KVH INDUSTRIES INC \DE\ 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements and related notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed under the heading “Item 1A. Risk Factors” and elsewhere in this annual report. Overview We design, develop, manufacture and market mobile connectivity products and services for the marine and land mobile markets, and inertial navigation products for commercial and defense markets. Our reporting segments are as follows: • the mobile connectivity segment and • the inertial navigation segment Through these segments, we manufacture and sell our solutions in a number of major geographic areas, including internationally. We generate a majority of our revenues from various international locations, primarily consisting of Canada, Europe (both inside and outside the European Union), Africa, Asia/Pacific, and the Middle East. Mobile Connectivity Segment Our mobile connectivity segment offers satellite communications products and services. Our mobile connectivity products enable customers to receive voice and Internet services and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. We sell and lease our mobile connectivity products through an extensive international network of dealers and distributors. We also sell and lease products directly to end users. Our mobile connectivity service sales include sales of satellite voice and Internet airtime services, engineering services provided under development contracts, sales from product repairs, and extended warranty sales. Our mobile connectivity service sales also include our distribution of entertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group. We typically recognize revenue from media content sales ratably over the period of the service contract. We provide, for monthly fixed fees and usage-based fees, satellite connectivity services for broadband Internet, data and Voice over Internet Protocol (VoIP) service to our TracPhone V-series customers. We also earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose to activate their subscriptions with us. As a percentage of total revenue, our service sales were 59% in 2020 and 61% in 2019. Within the mobile connectivity segment, our marine leisure business is highly seasonal, and seasonality can also impact our commercial marine business. Historically, we have generated the majority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year, compared to the first two quarters. 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. 31 Table of Contents 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 In May 2019, we sold our Videotel business, which provided eLearning computer-based training, to an affiliate of Oakley Capital, a UK company, for $89.4 million in cash, on a cash-free, debt-free basis, subject to a working capital adjustment. We made a bridge loan to the purchaser and received payment of the initial purchase price on June 21, 2019. We determined that the sale met the requirements for reporting as discontinued operations in accordance with ASC 205-20. 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, 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 Our inertial navigation segment offers precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing, and guidance. Our inertial navigation products also include tactical navigation systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. Our inertial navigation products are sold directly to U.S. and foreign governments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, our inertial navigation products are used in numerous commercial products, such as navigation and positioning systems for various applications including precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial robotics and optical stabilization. Our inertial navigation service sales include engineering services provided under development contracts, product repairs and extended warranty sales. 32 Table of Contents Summary of Net Sales The following table provides, for the periods indicated, our sales by segment for our continuing operations: Year Ended December 31, 2020 2019 (in thousands) 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 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% of our consolidated net sales for both 2020 and 2019. No other single product class accounted for 10% or more of consolidated net sales. No individual customer accounted for 10% or more of our consolidated net sales for 2020 or 2019. We operate in a number of major geographic areas across the globe. We generate our international net sales, based upon customer location, primarily from customers located in Canada, Europe, Africa, Asia/Pacific, the Middle East, and India. Our international net sales totaled 64% and 54% of our consolidated net sales for 2020 and 2019, respectively. No individual foreign country represented 10% or more of our consolidated net sales for 2020 and 2019. See Note 12 to our consolidated financial statements for more information on our segments. Customer-Funded Research and Development In addition to our internally funded research and development efforts, we also conduct research and development activities that are funded by our customers. These activities relate primarily to engineering studies, surveys, prototype development, program management, and standard product customization. In accordance with accounting principles generally accepted in the United States of America, we account for customer-funded research as service revenue, and we account for the associated research and development costs as costs of service and product sales. As a result, customer-funded research and development are not included in the research and development expense that we present in our statement of operations. The following table presents our total annual research and development effort, representing the sum of research costs of service and product sales and the operating expense of research and development as described in our statement of operations. Our management believes this information is useful because it provides a better understanding of our total expenditures on research and development activities. Year Ended December 31, 2020 2019 (in thousands) Research and development expense presented in the statement of operations $ 15,799 $ 15,926 Costs of customer-funded research and development included in costs of service sales 2,935 4,373 Total consolidated statements of operations expenditures on research and development activities $ 18,734 $ 20,299 33 Table of Contents Results of Operations The following table provides, for the periods indicated, certain financial data relating to our continuing operations expressed as a percentage of net sales: Year Ended December 31, 2020 2019 (1) Sales: Product 40.7 % 39.2 % Service 59.3 60.8 Net sales 100.0 100.0 Costs and expenses: Costs of product sales 26.2 27.2 Costs of service sales 37.5 38.8 Research and development 10.0 10.1 Sales, marketing and support 18.8 21.2 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 Loss from operations (14.5) (13.4) Interest income 0.6 1.3 Interest expense — 0.6 Other income, net 0.1 0.1 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) % (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 Net 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 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. 