including extended warranties are not a significant portion of our total sales.

Accounts Receivable Allowance

Our estimate of allowance for doubtful accounts related to trade receivables is primarily based on specific and historical criteria.

We evaluate specific accounts where we have information that the customer may have an inability to meet its financial obligations.

We make judgments, based on facts and circumstances, regarding the need to record a specific reserve for that customer against amounts owed to reduce the receivable to the amount that we expect to collect.

We also provide for a reserve based on an aging analysis of our accounts receivable.

We evaluate these reserves on a monthly basis and adjust them as we receive additional information that impacts the amount reserved.

If circumstances change, we could change our estimates of the recoverability of amounts owed to us by a material amount.

Our bad debt recovery was $0.2 million for 2019 compared to bad debt expense of $0.4 million for 2018 .

We wrote off $0.6 million and $0.3 million of our accounts receivable in 2019 and 2018 , respectively.

These write-offs were driven largely by the financial deterioration of several airtime and mobile connectivity product customers.

Inventory is valued at the lower of cost or net realizable value.

We generally must order components for our products and build inventory in advance of product shipments.

We regularly review current quantities on hand, actual and projected sales volumes and anticipated selling prices on products and write down, as appropriate, slow-moving and/or obsolete inventory to its net realizable value.

In 2019 and 2018 , we wrote off $2.5 million and $0.2 million, respectively, of inventory that was deemed excess or obsolete.

However, if we overestimate projected sales or anticipated selling prices, our inventory might be overstocked or overvalued, and we would have to reduce our inventory valuation accordingly.

Accounting for Income Taxes

We are subject to income taxes in the U.S.

and in numerous foreign jurisdictions.

We account for income taxes following ASC 740, Accounting for Income Taxes, recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of a deferred tax asset will not be realized.

As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate.

This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce the deferred tax assets to an amount that, in our judgment, is more likely than not to be recovered.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered.

Our assessment of future taxable income is based on historical experience and current and anticipated market and economic conditions and trends.

In the event that actual results differ from these estimates or we adjust our estimates in the future, we may need to adjust our valuation allowance, which could materially impact our consolidated financial position and results of operations.

In 2016, as a result of negative evidence, principally three years of cumulative pre-tax operating losses, we concluded that it was more likely than not that certain of our deferred tax assets were not realizable and therefore, recorded a full valuation allowance against those deferred tax assets.

As of December 31, 2019 , we concluded that a net increase of the valuation allowance of $0.3 million was appropriate.

As of December 31, 2019 , we had valuation allowances of $ 18.5 million to offset gross deferred tax assets of $20.1 million .

The change was the result of an increase in domestic tax credit and net operating loss balances offset by a decrease attributed the derecognition of foreign net operating losses.

We record benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained by the taxing authorities.

If this threshold is not met, no tax benefit of the uncertain position is recognized.

The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency.

We recognize interest and penalties within the income tax expense line in the accompanying consolidated statements of operations.

Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

The 2017 Tax Cut and Jobs Act (the "Tax Act") has resulted in significant changes to the U.S.

corporate income tax system.

These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation.

The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S.

earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S.

taxation as GILTI.

These changes were effective beginning in 2018.

The 2017 Tax Act also includes the transition toll tax, which is a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings.

Changes in tax rates and tax laws are accounted for in the period of enactment.

Therefore, during the year ended December 31, 2017, we recorded a reduction in our deferred tax assets and corresponding valuation allowance of $1.7 million and a net tax benefit of $0.1 million related to our estimate of the impact of the 2017 Tax Act.

Included in the $1.7 million reduction in our deferred tax assets and corresponding valuation allowance, was $0.8 million related to the transition toll tax.

As of December 31, 2018, we had completed our assessment of the total impact of the 2017 Tax Act, which resulted in a total reduction in our deferred tax assets and corresponding valuation allowance of $2.3 million and a net tax benefit of $0.1 million.

Included in the $2.3 million reduction in our deferred tax assets and corresponding valuation allowance, was $1.2 million related to the transition toll tax.

Because we completed this analysis in 2018, we recorded a reduction in our deferred tax assets and corresponding valuation allowance in 2018 of $0.5 million in order to adjust our 2017 estimate.

Warranty Provision

We typically offer standard limited warranties that range from one to two years and vary by product.

We provide for the estimated cost of product warranties at the time product revenue is recognized.

