KVH INDUSTRIES INC \DE\ 10-K

ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021, the end of the period covered by this annual report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is the process designed by and under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021 and concluded that it was effective. Our independent registered public accounting firm, Grant Thornton LLP, has issued a report regarding the effectiveness of our internal control over financial reporting as of December 31, 2021, and that report is included in Item 9A in this annual report. 41 Table of Contents Evaluation of Changes in Internal Control over Financial Reporting Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated changes in our internal control over financial reporting that occurred during the fourth quarter of 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Important Considerations The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. 42 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders KVH Industries, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of KVH Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2021, and our report dated March 11, 2022 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion . Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Boston, Massachusetts March 11, 2022 43 Table of Contents ITEM 9B. Other Information None. ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III We have omitted the information required in Part III of this annual report because we intend to include that information in our definitive proxy statement for our 2022 annual meeting of stockholders, which we expect to file before 120 days after the end of fiscal 2021. We incorporate the information required in Part III of this annual report by reference to our 2022 proxy statement. ITEM 10. Directors, Executive Officers and Corporate Governance Except as set forth below, the information required by this item is incorporated by reference to our 2022 proxy statement. Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our directors, executive officers and employees. Our Code of Business Conduct and Ethics can be found on our website, which is located at www.kvh.com. We intend to make all required disclosures concerning any amendments to or waivers from, our Code of Business Conduct and Ethics on our website. Any person may request a copy of the Code of Business Conduct and Ethics, at no cost, by writing to us at the following address: KVH Industries, Inc., 50 Enterprise Center, Middletown, Rhode Island, 02842, Attention: Investor Relations. ITEM 11. Executive Compensation The information required by this item is incorporated by reference to our 2022 proxy statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to our 2022 proxy statement. ITEM 13. Certain Relationships and Related Transactions and Director Independence The information required by this item is incorporated by reference to our 2022 proxy statement. ITEM 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to our 2022 proxy statement. 44 Table of Contents PART IV ITEM 15. Exhibits and Financial Statement Schedules Page (a) 1. Financial Statements Report of Independent Registered Public Accounting Fir m ( PCAOB ID Number 248 ) 49 Consolidated Balance Sheets as of December 31, 202 1 and 20 20 51 Consolidated Statements of Operations for the years ended December 31, 202 1 and 20 20 52 Consolidated Statements of Comprehensive Loss for the years ended December 31, 202 1 and 20 20 53 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 202 1 and 20 20 54 Consolidated Statements of Cash Flows for the years ended December 31, 202 1 and 20 20 55 Notes to Consolidated Financial Statements 56 (a) 2. Financial Statement Schedules None. 3. Exhibits Exhibit No. Description Filed with this Form 10-K Incorporated by Reference Form Filing Date Exhibit No. 3.1 Amended and Restated Certificate of Incorporation, as amended 10-Q August 6, 2010 3.1 3.2 Amended and Restated Bylaws 10-Q November 1, 2017 3.2 4.1 Specimen certificate for the common stock 10-K March 2, 2018 4.1 4.2 Description of Capital Stock 8-K August 4, 2020 4.1 *10.1 Amended and Restated 1996 Employee Stock Purchase Plan DEF 14A April 25, 2016 App. B *10.2 Amended and Restated 2016 Equity and Incentive Plan DEF 14A April 29, 2020 App. A *10.3 Form of Incentive Stock Option Agreement granted under the 2016 Equity and Incentive Plan 10-K March 9, 2017 10.5 *10.4 Form of Non-Statutory Stock Option Agreement granted under the 2016 Equity and Incentive Plan 10-K March 9, 2017 10.6 *10.5 Form of Restricted Stock Agreement granted under the 2016 Equity and Incentive Plan 10-K March 9, 2017 10.7 *10.6 Policy Regarding Automatic Grants to Non-Employee Directors 10-Q May 6, 2009 10.23 45 Table of Contents Exhibit No. Description Filed with this Form 10-K Incorporated by Reference Form Filing Date Exhibit No. 10.7 Amended and Restated Credit Agreement dated as of October 30, 2018 among KVH Industries, Inc., Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer, and the Lenders party hereto 10-Q October 31, 2018 10.1 10.8 Amended and Restated Security Agreement dated as of October 30, 2018 between KVH Industries, Inc. and Bank of America, N.A., as Administrative Agent 10-Q October 31, 2018 10.2 10.9 Amended and Restated Pledge Agreement dated as of October 30, 2018 between KVH Industries, Inc. and Bank of America, N.A., as Administrative Agent with respect to KVH Industries A/S 10-Q October 31, 2018 10.3 10.10 Amended and Restated Pledge Agreement dated as of October 30, 2018 between KVH Industries, Inc. and Bank of America, N.A., as Administrative Agent with respect to KVH Industries U.K. Limited 10-Q October 31, 2018 10.4 10.11 Consent dated as of May 13, 2019 among KVH Industries, Inc., as Borrower, Bank of America, N.A., as Lender and Administrative Agent, and The Washington Trust Company, as Lender, under the Amended and Restated Credit Agreement dated as of October 30, 2018 among such parties 8-K May 16, 2019 10.4 10.12 First Amendment to Amended and Restated Credit Agreement as of July 30, 2020 by and among KVH Industries, Inc., Bank of America, N.A., and The Washington Trust Company 10-Q July 31, 2020 10.3 10.13 Second Amendment to Amended and Restated Credit Agreement dated as of October 29, 2021 by and among KVH Industries, Inc., and Bank of America, N.A. 10-Q November 4, 2021 10.1 10. 14 Cooperation Agreement, dated as of April 8, 2020, by and among KVH Industries, Inc., Vintage Capital Management, LLC, and Kahn Capital Management, LLC 8-K April 9, 2020 10.1 10.1 5 Promissory Note dated as of May 1, 2020 and executed on May 3, 2020 by KVH Industries, Inc., in favor of Bank of America, N.A. 8-K May 6, 2020 10.1 21.1 List of Subsidiaries X 23.1 Consent of Grant Thornton LLP X 31.1 Rule 13a-14(a)/15d-14(a) certification of principal executive officer X 31.2 Rule 13a-14(a)/15d-14(a) certification of principal financial officer X 32.1 Rule 1350 certification X 46 Table of Contents 101.1 Interactive Data File regarding (a) our Consolidated Balance Sheets as of December 31, 2021 and 2020, (b) our Consolidated Statements of Operations for the years ended December 31, 2021 and 2020, (c) our Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020, (d) our Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021 and 2020, (e) our Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020, and (e) the Notes to such Consolidated Financial Statements X 104.1 Cover Page Interactive Data File (embedded within the Inline XBRL document) X * Management contract or compensatory plan. 47 Table of Contents ITEM 16. Form 10-K Summary None. SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KVH Industries, Inc. Date: March 11, 2022 By: / S / BRENT C. BRUUN Brent C. Bruun Interim President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Name Title Date /S/ BRENT C. BRUUN Interim President and Chief Executive Officer (Principal Executive Officer) March 11, 2022 Brent C. Bruun /S/ ROGER A. KUEBEL Chief Financial Officer (Principal Financial Officer) March 11, 2022 Roger A. Kuebel /S/ JENNIFER L. BAKER Vice President, Chief Accounting Officer (Principal Accounting Officer) March 11, 2022 Jennifer L. Baker /S/ CATHY-ANN MARTINE-DOLECKI Chair of the Board of Directors March 11, 2022 Cathy-Ann Martine-Dolecki /S/ DANELLE M. BARRETT Director March 11, 2022 Danelle M. Barrett /S/ JAMES S. DODEZ Director March 11, 2022 James S. Dodez /S/ CIELO M. HERNANDEZ Director March 11, 2022 Cielo M. Hernandez /S/ CHARLES R. TRIMBLE Director March 11, 2022 Charles R. Trimble 48 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders KVH Industries, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of KVH Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 11, 2022 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Recognition of satellite connectivity services revenue As described further in Note 1(e) to the financial statements, the Company's satellite connectivity services revenue, including broadband Internet, data and VoIP services, is recognized monthly based primarily on contracted fixed-fee schedules as well as any overages for minutes or megabytes of traffic processed. We identified satellite connectivity services revenue as a critical audit matter. The principal consideration for our determination that satellite connectivity service sales transactions are a critical audit matter is the complexity of the process used by management for recognizing revenue, given the diversity of data sources, and the number of systems involved, which includes third party systems. This requires a high degree of audit subjectivity and effort in designing and performing audit procedures to evaluate whether the satellite connectivity services revenue is recognized properly. Our audit procedures related to the satellite connectivity services revenue included the following, among others: • We tested the design and operating effectiveness of controls related to management’s review and validation of data coming from third parties that is used as an input in revenue recognition as well as the controls over review of appropriate revenue recognition for this revenue stream. 49 Table of Contents • We performed detailed transaction testing over the occurrence and accuracy of a sample of the revenue recognized by validating usage data from third party reports which is utilized in customer billing. • We obtained the billing service provider's SOC-1 report, bridge letter (as applicable), and Management's internal control review of the SOC-1 report. We verified that Management had assessed key complementary user entity controls (“CUEC”s). We inspected the SOC-1 report to verify that there were no failed controls, and that the opinion was unqualified. In addition, we tested key controls that were responsive to the CUECs. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2014. Boston, Massachusetts March 11, 2022 50 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 11,376 $ 12,578 Marketable securities 13,147 25,141 Accounts receivable, net of allowance for doubtful accounts of $ 1,636 and $ 1,596 as of December 31, 2021 & December 31, 2020, respectively 33,648 33,687 Inventories, net 24,640 24,674 Prepaid expenses and other current assets 3,789 3,894 Current contract assets 1,230 1,086 Total current assets 87,830 101,060 Property and equipment, net 60,114 56,273 Intangible assets, net 1,287 2,254 Goodwill 6,570 6,592 Right of use assets 3,055 6,893 Other non-current assets 6,778 7,785 Non-current contract assets 3,104 2,661 Deferred income tax asset 56 73 Total assets $ 168,794 $ 183,591 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 11,265 $ 11,400 Accrued compensation and employee-related expenses 7,053 7,156 Accrued other 7,892 6,597 Accrued product warranty costs 1,179 1,812 Current portion of long-term debt — 4,992 Contract liabilities 3,989 4,445 Current operating lease liability 1,912 3,826 Liability for uncertain tax positions 592 560 Total current liabilities 33,882 40,788 Other long-term liabilities 30 674 Long-term operating lease liability 1,224 3,204 Long-term contract liabilities 4,466 4,688 Long-term debt, excluding current portion — 1,935 Deferred income tax liability 215 418 Total liabilities $ 39,817 $ 51,707 Commitments and contingencies (Notes 1, 5, 6, 15 and 16) Stockholders’ equity: Preferred stock, $ 0.01 par value. Authorized 1,000,000 shares; no ne issued — — Common stock, $ 0.01 par value. Authorized 30,000,000 shares, 20,342,695 and 19,862,534 shares issued at December 31, 2021 and December 31, 2020, respectively; and 18,910,001 and 18,429,840 shares outstanding at December 31, 2021 and December 31, 2020, respectively 203 199 Additional paid-in capital 156,199 149,170 Accumulated deficit ( 12,165 ) ( 2,402 ) Accumulated other comprehensive loss ( 3,409 ) ( 3,232 ) 140,828 143,735 Less: treasury stock at cost, 1,432,694 shares as of December 31, 2021 and December 31, 2020 ( 11,851 ) ( 11,851 ) Total stockholders’ equity 128,977 131,884 Total liabilities and stockholders’ equity $ 168,794 $ 183,591 See accompanying Notes to Consolidated Financial Statements. 51 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2021 2020 Sales: Product $ 66,870 $ 64,619 Service 104,897 94,114 Net sales 171,767 158,733 Costs and expenses: Costs of product sales 46,810 41,608 Costs of service sales 65,162 59,517 Research and development 17,766 15,799 Sales, marketing and support 31,181 29,811 General and administrative 28,794 24,445 Goodwill impairment charge — 8,732 Intangible asset impairment charge — 1,758 Total costs and expenses 189,713 181,670 Loss from operations ( 17,946 ) ( 22,937 ) Interest income 886 996 Interest expense 56 18 Other income, net 7,245 193 Loss before income tax (benefit) expense ( 9,871 ) ( 21,766 ) Income tax (benefit) expense ( 108 ) 174 Net loss $ ( 9,763 ) $ ( 21,940 ) Net loss per common share Basic and diluted $ ( 0.54 ) $ ( 1.24 ) Weighted average number of shares outstanding: Basic and diluted 18,217 17,669 See accompanying Notes to Consolidated Financial Statements. 52 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2021 2020 Net loss $ ( 9,763 ) $ ( 21,940 ) Other comprehensive loss, net of tax: Foreign currency translation adjustment ( 177 ) ( 465 ) Other comprehensive loss, net of tax (1) ( 177 ) ( 465 ) Total comprehensive loss $ ( 9,940 ) $ ( 22,405 ) (1) Tax impact was nominal for all periods. See accompanying Notes to Consolidated Financial Statements. 53 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2019 19,399 $ 194 $ 144,485 $ 19,538 $ ( 2,767 ) ( 1,397 ) $ ( 11,461 ) $ 149,989 Net loss — — — ( 21,940 ) — — — ( 21,940 ) Other comprehensive loss — — — — ( 465 ) — — ( 465 ) Stock-based compensation — — 3,462 — — — — 3,462 Issuance of common stock under employee stock purchase plan 44 — 336 — — — — 336 Acquisition of treasury stock — — — — — ( 36 ) ( 390 ) ( 390 ) Exercise of stock options and issuance of restricted stock awards, net of forfeitures 420 5 887 — — — — 892 Balance at December 31, 2020 19,863 $ 199 $ 149,170 $ ( 2,402 ) $ ( 3,232 ) ( 1,433 ) $ ( 11,851 ) $ 131,884 Net loss — — — ( 9,763 ) — — — ( 9,763 ) Other comprehensive loss — — — — ( 177 ) — — ( 177 ) Stock-based compensation — — 4,109 — — — — 4,109 Issuance of common stock under employee stock purchase plan 26 — 215 — — — — 215 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 454 4 2,705 — — — — 2,709 Balance at December 31, 2021 20,343 $ 203 $ 156,199 $ ( 12,165 ) $ ( 3,409 ) ( 1,433 ) $ ( 11,851 ) $ 128,977 See accompanying Notes to Consolidated Financial Statements. 54 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 9,763 ) $ ( 21,940 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for doubtful accounts 530 333 Depreciation and amortization 14,601 11,663 Impairment charge to goodwill and intangibles — 10,490 Deferred income taxes ( 186 ) ( 283 ) Loss on disposals of fixed assets 494 713 Compensation expense related to stock-based awards and employee stock purchase plan 4,109 3,462 Unrealized currency translation (gain) loss ( 112 ) 151 PPP loan forgiveness ( 6,979 ) — Changes in operating assets and liabilities: Accounts receivable ( 506 ) ( 1,123 ) Inventories 33 ( 1,205 ) Prepaid expenses, other current assets, and current contract assets 147 ( 314 ) Other non-current assets and non-current contract assets 509 ( 484 ) Accounts payable ( 251 ) ( 3,274 ) Contract liabilities and long-term contract liabilities ( 665 ) ( 817 ) Accrued compensation, product warranty and other 945 ( 458 ) Other long-term liabilities 3 7 Net cash provided by (used in) operating activities $ 2,909 $ ( 3,079 ) Cash flows from investing activities: Capital expenditures ( 18,740 ) ( 14,066 ) Cash paid for acquisition of intangible assets ( 62 ) ( 75 ) Proceeds from sale of fixed assets 100 80 Purchases of marketable securities ( 6 ) ( 8,734 ) Maturities and sales of marketable securities 12,000 13,500 Net cash used in investing activities $ ( 6,708 ) $ ( 9,295 ) Cash flows from financing activities: Proceeds from PPP loan — 6,927 Proceeds from stock options exercised and employee stock purchase plan 2,939 1,216 Repurchase of common stock — ( 390 ) Payment of finance lease ( 294 ) ( 624 ) Net cash provided by financing activities $ 2,645 $ 7,129 Effect of exchange rate changes on cash and cash equivalents ( 48 ) ( 542 ) Net decrease in cash and cash equivalents ( 1,202 ) ( 5,787 ) Cash and cash equivalents at beginning of period 12,578 18,365 Cash and cash equivalents at end of period $ 11,376 $ 12,578 Supplemental disclosure of cash flow information: Cash paid for income taxes, net of refunds $ 419 $ 1,051 Changes in accrued other and accounts payable related to property and equipment additions $ 384 $ 165 Right of use assets (ROU) assets arising from entering into new operating lease obligations $ 407 $ 3,032 See accompanying Notes to Consolidated Financial Statements. 55 KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021 and 2020 (in thousands, except per share amounts) (1) Summary of Significant Accounting Policies (a) Description of Business KVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile connectivity products and services for the marine and land markets, and inertial navigation products for both the commercial and defense markets. KVH's reporting segments are as follows: • the mobile connectivity segment and • the inertial navigation segment KVH’s 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. KVH sells and leases its mobile connectivity products through an extensive international network of dealers and distributors. KVH also sells and leases products directly to end users. KVH’s mobile connectivity service sales represent primarily sales earned from satellite voice and Internet airtime services. KVH provides, for monthly fixed and usage fees, satellite connectivity services, including broadband Internet, data and VoIP services, to its TracPhone V-series customers. AgilePlans, a mini-VSAT Broadband service offering, is a monthly subscription model providing global connectivity to commercial maritime customers, including hardware, installation, broadband Internet, Voice over Internet Protocol (VoIP), entertainment and training content and global support for a monthly fee with no minimum commitment. KVH offers AgilePlans customers a variety of airtime data plans with varying data speeds and fixed data usage levels with overage charges per megabyte, which is similar to the plans that the Company offers to its other customers. The Company recognizes the monthly subscription fee as service revenue over the service delivery period. The Company retains ownership of the hardware that it provides to AgilePlans customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. KVH records the cost of the hardware used by AgilePlans customers as revenue-generating assets and depreciates the cost over an estimated useful life of five years . Since the Company is retaining ownership of the hardware, it does not accrue any warranty costs for AgilePlans hardware; however, any maintenance costs on the hardware is expensed in the period these costs are incurred. Mobile connectivity service sales also include the distribution of commercially licensed entertainment, including news, sports, music, and movies to commercial and leisure customers in the maritime, hotel, and retail markets through the KVH Media Group. KVH also earns monthly usage fees from third-party satellite connectivity services, including voice, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate their subscriptions with KVH. Mobile connectivity service sales also include engineering services provided under development contracts, sales from product repairs, and extended warranty sales. KVH's inertial navigation products offer precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing and guidance. KVH’s 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. KVH’s 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, KVH's inertial navigation technology is used in numerous commercial products, such as navigation and positioning systems for various applications including autonomous platforms, precision mapping, dynamic surveying, train location control and track geometry measurement systems, industrial robotics and optical stabilization. KVH’s inertial navigation service sales include product repairs, engineering services provided under development contracts and extended warranty sales. 56 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (b) Principles of Consolidation The accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. All of the operating expenses of the subsidiaries that serve as the Company’s European, Singaporean, Japanese, and Brazilian international distributors are reflected within sales, marketing, and support within the accompanying consolidated statements of operations. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Significant Estimates and Assumptions and Other Significant Non-Recurring Transactions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. The 2021 consolidated financial statements reflect a $ 6,979 gain in other income related to the U.S. Small Business Administration’s forgiveness of the PPP loan during the third quarter of 2021. See Note 5. The 2020 consolidated financial statements reflect a $ 10,490 goodwill and intangible impairment charge on the KVH Media Group reporting unit within the mobile connectivity segment. See Note 1(k) and Note 9. On an on-going basis, the Company evaluates its significant estimates, including those related to terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill and estimated fair values of long-lived assets, including goodwill, amortization methods and periods. Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. (d) Concentration of Credit Risk and Single Source Suppliers Cash, cash equivalents and marketable securities. The Company is potentially subject to financial instrument concentration of credit risk through its cash, cash equivalent and marketable securities investments. To mitigate these risks the Company maintains cash, cash equivalents and marketable securities with reputable and nationally recognized financial institutions. As of December 31, 2021, $ 13,147 classified as marketable securities was held by Wells Fargo and substantially all of the cash and cash equivalents were held by Bank of America, N.A. See Note 2 for a description of marketable securities. Trade accounts receivable. Concentrations of risk (see Note 11) with respect to trade accounts receivable are generally limited due to the large number of customers and their dispersion across several geographic areas. Although the Company does not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes allowances for potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations for future collectability concerns. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. Activity within the Company’s allowance for doubtful accounts for the periods presented is as follows: 2021 2020 Beginning balance $ 1,596 $ 1,589 Additions (subtractions) 530 333 Deductions (write-offs/recoveries) from reserve ( 490 ) ( 326 ) Ending balance $ 1,636 $ 1,596 Revenue and operations. Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results. 57 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (e) Revenue Recognition In accordance with Accounting Standards Codification (ASC) 606, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these products and services. To achieve this core principle, the Company applies the following five steps: 1) Identify the contract with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products and services to be transferred and identifies the payment terms related to these products and services, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors, including the customer’s historical payment pattern or, in the case of a new customer, published credit and financial information pertaining to the customer. 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products and services, the Company must apply judgment to determine whether promised products and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised products and services are accounted for as a combined performance obligation. 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. 4) Allocate the transaction price to performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct products or services that are substantially the same qualify as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct product or service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. 5) Recognize revenue when or as the Company satisfies a performance obligation The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised product or service to a customer. 58 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) Product sales Revenue from product sales is recognized when control of the goods is transferred to the customer, which generally occurs at the Company’s 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 the Company’s 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 the Company has fulfilled all of its performance obligations, the units are segregated for the specific customer only, and the goods are ready for physical transfer to the customer in accordance with their defined contract delivery schedule. The Company’s standard payment terms for product sales are generally Net 30. Under certain limited conditions, the Company, at its sole discretion, provides for the return of goods. No product is accepted for return and no credit is allowed on any returned product unless the Company has granted and confirmed prior written permission by means of appropriate authorization. The Company establishes 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 The Company sells products and services through arrangements that in certain instances bundle VSAT equipment, satellite connectivity and other services. For these arrangements, the Company has determined that the performance obligations are not distinct in the context of the contracts with certain customers. The Company recognizes 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 primarily on contracted fixed-fee schedules as well as any overages for minutes or megabytes of traffic processed. The Company has evaluated whether it obtains 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 its satellite connectivity service sales and its payments to the applicable service providers. Based on the Company's assessment of the indicators, the Company has determined that gross revenue reporting as a principal is appropriate. The applicable indicators of gross revenue reporting include, but are not limited to, the following: • The Company is the primary obligor in its arrangements with its subscribers. The Company manages all interactions with the subscribers, while satellite connectivity service providers do not interact with the subscribers. In addition, the Company assumes the entire performance risk under its arrangements with the subscribers and in the event of a performance issue, the Company may incur reductions in fees without regard for any recourse that the Company may have with the applicable satellite connective service providers. • The Company has discretion in establishing pricing, as the pricing under its arrangements with the subscribers is negotiated through a contracting process. The Company then separately negotiates the fees with the applicable satellite service providers. • The Company has complete discretion in determining which satellite service providers it will contract with. As a result, the Company has determined that it earns revenue (as a principal) from the delivery of satellite connectivity services to its subscribers and records 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. 59 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) The Company sells prepaid airtime services in the form of prepaid cards. A liability is established upon purchase equal to the cash paid for the prepaid card. The Company recognizes revenue from the prepaid services upon the use of the prepaid card by the customer. The Company does not offer refunds for unused prepaid services. Prepaid airtime services have not been a significant portion of the Company’s total sales. Media content sales include the Company's distribution of commercially licensed news, sports, movies and music content for commercial and leisure customers in the maritime, hotel, and retail markets. The Company typically recognizes 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 the Company to make assumptions about future billing adjustments for disputes with subscribers as well as unauthorized usage. The Company recognizes the monthly subscription fee as service revenue over the service delivery period. Under AgilePlans, the Company retains ownership of the hardware that it provides to these customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. Inertial navigation service sales The Company engages in contracts for development, production, and services activities related to standard product modification or enhancement. The Company considers 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 the Company performs 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 the Company for costs incurred plus a reasonable profit and take control of any work in process. The Company establishes 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 the Company's 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. The Company also sells 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 the Company’s total sales. Sales-type leases Revenue is recognized on sales-type leases primarily from the TracPhone mini-VSAT products. In accordance with ASC 842, the Company records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the net present value of all payments under these leases as product revenue, and the related costs of the product are charged to cost of sales. See Note 16. (f) Leases In accordance with ASC 842, the Company recognizes all leases greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. In ASC 842, a lease is defined as follows: “[a] contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” 60 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) Many of our lease agreements contain renewal options which are recognized if it is determined that the Company is reasonably certain to renew the lease at inception or when a triggering event occurs. Some of our lease agreements contain rent escalation clauses, rent holidays, capital improvement funding or other lease concessions. The Company recognizes the minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement and amortize such expense over the term of the lease beginning with the commencement date. Variable lease components that are not fixed at the beginning of the lease are recognized as incurred. Under certain third-party service agreements, the Company controls a specific space or underlying asset used in providing the service by the third-party service provider. These arrangements meet the definition under ASC 842 and therefore are accounted for under ASC 842. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when reasonably certain to be exercised. The present value of lease payments is determined using the incremental borrowing rate based on the information available at the lease commencement date. (g) Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments, which include cash equivalents, investments, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to the short maturity of these instruments. See Note 2 for more information on the fair value of the Company’s marketable securities. The carrying amount of the Company’s debt, and capital lease approximates fair value based on currently available quoted rates of similarly structured debt facilities. See Note 5 for more information on the fair value of the Company’s debt and line of credit and Note 16 for the Company's finance lease. (h) Cash, Cash Equivalents, and Marketable Securities In accordance with the Company’s investment policy, cash in excess of operational needs is invested in money market mutual funds, government agency bonds, United States treasuries, municipal bonds, corporate notes, or certificates of deposit. All highly liquid investments with a maturity date of three months or less at the date of purchase are classified as cash equivalents. The Company determines the appropriate classification of marketable securities at each balance sheet date. As of December 31, 2021 and 2020, all of the Company’s marketable securities have been designated as available-for-sale and are carried at their fair value with unrealized gains and losses included in accumulated other comprehensive loss in the accompanying consolidated balance sheets. The Company reviews investments in debt securities for other than temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it intends to sell the security, whether it expects to recover the credit loss, and if it is more likely than not that the Company will be required to sell the security prior to recovery. Evidence considered in this assessment includes the reasons for the impairment, compliance with the Company’s investment policy, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee. The Company has reviewed its securities with unrealized losses as of December 31, 2021 and 2020 and has concluded that no other-than-temporary impairments exist. (i) Inventories Inventories are stated at the lower of cost and net realizable value using the first-in first-out costing method. The Company adjusts the carrying value of its inventory based on the consideration of excess and obsolete components based on future estimate demand. The Company records inventory charges to costs of product sales. (j) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets. The principal lives used in determining the depreciation rates of various assets are: buildings and improvements, 5 - 40 years; leasehold improvements, shorter of original lease term or useful life; machinery, satellite hubs and equipment, 4 - 10 years; office and computer equipment, 3 - 7 years; and motor vehicles, 5 years. 