34 Table of Contents Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. 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 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 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 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 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 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. 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 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. 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 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. 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 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. 35 Table of Contents Interest and Other Income, Net 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 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. Discontinued Operations During the second quarter of 2019, we sold our Videotel business for $89.4 million in cash, on a cash-free, debt-free basis, subject to a working capital adjustment. We determined that the sale met the requirements for reporting as discontinued operations in accordance with ASC 205-20. 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, 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 information. Results for discontinued operations are as follows: Year Ended December 31, 2020 2019 Sales from discontinued operations $ — $ 5,769 Income from discontinued operations, net of tax $ — $ 49,264 36 Table of Contents Segment Discussion - Years ended December 31, 2020 and 2019 As noted above, we have classified our Videotel business as discontinued operations and have therefore excluded it from the segment information below. The Videotel business had previously been included in our mobile connectivity business segment. Our net sales by segment for 2020 and 2019 were as follows: Change For the year ended December 31, 2020 vs. 2019 2020 2019 $ % (dollars in thousands) Mobile connectivity sales Product (1) $ 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. See Note 11 of our consolidated financial statements for more information. Operating (loss) income by segment for 2020 and 2019 were as follows: Change For the year ended December 31, 2020 vs. 2019 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) Mobile connectivity loss from operations for 2019 include a $0.3 million unfavorable adjustment to correct an immaterial prior period accounting error related to the implementation and application of ASC 606. 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 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. 37 Table of Contents 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 $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 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 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. Unallocated 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 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 The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financial statements. Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. 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 We follow ASC Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. ASC 350 requires the completion of a goodwill impairment test at least annually based on either an optional qualitative assessment or a quantitative analysis comparing the estimated fair value of a reporting unit to its carrying value as of the test date. Any impairment charges would be based on the quantitative analysis. Prior to 2020, we have not recorded or incurred goodwill impairment charges. 38 Table of Contents 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. 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. 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 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. Liquidity and Capital Resources Our primary liquidity needs have been to fund general business requirements, including working capital requirements, capital expenditures, and, until recently, interest payments and debt repayments. 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 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, or at all. 39 Table of Contents 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, 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. Our ability to generate cash in the future will depend upon, among other things, the performance of our operating segments and general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As of December 31, 2020, we had $37.7 million in cash, cash equivalents, and marketable securities, of which $1.8 million in cash equivalents was held in local currencies by our foreign subsidiaries. Our foreign subsidiaries held no marketable securities as of December 31, 2020. As of December 31, 2020, we had $60.3 million in working capital. Operating Activities 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 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 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 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. 40 Table of Contents 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. 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, 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 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. 41 Table of Contents Mortgage Loan 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. Other Matters We intend to continue to invest in the mini-VSAT Broadband network on a global basis. As part of the future potential capacity expansion, we would plan to seek to acquire additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel. From time to time we have entered into multi-year agreements to lease satellite capacity, and we have also purchased numerous satellite hubs to support the added capacity. These transactions can involve millions of dollars, and from time to time we have entered into secured lending arrangements to finance them. 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, 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 See Note 1 of our accompanying audited consolidated financial statements for a description of recently issued accounting pronouncements including the dates of adoption and effects on our results of operations, financial position and disclosures. ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk Not applicable.