Factors that affect our warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair.

While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our estimated warranty obligation is affected by ongoing product failure rates, specific product class failures outside our baseline experience, material usage and service delivery costs incurred in correcting a product failure.

If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

For example, our warranty expense increased $0.1 million in 2019 from 2018 , driven primarily by an increase in warranty expenses related to our inertial navigation products from $0.3 million in 2018 to $0.4 million in 2019.

Mobile connectivity products warranty expense remained flat at $1.8 million for 2019 and 2018.

Assumptions and historical warranty experience are evaluated to determine the appropriateness of such assumptions.

We assess the adequacy of the warranty provision on a quarterly basis and we adjust this provision when necessary.

Stock-Based Compensation

Our stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period.

We use the Black-Scholes valuation model for estimating the fair value on the date of grant of compensatory stock options.

Determining the fair value of stock option awards at the grant date requires judgment regarding certain valuation assumptions, including the volatility of our stock price, expected term of the option, risk-free interest rate and expected dividends.

Changes in these assumptions and estimates could result in different fair values and could therefore impact our earnings.

These changes would not impact our cash flows.

The fair value of restricted stock awards is based upon our stock price on the grant date.

The amount of stock-based compensation expense recorded in any period for unvested awards requires estimates of the amount of stock-based awards that are expected to be forfeited prior to vesting.

As of January 1, 2017, we adopted ASC Update No.

2016-09, Compensation-Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting .

As a result of this adoption, commencing on January 1, 2017 prospectively, we have elected to account for forfeitures as they occur which could result in a significant reversal of previously recognized stock-based compensation expense.

Compensation costs for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for the entire award.

We have no awards that are subject to performance or market conditions as of December 31, 2019 .

We believe that our accounting policies for goodwill, intangible assets, and other long-lived assets are the only accounting policies critical to an understanding and evaluation of our financial results for 2020, as discussed below.

Goodwill, Intangible Assets, and other Long-Lived Assets

In January 2017, we adopted ASC Update No.

We follow ASC Update No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

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Any impairment charges would be based on the quantitative analysis.

To date, we have not recorded or incurred goodwill impairment losses.

For the October 1, 2018 and 2019 tests, we performed a qualitative assessment of goodwill impairment and concluded that it was more likely than not that our reporting units' fair values exceeded their carrying values.

Prior to 2020, we have not recorded or incurred goodwill impairment charges.

For the October 1, 2019 test, we performed a qualitative assessment of goodwill impairment and concluded that it was more likely than not that the reporting units’ fair values exceeded their carrying values.

Accordingly, it was not necessary for us to perform the quantitative analysis.

Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group.

If these comparisons indicate that an asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value.

Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset.

During 2019 , there were no events or changes in circumstances that indicated that any of the carrying amounts of our intangible assets or other long-lived assets may not be recoverable.

For the October 1, 2020 test, however, due to the uncertainty that the global pandemic presented during 2020, we determined that we should perform a quantitative analysis of goodwill impairment.

We performed this full quantitative analysis in the fourth quarter of 2020 in conjunction with our annual budgeting and long-term planning cycle.

The last full quantitative analysis was completed in 2017.

The COVID-19 pandemic has impacted various aspects of our operations, and we have been monitoring the impact of this global crisis carefully throughout the year.

We have particularly monitored the operations of KVH Media Group which depends heavily on travel and travel-related industries.

The revenues and cash flows of KVH Media Group have been significantly impacted by the global reduction in travel since the start of the pandemic.

In response to the impact of the pandemic, particularly with respect to our KVH Media Group business, during our annual budgeting and long-term planning process, we conducted detailed discussions with many of our largest customers in the KVH Media Group to validate our assumptions, which indicated further expected delays in recovery, and certain areas of the KVH Media Group business that may not recover completely or at all.

Accordingly, in connection with our annual goodwill assessment, we updated our long-term revenue and cash flow forecast to reflect these most recent observations, which were used in our annual goodwill test.

With the assistance of our valuation specialists, we utilized an income approach and market approach to estimate the fair value of our reporting units.

We believe that the assumptions we used to estimate the fair value of our reporting units were reasonable.

As an additional corroborative test of the reasonableness of those assumptions, we completed a reconciliation of our market capitalization and overall enterprise value to the fair value of all of our reporting units as of October 1, 2020.