61 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (k) Goodwill, Intangible Assets and other Long-Lived Assets The Company’s goodwill and intangible assets are associated with the purchase of Virtek Communication (now known as KVH Industries Norway AS) in September 2010 and Headland Media Limited (now known as the KVH Media Group) in May 2013. In accordance with ASC Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. (ASC 350), the Company performs 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. As a result of the 2020 annual impairment test, the Company recorded goodwill impairment charges of $ 8,732 and intangible asset impairment charges of $ 1,758 related to its KVH Media Group reporting unit. Prior to 2020, the Company had not recorded or incurred goodwill impairment charges. For the October 1, 2020 test, due to the uncertainty that the global pandemic presented during 2020, the Company determined that it should perform a quantitative analysis of goodwill impairment. The Company performed this full quantitative analysis in the fourth quarter of 2020 in conjunction with its annual budgeting and long-term planning cycle. 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. With the assistance of valuation specialists, the Company utilized an income approach and market approach to estimate the fair value of its reporting units, based on assumptions the Company believed to be reasonable. As an additional corroborative test of the reasonableness of those assumptions, the Company completed a reconciliation of its market capitalization and overall enterprise value to the fair value of all of its reporting units as of October 1, 2020. The Company estimated that, as of October 1, 2020, the fair value of the mobile broadband reporting unit exceeded its carrying value by 18 %; however, the carrying value of the KVH Media Group reporting unit exceeded its fair value by $ 10,156 , which signified that an impairment had occurred and identified a triggering event to review the 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 its long-lived assets, the Company performed an undiscounted cash flow analysis and concluded that the carrying value of the asset group was not recoverable. Accordingly, the Company then performed an analysis to estimate the fair value of the other long-lived assets and recognized an impairment charge of $ 1,758 , 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 $ 334 . As a result, the Company recognized an impairment charge to KVH Media Group’s goodwill in the amount of $ 8,732 , the remaining amount by which the carrying value exceeded its fair value. For the October 1, 2021 test, the Company performed a qualitative assessment of goodwill impairment (Step 0) and concluded that for the mobile broadband reporting unit, it was more likely than not that, for this reporting unit, the fair value exceeded the carrying value. For the KVH Media Group reporting unit, the Company determined that it was necessary to perform the Step 1 quantitative analysis due to the ongoing global pandemic and its impacts. The Company utilized an income approach to estimate the fair value of the reporting unit. The Company believes that the assumptions used to estimate the fair value of its KVH Media Group reporting unit were reasonable. The Company estimated that, as of October 1, 2021, the fair value of its KVH Media Group exceeded its carrying value by more than 20%. 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. The Company did not identify any impairment indicators that required an interim goodwill impairment test as of December 31, 2021. 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, the Company 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 2021, there were no events or changes in circumstances that indicated any of the carrying amounts of the Company’s intangible assets or other long-lived assets may not be recoverable. See Note 9 for further discussion of goodwill and intangible assets. 62 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (l) Other Non-Current Assets Other non-current assets are primarily comprised of long-term lease receivables, prepaid expenses, and deposits. (m) Product Warranty The Company’s products carry standard limited warranties that range from one to two years and vary by product. The warranty period begins on the date of retail purchase or lease by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include the number of units sold or leased, historical and anticipated rates of warranty repairs and the cost per repair. Warranty and related costs are reflected within sales, marketing and support in the accompanying consolidated statements of operations. As of December 31, 2021 and 2020, the Company had accrued product warranty costs of $ 1,179 and $ 1,812 , respectively. The following table summarizes product warranty activity during 2021 and 2020: 2021 2020 Beginning balance $ 1,812 $ 2,194 Charges to expense 457 1,091 Costs incurred ( 1,090 ) ( 1,473 ) Ending balance $ 1,179 $ 1,812 (n) Shipping and Handling Costs Shipping and handling costs are expensed as incurred and included in cost of sales. Billings for shipping and handling are reflected within net sales in the accompanying consolidated statements of operations. (o) Research and Development Expenditures for research and development, including customer-funded research and development, are expensed as incurred. Revenue and related development costs from customer-funded research and development are as follows: Year Ended December 31, 2021 2020 Customer-funded service sales $ 363 $ 2,043 Customer-funded costs included in costs of service sales $ 803 $ 2,935 (p) Advertising Costs Costs related to advertising are expensed as incurred. Advertising expense was $ 1,259 and $ 1,285 for the years ended December 31, 2021 and 2020, respectively, and is included in sales, marketing, and support expense in the accompanying consolidated statements of operations. (q) Foreign Currency Translation The financial statements of the Company’s foreign subsidiaries located in Denmark and Singapore are maintained using the United States dollar as the functional currency. Exchange rates in effect on the date of the transaction are used to record monetary assets and liabilities. Revenue and other expense elements are recorded at rates that approximate the rates in effect on the transaction dates. Foreign currency exchange gains and losses are recognized within “ Other income, net ” in the accom panying consolidated statements of operations. For the years ended December 31, 2021 and 2020, the Company recorded a total of net foreign currency exchange losses in its accompanying consolidated statements of operations of $ 3 and $ 48 , respectively, which is comprised of both realized and unrealized foreign currency exchange gains and losses. 63 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) The financial statements of the Company’s foreign subsidiaries located in the United Kingdom, Brazil, Norway, Cyprus, India and Japan use the foreign subsidiaries’ respective local currencies as the functional currency. The Company translates the assets and liabilities of these foreign subsidiaries at the exchange rates in effect at year-end. Net sales, costs and expenses are translated using average exchange rates in effect during the year. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive loss included in stockholders' equity in the accompanying consolidated balance sheets. (r) Income Taxes The Company is subject to income taxes in the U.S. and in numerous foreign jurisdictions. The Company accounts for income taxes following ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes 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. See Note 8 for further discussion of income taxes. (s) Net Loss per Common Share Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined in accordance with the treasury stock accounting method. For the years ended December 31, 2021 and 2020 since there was a net loss, the Company excluded all 747 and 1,566 shares, respectively, in outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these securities would have reduced the net loss per share. A reconciliation of the basic and diluted weighted average common shares outstanding is as follows: December 31, 2021 2020 Weighted average common shares outstanding—basic 18,217 17,669 Dilutive common shares issuable in connection with stock plans — — Weighted average common shares outstanding—diluted 18,217 17,669 (t) Contingent Liabilities The Company estimates the amount of potential exposure it may have with respect to claims, assessments and litigation in accordance with ASC 450, Contingencies . As of December 31, 2021 and 2020, the Company was not party to any lawsuit or proceeding that, in management's opinion, was likely to materially harm the Company's business, results of operations, financial condition or cash flows. It is not always possible to predict the outcome of litigation, as it is subject to many uncertainties. Additionally, it is not always possible for management to make meaningful estimates of the potential loss or range of loss associated with such litigation. 64 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (u) Operating Segments The Company operates in two segments, the mobile connectivity and inertial navigation segments. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its President, Chief Executive Officer and Chairman of the Board. The Company operates in a number of major geographic areas, including internationally. Revenues are generated from international locations, primarily consisting of Canada, European countries, both inside and outside the European Union, as well as Africa, Asia/Pacific, the Middle East, and South America (see Note 12, " Segment Reporting "). (v) Recently Issued Accounting Standards From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, the Company evaluates the pronouncements to determine the potential effects of adoption on our consolidated financial statements. Standard Implemented ASC Update No. 2019-12 In December 2019, the FASB issued ASC Update No. 2019-12, Income Taxes (Topic 740) . The update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The purpose of Update No. 2019-12 is to remove certain exceptions for recognizing deferred taxes for investments and simplify the accounting for income taxes in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. It amends the requirements relating to the accounting for "hybrid" tax regimes. Update No. 2019-12 did not have a material impact on the Company's financial position or results of operations. Standards to be Implemented ASC Update No. 2016-13, ASC Update No. 2018-19, ASC Update No. 2019-04, ASC Update No. 2019-05, ASC Update No. 2019-10, ASC Update No. 2019-11 and ASC Update No. 2020-02 In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The purpose of Update No. 2016-13 is to replace the incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses . This update introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost. The amendment also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASC Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments . This update introduced clarifications of the Board’s intent with respect to accrued interest, the transfer between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projects of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures, and extension and renewal options. In May 2019, the FASB issued ASC Update No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief . The amendments in the update ease the transition for entities adopting ASC Update 2016-13 and increase the 65 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) comparability of financial statement information. With the exception of held-to-maturity debt securities, the amendments allow entities to irrevocably elect to apply the fair value option to financial instruments that were previously recorded at amortized cost basis within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost . In November 2019, the FASB issued ASC Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The amendments in this update change some effective dates for certain new accounting standards including those pertaining to Topic 326 discussed above, for certain types of entities. In November 2019, the FASB issued ASC Update No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (Topic 326). The update is effective for entities that have adopted ASU 2016-13. The purpose of Update No. 2019-11 is to clarify the scope of the recovery guidance to purchased financial assets with credit deterioration. In February 2020, the FASB issued ASC Update No. 2020-02, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842). The purpose of Update No. 2020-02 is to clarify the scope and interpretation of the standard. As a smaller reporting entity, the effective date for Topic 326 will be the fiscal year beginning after December 15, 2022. The adoption of Update Nos. 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-02 is not expected to have a material impact on the Company's financial position or results of operations. There are no other recent accounting pronouncements issued by the FASB that the Company expects would have a material impact on the Company's financial statements. (2) Marketable Securities Marketable securities as of December 31, 2021 and 2020 consisted of the following: December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market mutual funds $ 13,147 $ — $ — $ 13,147 Total marketable securities designated as available-for-sale $ 13,147 $ — $ — $ 13,147 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market mutual funds $ 20,142 $ — $ — $ 20,142 United States treasuries 4,999 — — 4,999 Total marketable securities designated as available-for-sale $ 25,141 $ — $ — $ 25,141 The effective maturity date of the United States treasuries is less than one year. Interest income from marketable securities was $ 6 and $ 135 for the years ended December 31, 2021 and 2020, respectively. 66 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (3) Inventories Inventories are stated at the lower of cost and net realizable value using the first-in first-out costing method. Inventories as of December 31, 2021 and 2020 include the costs of material, labor, and factory overhead. Components of inventories consist of the following: December 31, 2021 2020 Raw materials $ 15,772 $ 13,957 Work in process 4,035 3,996 Finished goods 4,833 6,721 $ 24,640 $ 24,674 (4) Property and Equipment Property and equipment, net, as of December 31, 2021 and 2020 consist of the following: December 31, 2021 2020 Land $ 3,828 $ 3,828 Building and improvements 24,271 24,197 Leasehold improvements 472 482 Revenue-generating assets 63,587 56,336 Machinery and equipment 16,790 15,536 Office and computer equipment 15,395 13,855 Motor vehicles 31 31 124,374 114,265 Less accumulated depreciation ( 64,260 ) ( 57,992 ) $ 60,114 $ 56,273 Depreciation expense for the years ended December 31, 2021 and 2020 amounted to $ 13,574 and $ 10,659 , respectively. Certain revenue-generating hardware assets are utilized by the Company in the delivery of the Company's airtime services, media, and other content. (5) Debt and Line of Credit Long-term debt consists of the following: December 31, 2021 2020 PPP loan $ — $ 6,927 Total long-term debt — 6,927 Less amounts classified as current — 4,992 Long-term debt, excluding current portion $ — $ 1,935 67 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) Paycheck Protection Program Loan In May 2020, the Company received a $ 6,927 loan (the PPP Loan) from Bank of America, N.A., (the Lender) under the Paycheck Protection Program (PPP), 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 (the SBA). The term of the PPP Loan was two years from the funding date, and the interest rate was 1.00%. Interest on the loan accrued from the funding date, but was deferred. In August 2021, the Company applied for forgiveness of the full amount of the PPP Loan. On September 24, 2021, the Company received notification from the Lender that, on September 19, 2021, the SBA had determined that the PPP Loan forgiveness application was approved, and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA. The forgiveness of the PPP Loan including all interest accrued of $ 6,979 is recognized in Other income, net in the accompanying consolidated statements of operations for the year ended December 31, 2021. Line of Credit Effective October 30, 2018, the Company 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), which included a reducing revolving credit facility (the 2018 Revolver) of up to $ 20,000 initially and reducing to $ 15,000 on December 31, 2019, to be used for general corporate purposes. The Company's obligations under the 2018 Credit Agreement are secured by substantially all of its assets and the pledge of equity interests in certain of its subsidiaries. As of December 31, 2021, no amounts were outstanding under the 2018 Revolver. 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 the Company’s representations and warranties and the absence of any default under the 2018 Credit Agreement. As of December 31, 2021, the Company was only able to draw on $ 10,900 of the $ 15,000 facility due to covenant restrictions. The 2018 Credit Agreement contained 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, 2020 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, the Company amended the 2018 Credit Agreement to reflect the incurrence of the PPP Loan. Under the amended facility, the principal and interest on the PPP Loan were 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. In September 2021, the PPP Loan was forgiven in full. On October 29, 2021, the Company amended the 2018 Credit Agreement to maintain the $ 15,000 2018 Revolver, extend the maturity date of the 2018 Revolver to October 28, 2022, eliminate the Consolidated Fixed Charge Coverage Ratio financial covenant, add a minimum trailing four-quarter Consolidated Adjusted EBITDA financial covenant of $ 3,000 , modify the definition of Consolidated Adjusted EBITDA, modify the interest rate margins and certain lender fees, and transition the interest rate provisions based on LIBOR to the Bloomberg Short Term Bank Yield Index. In addition, Bank of America became the sole lender under the 2018 Credit Agreement. 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 the Company’s business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements. 68 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (6) Commitments and Contingencies The Company has certain operating leases and other commitments for satellite capacity, various equipment, and facilities. The following reflects future minimum payments under operating leases and other commitments that have initial or remaining non-cancelable terms at December 31, 2021: Years ending December 31, Commitments (a) 2022 $ 29,679 2023 28,190 2024 5,041 2025 44 2026 2 Total minimum payments $ 62,956 (a) Includes the future minimum lease payments for the Company's operating leases as seen in Note 16. Total rent expense incurred under facility operating leases for the years ended December 31, 2021 and 2020 amounted to $ 868 and $ 875 , respectively. Total expense incurred under satellite capacity and equipment operating leases and other commitments for the years ended December 31, 2021 and 2020 amounted to $ 39,216 and $ 34,990 , respectively, which also includes payments for usage charges in excess of the minimum contractual requirements. In the normal course of business, the Company enters into unconditional purchase order obligations with its suppliers for inventory and other operational purchases. Outstanding and unconditional purchase order obligations were $ 26,371 as of December 31, 2021, which the Company expects to fulfill in 2022. The Company did not have any off-balance sheet commitments, guarantees, or standby repurchase obligations as of December 31, 2021. (7) Stockholders’ Equity The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation . Stock-based compensation expense, excluding compensation charges related to our employee stock purchase plan, or the ESPP, was $ 4,053 and $ 3,414 for the years ended December 31, 2021 and 2020, respectively. The Company is authorized to grant stock options, restricted stock awards and other stock-based awards under its Amended and Restated 2016 Equity and Incentive Plan (the 2016 Plan) with respect to up to 4,800 shares of common stock, an increase of 1,800 shares reserved for issuance under the previous 2016 Plan as approved by our shareholders on June 10, 2020. Options have generally been granted with an exercise price equal to the fair market value of the common stock on the date of grant and have generally provided for vesting in equal annual amounts over four years beginning on the first anniversary of the date of the grant. No options are exercisable for periods of more than five years after date of grant. Under the 2016 Plan, each share issued under awards other than options and stock appreciation rights will reduce the number of shares reserved for issuance by two shares. Shares issued under options or stock appreciation rights will reduce the shares reserved for issuance on a share-for-share basis. The 2016 Plan and earlier equity compensation plans, pursuant to which an aggregate of 14,215 shares of the Company’s common stock were reserved for issuance, were all approved by the Company's shareholders. As of December 31, 2021, 458 shares were available for future grants. The Compensation Committee of the Board of Directors administers the equity compensation plans, approves the individuals to whom awards will be granted and determines the number of shares and other terms of each award. Outstanding options under the Company's equity compensation plans at December 31, 2021 expire from March 2022 through March 2026. None of the Company’s outstanding options includes performance-based or market-based vesting conditions as of December 31, 2021. 69 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (a) Employee Stock Options The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The expected volatility assumption is based on the historical daily price data of the Company’s common stock over a period equivalent to the weighted average expected life of the Company’s options. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns and represents the period of time the options granted are expected to be outstanding. The risk-free interest rate is based on the actual U.S. Treasury zero-coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend yield of zero is based upon the fact that the Company has not historically declared or paid cash dividends, and does not expect to declare or pay dividends in the foreseeable future. The per share weighted-average fair values of stock options granted during 2021 and 2020 were $ 4.70 and $ 2.88 , respectively. The weighted-average assumptions used to value options as of their grant date were as follows: Year Ended December 31, 2021 2020 Risk-free interest rate 0.92 % 0.21 % Expected volatility 44.98 % 44.03 % Expected life (in years) 4.28 4.29 Dividend yield 0 % 0 % The changes in outstanding stock options for the year ended December 31, 2021 and 2020 are as follows: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 2,034 $ 9.25 Granted 497 $ 12.68 Exercised ( 274 ) $ 9.86 Expired, canceled or forfeited ( 130 ) $ 9.96 Outstanding at December 31, 2021 2,127 $ 9.93 2.68 $ 931 Exercisable at December 31, 2021 858 $ 9.41 1.65 $ 453 Options vested or expected to vest at December 31, 2021 2,127 $ 9.93 2.68 $ 931 Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at December 31, 2019 1,624 $ 9.86 Granted 654 $ 8.12 Exercised ( 110 ) $ 8.02 Expired, canceled or forfeited ( 134 ) $ 12.14 Outstanding at December 31, 2020 2,034 $ 9.25 3.21 $ 4,288 Exercisable at December 31, 2020 611 $ 9.83 2.19 $ 939 Options vested or expected to vest at December 31, 2020 2,034 $ 9.25 3.21 $ 4,288 The total aggregate intrinsic value of options exercised was $ 914 and $ 269 in 2021 and 2020, respectively. 70 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) As of December 31, 2021, there was $ 3,599 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.42 years. In 2021 and 2020, the Company recorded compensation charges of $ 1,740 and $ 1,401 , respectively, related to stock options. Compensation costs for options subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for the entire award. During 2021 and 2020, cash received under stock option plans for exercises was $ 2,709 and $ 880 , respectively. (b) Restricted Stock The Company granted 217 and 317 restricted stock awards to employees under the terms of the 2016 Plan or the Amended and Restated 2006 Stock Incentive Plan (2006 Plan) for the years ended December 31, 2021 and 2020, respectively. The restricted stock awards have generally provided for vesting annually over four years from the date of grant subject to the recipient remaining an employee through the applicable vesting dates. Compensation expense for restricted stock awards is measured at fair value on the date of grant based on the number of shares granted and the quoted market closing price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of forfeitures. The weighted-average grant-date fair value of restricted stock granted during 2021 and 2020 was $ 12.23 and $ 8.19 per share, respectively. As of December 31, 2021, there was $ 3,838 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.21 years. 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. Compensation cost for awards initially subject to certain performance conditions are recognized on a ratable basis over the requisite service period for the entire award. In 2021 and 2020, the Company recorded compensation charges of $ 2,313 and $ 2,013 , respectively, related to restricted stock awards. Restricted stock activity under the 2006 Plan and the 2016 Plan for 2021 is as follows: Number of Shares Weighted- average grant date fair value Outstanding at December 31, 2020, unvested 556 $ 8.90 Granted 217 12.23 Vested ( 247 ) 9.18 Forfeited ( 37 ) 9.46 Outstanding at December 31, 2021, unvested 489 $ 10.19 (c) Employee Stock Purchase Plan Under the Company's Amended and Restated 1996 Employee Stock Purchase Plan (ESPP), an aggregate of 1,650 shares of common stock have been reserved for issuance, of which 821 shares remain available as of December 31, 2021. The ESPP covers all of the Company’s employees. Under the terms of the ESPP, eligible employees can elect to have up to six percent of their pre-tax compensation withheld to purchase shares of the Company’s common stock on a semi-annual basis at 85 % of the market price on the first or last day of each purchase period, whichever is lower. During 2021 and 2020, shares issued under this plan were 26 and 44 shares, respectively. The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of these discounted purchases. The fair value of the 15 % discount is recognized as compensation expense over the purchase period. The Company applies a graded vesting approach because the ESPP provides for multiple purchase periods and is, in substance, a series of linked awards. In 2021 and 2020, the Company recorded compensation charges of $ 56 and $ 48 , respectively, related to the ESPP. During 2021 and 2020, cash received under the ESPP was $ 230 and $ 336 , respectively. 71 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (d) Stock-Based Compensation Expense The following presents stock-based compensation expense, including expense for the ESPP, in the Company's consolidated statements of operations for the years ended December 31, 2021 and 2020. 2021 2020 Cost of product sales $ 271 $ 165 Cost of service sales 10 — Research and development 644 593 Sales, marketing and support 898 682 General and administrative 2,286 2,022 $ 4,109 $ 3,462 (e) Accumulated Other Comprehensive Loss (AOCI) Comprehensive loss includes net income (loss) and unrealized gains and losses from foreign currency translation. The components of the Company’s comprehensive loss and the effect on earnings for the periods presented are detailed in the accompanying consolidated statements of comprehensive loss. Foreign Currency Translation Total Accumulated Other Comprehensive Loss Balance, December 31, 2019 $ ( 2,767 ) $ ( 2,767 ) Other comprehensive loss ( 465 ) ( 465 ) Net other comprehensive loss ( 465 ) ( 465 ) Balance, December 31, 2020 ( 3,232 ) ( 3,232 ) Other comprehensive loss ( 177 ) ( 177 ) Net other comprehensive loss ( 177 ) ( 177 ) Balance, December 31, 2021 $ ( 3,409 ) $ ( 3,409 ) 72 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (8) Income Taxes Income tax (benefit) expense for the years ended December 31, 2021 and 2020 attributable to loss from operations is presented below. Current Deferred Total Year ended December 31, 2021 Federal $ 27 $ — $ 27 State — — — Foreign 44 ( 179 ) ( 135 ) $ 71 $ ( 179 ) $ ( 108 ) Year ended December 31, 2020 Federal $ 240 $ — $ 240 State — — — Foreign 321 ( 387 ) ( 66 ) $ 561 $ ( 387 ) $ 174 Actual income tax (benefit) expense differs from the “expected” income tax (benefit) expense computed by applying the United States Federal statutory income tax rate of 21% for both 2021 and 2020 to loss before tax (benefit) expense, as follows: Year Ended December 31, 2021 2020 Income tax benefit at Federal statutory income tax rate $ ( 2,073 ) $ ( 4,571 ) Increase (decrease) in income taxes resulting from: State income tax benefit, net of federal benefit ( 342 ) ( 600 ) State research and development, investment credits ( 137 ) ( 213 ) Non-deductible meals & entertainment 1 22 Non-deductible stock compensation expense ( 194 ) 19 Non-deductible compensation under 162(m) 35 — Foreign tax rate differential 58 235 Federal research and development credits ( 607 ) ( 707 ) Uncertain tax positions 32 39 Provision to tax return adjustments 33 144 Change in valuation allowance 4,648 3,980 PPP loan forgiveness ( 1,455 ) — Impairment of goodwill and intangibles — 1,834 Prior period adjustments ( 117 ) — Other 10 ( 8 ) Income tax (benefit) expense $ ( 108 ) $ 174 73 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) Loss before income tax (benefit) expense determined by tax jurisdiction, are as follows: Year Ended December 31, 2021 2020 United States $ ( 10,040 ) $ ( 11,862 ) Foreign 169 ( 9,904 ) Total $ ( 9,871 ) $ ( 21,766 ) Deferred tax assets and liabilities for the periods presented consisted of the following: December 31, 2021 2020 Deferred tax assets: Accounts receivable, due to allowance for doubtful accounts $ 373 $ 221 Inventories 1,211 1,209 Operating loss carry-forwards 5,784 2,744 Stock-based compensation expense 1,106 874 Property and equipment, due to difference in depreciation 1,978 841 Research and development tax credit carry-forwards 6,247 5,640 Foreign tax credit carry-forwards 2,345 2,345 State tax credit carry-forwards 3,975 3,838 Capitalized research and development 2,690 3,154 Warranty reserve 277 429 Accrued expenses 1,174 1,216 Lease liability 700 1,574 Gross deferred tax assets 27,860 24,085 Less valuation allowance ( 27,080 ) ( 22,432 ) Total deferred tax assets 780 1,653 Deferred tax liabilities: Purchased intangible assets ( 199 ) ( 384 ) Property and equipment, due to differences in depreciation ( 52 ) ( 50 ) Right of use asset ( 688 ) ( 1,564 ) Total deferred tax liabilities ( 939 ) ( 1,998 ) Net deferred tax liability $ ( 159 ) $ ( 345 ) Deferred income tax asset $ 56 $ 73 Deferred income tax liability $ ( 215 ) $ ( 418 ) As of December 31, 2021 the Company has federal and state tax loss carryforwards of approximately $ 22,103 and $ 16,878 , respectively. The federal loss carryforward has no expiration date. The state losses expire through the year 2041. As of December 31, 2021, the Company had federal research and development tax credit carry-forwards in the amount of $ 6,238 and other general business credits of $ 9 that expire in years 2028 through 2041. As of December 31, 2021, the Company had foreign tax credit carry-forwards in the amount of $ 2,345 that expire in years 2026 through 2027. As of December 31, 2021, the Company had state research and development tax credit carry-forwards in the amount of $ 4,918 that expire in years 2022 through 2028. The Company also had other state tax credit carry-forwards of $ 114 available to reduce future state tax expense that expire in years 2022 through 2028. The Company’s ability to utilize these net operating loss carry-forwards and tax credit carry-forwards may be limited in the future if the Company experiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders change by more than 50% over a three-year period. 74 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) In assessing the realizability of its net deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2021, the Company concluded that a net increase of $ 4,648 of the valuation allowance was appropriate. The change was the result of an increase in domestic tax credits, net operating loss balances, and property and equipment differences due to depreciation. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating tax losses and its near-term forecasts of future taxable income or losses. As of December 31, 2021, unremitted foreign earnings, which were not significant, have been retained by the Company's foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to state tax and withholding taxes payable to various foreign countries. The Company establishes reserves for uncertain tax positions based on management’s assessment of exposure associated with tax deductions, permanent tax differences, and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur that warrant adjustment to the reserve. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The aggregate changes in the total gross amount of unrecognized tax benefits are as follows: Year Ended December 31, 2021 2020 Unrecognized tax benefits as of January 1 $ 1,771 $ 1,897 Gross decrease in unrecognized tax benefits - prior year tax positions ( 104 ) ( 105 ) Lapse of statute of limitations ( 14 ) ( 21 ) Unrecognized tax benefits as of December 31 $ 1,653 $ 1,771 All unrecognized tax benefits as of December 31, 2021 and 2020, if recognized, would result in a reduction of the Company's effective tax rate. The Company recorded interest and penalties of $ 46 and $ 61 in its consolidated statement of operations for the years ended December 31, 2021 and 2020, respectively. Total accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $ 255 and $ 208 as of December 31, 2021 and 2020, respectively. The timing of any resolution of income tax examinations is highly uncertain, as are the amounts and timing of any settlement payment. These events could cause fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2021 may decrease approximately $ 19 in the next twelve months as a result of a lapse of statutes of limitation and settlements with taxing authorities. The Company’s tax jurisdictions include the United States, the United Kingdom, Denmark, Cyprus, Norway, Brazil, Singapore, Japan, and India. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to 2018, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state and foreign taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding year. 75 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (9) Goodwill and Intangible Assets Intangible assets arose from an acquisition made prior to 2013 and the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013. Intangibles arising from the acquisition made prior to 2013 were amortized on a straight-line basis over an estimated useful life of 7 years. Intangibles arising from the acquisition of KVH Media Group are being amortized on a straight-line basis over the estimated useful life of: (i) 10 years for acquired subscriber relationships and (ii) 15 years for distribution rights. Due to the impairment of distribution rights during the Company's 2020 annual impairment test, the estimated useful life of distribution rights was reduced from 15 years to 1 year. The intangibles arising from the KVH Media Group acquisition were recorded in pounds sterling and fluctuations in exchange rates cause these amounts to increase or decrease from time to time. In January 2017, the Company completed the acquisition of certain subscriber relationships from a third party. This acquisition did not meet the definition of a business under ASC 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business , which the Company adopted on October 1, 2016. The Company ascribed $ 100 of the initial purchase price to the acquired subscriber relationships definite-lived intangible assets with an initial estimated useful life of 10 years. Under the asset purchase agreement, the purchase price includes a component of contingent consideration under which the Company is required to pay a percentage of recurring revenues received from the acquired subscriber relationships through 2026 up to a maximum annual payment of $ 114 . As of December 31, 2021, the carrying value of the intangible assets acquired in the asset acquisition was $ 408 . As the acquisition did not represent a business combination, the contingent consideration arrangement is recognized only when the contingency is resolved and the consideration is paid or becomes payable. The amounts payable under the contingent consideration arrangement, if any, will be included in the measurement of the cost of the acquired subscriber relationships. An additional $ 62 and $ 75 of consideration was earned under the contingent consideration arrangement during the years ended December 31, 2021 and 2020, respectively. Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at December 31, 2021 and 2020, respectively: Gross Carrying Amount Accumulated Amortization Net Carrying Value December 31, 2021 Subscriber relationships $ 8,033 $ 6,746 $ 1,287 Distribution rights 315 315 — Internally developed software 446 446 — Proprietary content 153 153 — Intellectual property 2,284 2,284 — $ 11,231 $ 9,944 $ 1,287 December 31, 2020 Subscriber relationships $ 7,977 $ 5,958 $ 2,019 Distribution rights 311 76 235 Internally developed software 446 446 — Proprietary content 153 153 — Intellectual property 2,284 2,284 — $ 11,171 $ 8,917 $ 2,254 Amortization expense related to intangible assets was $ 1,027 and $ 1,004 for years ended December 31, 2021 and 2020, respectively, and was categorized as general and administrative expense. As of December 31, 2021, the total weighted average remaining useful lives of the definite-lived intangible assets was 1.5 years and the weighted average remaining useful lives by the definite-lived intangible asset category are as follows: 76 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) Intangible Asset Weighted Average Remaining Useful Life in Years Subscriber relationships 1.5 Estimated future amortization expense for intangible assets recorded by the Company at December 31, 2021 is as follows: Years ending December 31, Amortization Expense 2022 $ 782 2023 315 2024 60 2025 60 2026 60 Thereafter 10 Total amortization expense $ 1,287 The changes in the carrying amount of intangible assets during the year ended December 31, 2021 is as follows: 2021 Balance at December 31, 2020 $ 2,254 Amortization expense ( 1,027 ) Intangibles assets acquired in asset acquisition 62 Foreign currency translation adjustment ( 2 ) Balance at December 31, 2021 $ 1,287 Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. All of the Company's goodwill as of December 31, 2021 relates to its mobile connectivity reportable segment. No ne of the Company's goodwill is deductible for tax purposes. The changes in the carrying amount of goodwill during the year ended December 31, 2021 is as follows: Goodwill Balance at December 31, 2020 $ 6,592 Foreign currency translation adjustment ( 22 ) Balance at December 31, 2021 $ 6,570 (10) 401(k) Plan The Company has a 401(k) Plan (the Plan) for all eligible employees. Participants may defer a portion of their pre-tax or post-tax earnings subject to limits determined by the Internal Revenue Service. Participants age 50 or older may be eligible to make additional contributions. The Company matches contributions by the Plan participants up to 6 %. The Company’s contributions vest over a five-year period from the date of hire. During a five and half month period in 2020, as a result of the uncertainty caused by the COVID-19 pandemic, the Company paused matching contributions. The Company matching contributions were $ 900 and $ 561 for the years ended December 31, 2021 and 2020, respectively. In addition, the Company may make additional contributions to the Plan at the discretion of the Compensation Committee of the Board of Directors. There were no discretionary contributions in 2021 and 2020. 77 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (11) Revenue from Contracts with Customers (ASC 606) 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 the Company expects to be entitled to receive in exchange for these products and services. Disaggregation of Revenue The following table summarizes net sales from contracts with customers for the years ended December 31, 2021 and 2020: Year Ended December 31, 2021 2020 Mobile connectivity product, transferred at point in time $ 27,490 $ 25,140 Mobile connectivity product, transferred over time 2,522 2,723 Mobile connectivity service 103,899 91,590 Inertial navigation product 36,858 36,756 Inertial navigation service 998 2,524 Total net sales $ 171,767 $ 158,733 Revenue recognized during the years ended December 31, 2021 and 2020 from amounts included in contract liabilities at the beginning of the fiscal year was approximately $ 2,281 and $ 2,586 , respectively. For mobile connectivity product sales, the delivery of the Company’s performance obligations are generally transferred to the customer, and associated revenue is recognized, at a point in time, with the exception of certain mini-VSAT contracts which are transferred to customers over time. For mobile connectivity service sales, the delivery of the Company’s performance obligations are transferred to the customer, and associated revenue is recognized, over time. For inertial navigation product sales, the delivery of the Company’s performance obligations are generally transferred to the customer, and associated revenue is recognized, at a point in time. For inertial navigation service sales, the Company's performance obligations are generally transferred to customers, and associated revenue is recognized, over time. Business and Credit Concentrations Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers and their dispersion across several geographic areas. Although the Company does not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes allowances for potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations for future collectability concerns. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. No single customer accounted for 10% or more of consolidated net sales for the years ended December 31, 2021 or 2020 or accounts receivables as of December 31, 2021 or 2020. Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results. 78 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (12) Segment Reporting The Company's reportable segments are mobile connectivity and inertial navigation. The financial results of each segment are based on revenues from external customers, costs of revenue and operating expenses that are directly attributable to the segment and an allocation of costs from shared functions. These shared functions include, but are not limited to, facilities, human resources, information technology, and engineering. Allocations are made based on management’s judgment of the most relevant factors, such as head count, number of customer sites, or other operational data that contribute to the shared costs. Certain corporate-level costs have not been allocated as they are not directly attributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance, and costs associated with corporate actions. Segment-level asset information has not been provided as such information is not reviewed by the chief operating decision-maker for purposes of assessing segment performance and allocating resources. There are no significant inter-segment sales or transactions. The Company's performance is impacted by the levels of activity in the marine and land mobile markets and defense sectors, among others. Performance in any particular period could be impacted by the timing of sales to certain large customers. The mobile connectivity segment primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to television, the Internet and voice services while on the move. Product sales within the mobile connectivity segment accounted for approximately 17 % and 18 % of our consolidated net sales for 2021 and 2020, respectively. Sales of mini-VSAT Broadband airtime service accounted for approximately 54 % and 51 % of our consolidated net sales for 2021 and 2020, respectively. The inertial navigation segment manufactures and distributes a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address the rigorous requirements of military and commercial customers and provide reliable, easy-to-use and continuously available navigation and pointing data. The principal product categories in this segment include the FOG-based inertial measurement units (IMUs) for precision guidance, FOGs for tactical navigation as well as pointing and stabilization systems, and digital compasses that provide accurate heading information for demanding applications, security, automation and access control equipment and systems. Sales of FOG-based guidance and navigation systems within the inertial navigation segment accounted for approximately 16 % of consolidated net sales for both 2021 and 2020. No other single product class accounts for 10% or more of consolidated net sales. The Company operates in a number of major geographic areas, including internationally. Revenues from international locations primarily include Canada, European Union countries, and other European countries, as well as countries in Africa, Asia/Pacific, the Middle East, and India. Revenues are based upon customer location and internationally represented 60 % and 64 % of consolidated net sales for 2021 and 2020, respectively. Sales to Singapore customers represented 11 % of the Company's consolidated net sales for 2021. No other individual foreign country represented 10% or more of the Company's consolidated net sales for 2021. No individual foreign country represented 10% or more of the Company's consolidated net sales for 2020. As of December 31, 2021 and 2020, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets and were deemed not material. 