We estimated that, as of October 1, 2020, the fair value of our mobile broadband reporting unit exceeded its carrying value by 18%;

however, the carrying value of our KVH Media Group reporting unit exceeded its fair value by $10.2 million, which signified that an impairment had occurred and identified a triggering event to review our other long-lived assets for impairment.

In accordance with ASC 360-10, Property, Plant and Equipment – Impairment or Disposal of Long-Lived Assets (ASC 360), with regard to our long-lived assets, we performed an undiscounted cash flow analysis and concluded that the carrying value of the asset group was not recoverable.

Accordingly, we then performed an analysis to estimate the fair value of the other long-lived assets and recognized impairment charge of $1.8 million against the distribution rights intangible asset, the amount by which the carrying value of the asset group’s other long-lived assets exceeded their estimated fair value, and a reduction in the associated deferred tax liability of $0.3 million.

As a result, we recognized an impairment charge to KVH Media Group’s goodwill in the amount of $8.7 million, the remaining amount by which the carrying value exceeded its fair value.

After recording this impairment, our consolidated balance sheet continues to include $8.8 million of goodwill and other intangible assets, of which $4.4 million relates to KVH Media Group.

A negative trend of operating results or material changes to forecasted operating results could result in the requirement for additional interim goodwill impairment tests and the potential of future goodwill impairment charges, which could be material.

See Note 9 for further discussion of goodwill and intangible assets.

Contingencies

We are subject to ongoing business risks arising in the ordinary course of business.

Legal Proceedings, for more information regarding litigation matters.

An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.

We regularly evaluate current information available to determine whether such amounts should be adjusted and record changes in estimates in the period they become known.

We reserve for legal contingencies and legal fees when the amounts are probable and reasonably estimable.

Liquidity and Capital Resources

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In recent years, we have funded our operations primarily from cash flows from operations, an asset sale, bank financings, proceeds received from exercises of stock options and proceeds from the issuance of stock.

In June 2019, we received $89.4 million from the sale of our Videotel business.

In February 2018, we sold 376,569 shares of treasury stock to SKY Perfect JSAT Corporation for an aggregate of $4.5 million in a private placement.

We believe that our cash and cash equivalents as of December 31, 2019 , our estimated cash flows from operations, and borrowings available under our credit agreement will be sufficient to fund our operations, anticipated capital expenditures, and debt repayment obligations through at least the next twelve months based on our current operating plans.

In May 2020, we received a $6.9 million loan (the PPP Loan) from Bank of America, N.A.

under the Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act.

We believe that our cash and cash equivalents as of December 31, 2020 and our estimated cash flows from operations will be sufficient to fund our operations, anticipated capital expenditures, and debt repayment obligations through at least the next twelve months based on our current operating plans.

However, as the need or opportunity arises, we may seek to raise additional capital through public or private sales of securities or through additional debt financing.

There are no assurances that we will be able to obtain any additional funding or that such funding will be available on terms acceptable to us.

There are no assurances that we will be able to obtain any additional funding or that such funding will be available on terms acceptable to us, or at all.

We believe that our primary long-term capital requirements relate to servicing and repaying our satellite service capacity and equipment lease obligations.

At December 31, 2019 , we had no outstanding debt obligations and had outstanding non-cancellable satellite service capacity and other lease obligations with future minimum payments of $59.2 million .

At December 31, 2020, we had $6.9 million of outstanding debt obligations related to the PPP loan and had outstanding non-cancellable satellite service capacity and other lease obligations with future minimum payments of $88.1 million.

Our ability to make payments on our satellite service capacity and equipment lease obligations, as well as our ability to fund planned capital expenditures, will depend on our ability to generate cash in the future.

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Operating Activities

Operating activities used $14.2 million of net cash in 2019 and provided $5.2 million of net cash in 2018 , a decrease of $19.4 million.

Although our net income increased $41.5 million to $33.3 million in 2019 from a net loss of $8.2 million in 2018 , our net income in 2019 reflected discrete operating items additions of $37.7 million, whereas our net loss in 2018 reflected net discrete operating items deductions of $15.7 million.

The $19.4 million decrease also reflected a $4.0 million increase in cash outflows relating to accounts payable, a $3.6 million increase in cash outflows related to accrued compensation, product warranty and other, a $2.2 million decrease in cash inflows relating to accounts receivable and a $0.4 million increase in cash outflows for inventory.

Partially offsetting these items were a $1.7 million increase in cash inflows related to deferred revenue and contract liabilities and a $1.0 million decrease in cash outflows relating to non-current assets.

Operating activities used $3.1 million of net cash in 2020 and used $14.2 million of net cash in 2019, a decrease in net cash used in operating activities of $11.1 million.

Although our net income decreased $55.2 million to a net loss of $21.9 million in 2020 from net income of $33.3 million in 2019, our net loss in 2020 reflected non-cash deductions of $26.5 million, whereas our net income in 2019 reflected net non-cash additions of $37.7 million.

The $11.1 million decrease in net cash used in operating activities also reflected a $3.2 million increase in cash inflows relating to accounts receivable, a $2.2 million decrease in cash outflows related to accrued compensation, product warranty, and others, and a $0.6 million decrease in cash outflows related to other non-current assets and non-current contract assets.

Partially offsetting these items were a $2.0 million decrease in cash inflows related to deferred revenue, contract liabilities and long-term contract liabilities, a $1.4 million increase in cash outflows related to accounts payable, and a $0.7 million increase in cash outflows related to inventories.

Investing Activities

Net cash provided by investing activities for 2019 was $46.0 million as compared to net cash used in investing activities of $7.6 million for 2018 .

The $53.6 million increase in net cash provided by investing activities was primarily the result of an $88.4 million increase in proceeds from the sale of Videotel and a $3.4 million decrease in capital expenditures.

Partially offsetting these items was a $38.2 million increase in net investments in marketable securities.

Net cash used in investing activities for 2020 was $9.3 million as compared to net cash provided by investing activities of $46.0 million for 2019.

The $55.3 million decrease in net cash provided by investing activities was primarily the result of the receipt of $88.4 million in net proceeds from the sale of Videotel in May 2019 and a $1.5 million increase in capital expenditures.

Partially offsetting these items was a $34.6 million decrease in cash outflows relating to the purchase and sale of marketable securities.

Financing Activities

Net cash used in financing activities for 2019 was $30.8 million as compared to $13.3 million for 2018 .

The $17.5 million increase in net cash used in financing activities is primarily attributable to a $16.8 million increase in payments on borrowings, a $4.5 million decrease in proceeds from the sale of treasury stock and a $1.3 million increase in stock repurchases, offset in part by a $5.0 million increase in proceeds from line of credit borrowings.

Net cash provided by financing activities for 2020 was $7.1 million as compared to net cash used in financing activities in 2019 of $30.8 million.

The $37.9 million increase in net cash provided by financing activities is primarily attributable to the $36.4 million difference between cash inflows of $6.9 million from long-term debt in 2020 compared to net cash outflows of $29.5 million from the repayment of line of credit, term note and other long-term borrowings in 2019, a $0.9 million decrease in cash outflows relating to the repurchase of treasury stock and a $0.5 million increase in cash inflows relating to proceeds from stock options exercises and the employee stock purchase plan.

Borrowing Arrangements

Principal Credit Facility

On October 30, 2018, we amended and restated our 2014 credit agreement by entering into (i) a three-year senior credit facility agreement, or the 2018 credit agreement, with Bank of America, N.A., as administrative agent, and the lenders named from time to time as parties thereto, or the 2018 lenders, for an aggregate amount of up to $42.5 million, including a term loan, or the 2018 term loan, of $22.5 million and a reducing revolving credit facility, or the 2018 revolver, of up to $20.0 million initially and reducing to $15.0 million on December 31, 2019, each to be used for general corporate purposes, including the refinancing of our then-outstanding indebtedness under the 2014 credit agreement, (ii) a security agreement required by the 2018 lenders with respect to our grant of a security interest in substantially all of our assets in order to secure our obligations under the 2018 credit agreement and, (iii) pledge agreements required by the 2018 lenders with respect to our grant of a security interest in 65% of the capital stock of each of KVH Industries A/S and KVH Industries U.K.

Limited that we hold in order to secure our obligations under the 2018 credit agreement.

On the closing date, we repaid $17.2 million on the 2014 term loan and refinanced its remaining balance.

On the closing date, we also borrowed $5.0 million under the 2018 revolver.

On May 13, 2019, we entered into a consent with Bank of America, N.A., as administrative agent, authorizing the purchase agreement and bridge loan to Oakley Capital, as discussed in Note 1 to our consolidated financial statements.