79 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) Net sales and operating income (loss) for the Company's reporting segments and the Company's loss before income tax (benefit) expense for the years ended December 31, 2021 and 2020 were as follows: For the year ended December 31, 2021 2020 Net sales: Mobile connectivity $ 133,911 $ 119,453 Inertial navigation 37,856 39,280 Consolidated net sales $ 171,767 $ 158,733 Operating income (loss): Mobile connectivity (1) $ 2,749 $ ( 10,071 ) Inertial navigation 1,649 4,799 Subtotal 4,398 ( 5,272 ) Unallocated, net ( 22,344 ) ( 17,665 ) Loss from operations ( 17,946 ) ( 22,937 ) Net interest and other income 8,075 1,171 Loss before income tax (benefit) expense $ ( 9,871 ) $ ( 21,766 ) (1) Includes an impairment charge of $ 10,490 for the KVH Media Group reporting unit within the mobile connectivity segment for the year ended December 31, 2020. Depreciation expense and amortization expense for the Company's segments are presented in the table that follows for the periods presented: For the year ended December 31, 2021 2020 Depreciation expense: Mobile connectivity $ 11,322 $ 8,726 Inertial navigation 1,569 1,325 Unallocated 683 608 Total consolidated depreciation expense $ 13,574 $ 10,659 Amortization expense: Mobile connectivity $ 1,027 $ 1,004 Inertial navigation — — Unallocated — — Total consolidated amortization expense $ 1,027 $ 1,004 80 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) (13) Share Buyback Program On October 4, 2019, the Company's Board of Directors authorized a share repurchase program pursuant to which the Company was authorized to purchase up to 1,000 shares of the Company’s common stock. The program expired on October 4, 2020. Under the repurchase program, the Company, at management’s discretion, was 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. In January 2020, the Company repurchased 36 shares of common stock in open market transactions at a cost of approximately $ 390 . The total amount the Company repurchased under the repurchase program since the inception of the October 4, 2019 repurchase program was 151 shares of common stock for an approximate cost of $ 1,690 . There were no repurchase programs outstanding during 2021. (14) Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures (ASC 820), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments in money market mutual funds and United States treasuries. Level 2: Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based on directly or indirectly market-corroborated inputs. The Company has no Level 2 assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity, and are developed based on the best information available given the circumstances. The Company has no Level 3 assets. Assets and liabilities measured at fair value are based the valuation techniques identified in the table below. The valuation techniques are: (a) Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets. The following tables present financial assets and liabilities at December 31, 2021 and December 31, 2020 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy: December 31, 2021 Total Level 1 Level 2 Level 3 Valuation Technique Assets Money market mutual funds $ 13,147 $ 13,147 $ — $ — (a) December 31, 2020 Total Level 1 Level 2 Level 3 Valuation Technique Assets Money market mutual funds $ 20,142 $ 20,142 $ — $ — (a) United States treasuries $ 4,999 $ 4,999 $ — $ — (a) 81 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) The carrying amount of certain financial instruments approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of the Company's operating and financing lease liabilities approximates fair value based on currently available quoted rates of similarly structured borrowings. Assets Measured and Recorded at Fair Value on a Nonrecurring Basis The Company's non-financial assets, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if an impairment exists. During 2020, the Company recorded an impairment charge of $ 10,490 to goodwill and intangible assets. There was no additional impairment of the Company's non-financial assets noted as of December 31, 2021. See Note 1(k) and Note 9 for additional details. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis. (15) Legal Matters In the ordinary course of business, the Company is a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. The Company is not a party to any lawsuit or proceeding that, in management's opinion, is likely to materially harm the Company's business, results of operations, financial condition, or cash flows. (16) Leases Lessee The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense was $ 3,963 and $ 3,413 for the year ended December 31, 2021 and 2020, respectively. Short-term operating lease costs was $ 237 and $ 244 for the years ended December 31, 2021 and 2020, respectively. Sublease income was $ 134 for both the years ended December 31, 2021 and 2020. Maturities of lease liabilities as of December 31, 2021 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows: Years ending December 31, 2022 $ 2,033 2023 819 2024 428 2025 38 Total undiscounted lease payments $ 3,318 Less amount representing interest $ ( 182 ) Present value of operating lease liabilities $ 3,136 Less current installments of obligation under current-operating lease liabilities $ 1,912 Obligations under long-term operating lease liabilities, excluding current installments $ 1,224 Weighted-average remaining lease term - operating leases (years) 1.97 Weighted-average discount rate - operating leases 5.50 % During the first quarter of 2018, the Company entered into a five-year financing lease for three satellite hubs for its HTS network. During the first quarter of 2021, the terms of this lease were adjusted and the Company discontinued use of two satellite hubs and was released from the related payment obligation in exchange for additional satellite service capacity. As of December 31, 2021, the gross costs and accumulated depreciation associated with this lease are included in revenue generating 82 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) assets and amounted to $ 1,268 and $ 710 , respectively. The obligations under financing leases are stated at the present value of minimum lease payments. The property and equipment held under this financing lease are amortized on a straight‑line basis over the seven-year estimated useful life of the asset, since the lease meets the bargain purchase option criteria . Amortization of assets held under financing leases is included within depreciation expense. Depreciation expense for the remaining capital assets was $ 181 for both the years ended December 31, 2021 and 2020. The future undiscounted lease payments under this financing lease as of December 31, 2021 are: 2022 $ 264 2023 22 Total undiscounted lease payments $ 286 Less amount representing interest $ ( 3 ) Present value of financing lease liabilities $ 283 Less current installments of obligation under accrued other $ 261 Obligations under other long-term liabilities, excluding current installments $ 22 Weighted-average remaining lease term - finance leases (years) 1.17 Weighted-average discount rate - finance leases 1.53 % Lessor The Company enters into leases with certain customers primarily for the TracPhone mini-VSAT systems. These leases are classified as sales-type leases as title of the equipment transfers to the customer at the end of the lease term. The Company records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the net present value of all payments under these leases as product revenue, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the lease term (typically three to five years ) using an implicit interest rate. The sales-type leases do not have unguaranteed residual assets. The current portion of the net investment in these leases was $ 3,881 as of December 31, 2021 and the non-current portion of the net investment in these leases was $ 6,777 as of December 31, 2021. The current portion of the net investment in the leases is included in accounts receivable, net of allowance for doubtful accounts on the accompanying consolidated balance sheets and the non-current portion of the net investment in these leases is included in other non-current assets on the accompanying consolidated balance sheets. Interest income from sales-type leases was $ 882 and $ 859 during the year ended December 31, 2021 and 2020, respectively. The future undiscounted cash flows from these leases as of December 31, 2021 are: 2022 $ 4,589 2023 3,479 2024 2,540 2025 1,160 2026 340 Total undiscounted cash flows $ 12,108 Present value of lease payments $ 10,658 Difference between undiscounted cash flows and discounted cash flows $ 1,450 83 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2021 and 2020 (in thousands, except per share amounts) In 2021, the Company entered into three-year leases for its TracPhone mini-VSAT systems, in which ownership of the hardware does not transfer to the lessee by the end of the lease term. As a result, and in light of other factors indicated in ASC 842, these leases are classified as operating leases. As of December 31, 2021, the gross costs and accumulated depreciation associated with these operating leases are included in revenue generating assets and amounted to $ 1,444 and $ 154 , respectively. They are depreciated on a straight-line basis over a five-year estimated useful life. Depreciation expense for these assets was $ 154 for the year ended December 31, 2021. For the year ended December 31, 2021, lease revenue of $ 243 was recognized in service sales in the statements of operations. As of December 31, 2021, minimum future lease payments to be received on the operating leases are as follows: 2022 445 2023 444 2024 202 Total $ 1,091 (17) Subsequent Events On March 6, 2022, the Company's President and Chief Executive Officer, Martin Kits van Heyningen retired from his executive and Board roles after more than 40 years of service. The Board of Directors has engaged an executive search firm to identify a new Chief Executive Officer. Brent C. Bruun, the Company’s Chief Operating Officer, has been appointed as its interim President and Chief Executive Officer. In March 2022, the Company also restructured its operations to reduce costs and better reflect a more focused strategy, which resulted in an approximately 10 % reduction in its workforce. 84