Paycheck Protection Program Loan

In May 2020, we received a $6.9 million loan (the PPP Loan) from Bank of America, N.A., under the Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (as modified by the Paycheck Protection Flexibility Act of 2020, the CARES Act) and is administered by the U.S.

Small Business Administration.

We believe we have used the proceeds from the PPP Loan in accordance with the requirements of the CARES Act, primarily to fund payroll costs and to retain workers.

The term of the PPP Loan is two years from the funding date of the PPP Loan.

The interest rate on the PPP Loan is 1.00%.

Under the terms of the PPP Loan, interest accrues from the funding date of the PPP Loan but is deferred until the lender determines the amount of loan forgiveness, but the deferral period will end if we fail to apply for loan forgiveness within ten months after the loan forgiveness covered period.

Principal and interest on the PPP Loan will be payable in monthly installments in accordance with the repayment letter when forgiveness has been determined.

The promissory note evidencing the PPP Loan contains various events of default relating to, among other things, insolvency, bankruptcy or the like, payment defaults under the PPP Loan or other loans by the lender, certain defaults under other indebtedness, breach of representations and warranties, the occurrence of a material adverse event, changes in ownership, or breach of other provisions of the promissory note.

Upon an event of default, all principal and accrued interest on the PPP Loan and any and all other loans made by the lender to us would, at the lender’s option, become immediately due and payable.

We agreed that we will not receive any other loan under the Paycheck Protection Program.

Pursuant to the terms of the CARES Act, we can apply for and may be granted forgiveness for all or a portion of the PPP Loan, if and to the extent that we satisfy all of the requirements applicable to forgiveness of the PPP Loan.

Such forgiveness will be determined in part based on the use of PPP Loan proceeds in accordance with the terms of the CARES Act during the 24-week period after loan origination and the maintenance or achievement of certain employee and compensation levels.

No decision has been made as to whether we will apply for forgiveness and we can provide no assurance that all or any portion of the PPP Loan will be forgiven should we apply for forgiveness.

Term Note and Line of Credit

Effective October 30, 2018, we entered into an amended and restated three-year senior secured credit facility agreement (the 2018 Credit Agreement) with Bank of America, N.A., as Administrative Agent, and the lenders named from time to time as parties thereto (the 2018 Lenders), for an aggregate amount of up to $42.5 million, including a term loan (2018 Term Loan) of $22.5 million and a reducing revolving credit facility (the 2018 Revolver) of up to $20.0 million initially and reducing to $15.0 million on December 31, 2019, each to be used for general corporate purposes, including the refinancing of indebtedness under our then-outstanding senior credit facility agreement.

Our obligations under the 2018 Credit Agreement are secured by substantially all of our assets and the pledge of equity interests in certain of our subsidiaries.

On June 27, 2019, we used the proceeds of the sale of Videotel to repay in full the then-outstanding balance of $21.4 million under the 2018 Term Loan and to repay $13.0 million of the then-outstanding balance under the 2018 Revolver.

Under the terms of the consent, the 2018 revolver will remain at $20.0 million through the term of the 2018 credit agreement.

The 2018 Revolver remained at $20.0 million through December 31, 2019 and then reduced to $15.0 million for the remaining term of the 2018 Credit Agreement.

On October 30, 2021, the entire principal balance of any outstanding loans under the 2018 Revolver will be due and payable, together with all accrued and unpaid interest, fees and any other amounts due and payable under the 2018 Credit Agreement.

As of December 31, 2019 , no amounts were outstanding under the 2018 revolver, and the full balance of $20.0 million was available for borrowing.

The 2018 credit agreement contains provisions requiring the mandatory prepayment of amounts outstanding under the 2018 revolver under specified circumstances, including (i) 100% of the net cash proceeds from certain dispositions to the extent not reinvested in our business within a stated period, (ii) 50% of the net cash proceeds from stated equity issuances and (iii) 100% of the net cash proceeds from certain receipts above certain threshold amounts outside the ordinary course of business.

Borrowings under the 2018 revolver are subject to the satisfaction of various conditions precedent at the time of each borrowing, including the continued accuracy of our representations and warranties and the absence of any default under the 2018 credit agreement.

As of December 31, 2020, no amounts were outstanding under the 2018 Revolver.

Borrowings of up to $15.0 million under the 2018 Revolver are subject to the satisfaction of various conditions precedent at the time of each borrowing, including the continued accuracy of our representations and warranties and the absence of any default under the 2018 Credit Agreement.

As of December 31, 2020, we are only able to draw on $9.4 million of the $15.0 million facility due to covenant restrictions.

The 2018 Credit Agreement contains two financial covenants, a maximum Consolidated Leverage Ratio and a minimum Consolidated Fixed Charge Coverage Ratio, each as defined in the 2018 Credit Agreement.

The Consolidated Leverage Ratio may not be greater than 2.50:1.00 on December 31, 2019 and declines to 2.00:1.00 on December 31, 2020.

The Consolidated Leverage Ratio could not exceed 2.50:1.00 through December 31, 2019 and may not exceed 2.00:1.00 after December 31, 2020.

The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00.

On July 30, 2020, we amended the 2018 Credit Agreement to reflect the incurrence of the PPP loan.

Under the amended agreement, the principal and interest on the PPP loan are not included in the maximum Consolidated Leverage Ratio or the minimum Consolidated Fixed Charge Coverage Ratio calculations except as to any portion of the PPP Loan that is not ultimately forgiven.

The 2018 Credit Agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment of taxes and other obligations, compliance with laws, performance of material contracts, creation of liens, incurrence of indebtedness, investments, dispositions, fundamental changes, restricted payments, changes in the nature of our business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements.

Our obligation to repay any loans that may be outstanding under the 2018 credit agreement could be accelerated upon an event of default under its terms, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to comply with our affirmative and negative covenants under the 2018 credit agreement, a change of control, certain defaults in payment relating to other indebtedness, the acceleration of payment of certain other indebtedness, certain events relating to our liquidation, dissolution, bankruptcy, insolvency or receivership, the entry of certain judgments against us, certain property loss events, and certain events relating to the impairment of collateral or the 2018 lenders’ security interest therein.

Mortgage Loan

In April 2019, we repaid in full the outstanding balance under our mortgage loan of $2.6 million.

In April 2010, we entered into two interest rate swap agreements that were intended to hedge our mortgage interest obligations over the term of the mortgage loan by fixing the interest rates specified in the mortgage loan to 5.91% for half of the principal amount outstanding as of April 1, 2010 and 6.07% for the remaining half.

We previously had a mortgage loan (Mortgage Loan) related to our headquarters facility in Middletown, Rhode Island.

On April 1, 2019, on the Mortgage Loan’s original termination date, we repaid in full the outstanding balance of $2.6 million.

As discussed in Note 17 to the consolidated interim financial statements, in April 2010 we entered into two interest rate swap agreements that were intended to hedge our mortgage interest obligations over the term of the Mortgage Loan by fixing the interest rates specified in the Mortgage Loan to 5.91% for half of the principal amount outstanding as of April 1, 2010 and 6.07% for the remaining half.

Both interest rate swap agreements were also settled upon repayment of the Mortgage Loan.

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These transactions can involve millions of dollars, and from time to time we have entered into secured lending arrangements to finance them.

During the first quarter of 2018, we entered into a five-year capital lease for three satellite hubs for the HTS network.

The total cost of the five-year capital lease will be $3.1 million.

On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares of our common stock.

The program was superseded on October 4, 2019.

On October 4, 2019, our Board of Directors authorized a new share repurchase program pursuant to which we may purchase up to one million shares of our common stock.

The repurchase program is expected to be funded by using our existing cash, cash equivalents, marketable securities and future cash flows.

Under the repurchase program, we, at management’s discretion, may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement.

The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements.

The program may be modified, suspended or terminated at any time without prior notice.

The repurchase program has a duration of one year.

Under the 2018 Credit Agreement, we may not repurchase more than $5.0 million of shares before October 31, 2021 without appropriate consent.

On October 4, 2019, our Board of Directors authorized a share repurchase program pursuant to which we were authorized to purchase up to one million shares of our common stock.

The program expired on October 4, 2020.

Under the repurchase program, at management’s discretion, we were authorized to repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement.

As of December 31, 2020, we had repurchased 150,272 shares of our common stock in open market transactions at a cost of approximately $1.7 million.

Off-Balance Sheet Arrangements

As of December 31, 2019 , we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

As of December 31, 2020, except for certain satellite service capacity obligations that are not considered operating or financing leases under ASC 842, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Please see Note 6 for additional information on our satellite service capacity obligations.

Recently Issued Accounting Pronouncements

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What changed 10-K

Item 7. Management’s Discussion and Analysis