What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 224 added, 113 removed, 168 unchanged (67% of the section changed)

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In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Risk Factors” in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2021.

These and many other factors could affect our future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf.

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Disposition of Assets

On April 29, 2022, we sold our subsidiary, KVH Media Group Entertainment Limited, for net proceeds of approximately $2.5 million.

The subsidiary, which formed part of the KVH Media Group reporting unit of our mobile connectivity segment, operated the radio portion of the KVH Media Group business.

The transaction did not meet the criteria as an asset held for sale or a discontinued operation under ASC 205-20.

On August 9, 2022, we entered into an Asset Purchase Agreement with EMCORE Corporation to sell to EMCORE the Company’s inertial navigation business for gross proceeds of $55,000, less specified deductions and a holdback of $1,000 and subject to a working capital adjustment.

The sale was completed simultaneously with the execution and delivery of the Asset Purchase Agreement.

Simultaneously with the execution of the Asset Purchase Agreement, we entered into a Transition Services Agreement with EMCORE, pursuant to which we agreed to provide certain transition services to support the continued operation of the inertial navigation business for a specified period of time following the sale.

The inertial navigation business did not meet the ASC 205-20 criteria to be classified as held for sale as of June 30, 2022.

On August 9, 2022, we also terminated the 2018 Credit Agreement and the related security and pledge agreements with Bank of America, N.A., as Administrative Agent.

At the time of termination, no borrowings were outstanding under the 2018 Credit Agreement.

With the termination of this agreement, all associated liens were released.

Disposition of Business

On April 29, 2022, KVH Media Group Limited, our wholly owned subsidiary, sold its subsidiary KVH Media Group Entertainment Limited, which is in the KVH Media Group reporting unit of our mobile connectivity segment, for net cash proceeds of approximately $2.4 million.

This transaction did not meet the criteria as a discontinued operation under ASC 205-20.

We recorded a gain on the sale of approximately $0.6 million, which is recorded in other income, net in the accompanying consolidated statements of operations.

See Note 14 to our consolidated interim financial statements for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary.

Management Transition and Restructuring

On March 7, 2022, we announced that our President and Chief Executive Officer, Martin Kits van Heyningen, was retiring from his executive and Board roles after more than 40 years of service and assuming a consulting position with us.

The Board of Directors has engaged an executive search firm to identify a new Chief Executive Officer.

Bruun, our Chief Operating Officer, has been appointed as our interim President and Chief Executive Officer.

We have incurred approximately $0.5 million of costs associated with the management transition through March 31, 2022, including a separation payment, consulting fees and health insurance coverage for Mr.

Bruun, our then Chief Operating Officer, was appointed as our interim President and Chief Executive Officer.

Subsequently, on June 15, 2022, he was appointed as our President and Chief Executive Officer and as a Class II member of the Board of Directors.

We have incurred approximately $0.5 million of costs associated with the management transition through June 30, 2022, including a separation payment, consulting fees and health insurance coverage for Mr.

Kits van Heyningen, as well as professional and advisory fees, and expect to continue to incur ongoing compensation expenses until March 2023.

Approximately $0.4 million is accrued as of June 30, 2022.

In March 2022, we also restructured our operations to reduce costs and better pursue a more focused strategy.

We reduced our workforce by approximately 10% and expect to reduce expenses from these actions.

Approximately $1.7 million of costs were incurred in the first quarter of 2022, with the benefit to earnings expected to begin in the second quarter of 2022.

We reduced our workforce by approximately 10% and began incurring reduced expenses from these actions beginning in the second quarter of 2022.

Approximately $2.2 million of severance payments, other employee benefits, and legal and advisory fees were incurred for the six months ended June 30, 2022.

We expect to incur an additional $0.2 million in severance payments and other employee benefit costs through December 31, 2022 arising from this restructuring.

We also modified impacted employee's stock option and restricted stock awards.

Please see Note 5 to our consolidated interim financial statements for further discussion.

Executive Employment Agreements

In May 2022, we entered into executive employment agreements with each of Brent C.

Bruun, Roger A.

Kuebel, Felise Feingold and Robert Balog in order to retain their services and provide them with certain benefits in the event that we terminate the executive’s employment without cause (as defined in the agreement) or the executive terminates his or her employment for good reason (as defined in the agreement) (either such termination, a “Qualifying Termination”), including following a change of control.

The terms of the agreements are substantially identical except as to title, salary, target bonus and reporting responsibilities.

The agreements provide that, if the executive continues to serve as an employee through December 31, 2022 (the “Retention Date”), we will pay the executive a retention bonus equal to 75% of the executive’s base salary at the agreement date, and we will accelerate the vesting of the executive’s equity awards that would otherwise have vested in the twelve months after the Retention Date.

Please see Note 5 to our consolidated interim financial statements for further discussion regarding the equity compensation modifications.

If a Qualifying Termination occurs before December 31, 2022, the executive will receive a pro rata portion of the retention bonus.

If in connection with such a termination the executive becomes entitled to receive the change in control severance payments and benefits, the executive will also become entitled to receive the full retention bonus, and the Retention Date will be the later of the date of such change in control or such termination of employment.

For the three months ended June 30, 2022, we accrued approximately $0.3 million for the executive employment agreements.

Mobile Connectivity Segment

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The following table provides, for the periods indicated, our sales by segment:

Three Months Ended

(in thousands)

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

(in thousands) (in thousands)

Mobile connectivity $ 34,553 $ 33,755 $ 67,704 $ 64,262

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Net sales $ 41,837 $ 43,363 $ 82,931 $ 85,655

Product sales within the mobile connectivity segment accounted for 16% of our consolidated net sales for both the three months ended March 31, 2022 and 2021.

Sales of mini-VSAT Broadband airtime service accounted for 58% and 51% of our consolidated net sales for the three months ended March 31, 2022 and 2021, respectively.

Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems accounted for 17% and 14% of our consolidated net sales for the three months ended March 31, 2022 and 2021, respectively.

TACNAV product sales accounted for 2% and 12% of our consolidated net sales for the three months ended March 31, 2022 and 2021, respectively.

No other single product class accounted for 10% or more of our consolidated net sales for the three months ended March 31, 2022 or 2021.

No individual customer accounted for 10% or more of our consolidated net sales for the three months ended March 31, 2022 or 2021.

Product sales within the mobile connectivity segment accounted for 16% and 19% of our consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 16% and 17% of our consolidated net sales for the six months ended June 30, 2022 and 2021, respectively.

Sales of mini-VSAT Broadband airtime service accounted for 62% and 53% of our consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 60% and 52% of our consolidated net sales for the six months ended June 30, 2022 and 2021, respectively.

Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems accounted for 15% and 17% of our consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 16% of our consolidated net sales for both the six months ended June 30, 2022 and 2021.

No other single product class accounted for 10% or more of our consolidated net sales for the three months ended June 30, 2022 or 2021 or the six months ended June 30, 2022 or 2021.

No individual customer accounted for 10% or more of our consolidated net sales for the three months ended June 30, 2022 or 2021 or the six months ended June 30, 2022 or 2021.

We operate in a number of major geographic areas across the globe.

We generate our international net sales, based upon customer location, primarily from customers located in Singapore, Canada, countries in Europe, countries in Africa, other Asia/Pacific countries, the Middle East, and India.

Revenues are based upon customer location and internationally represented 64% and 62% of our consolidated net sales for the three months ended March 31, 2022 and 2021, respectively.

Sales to Singapore customers represented 12% and 10% of our consolidated net sales for the three months ended March 31, 2022 and 2021.

Revenues are based upon customer location and internationally represented 63% and 60% of our consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 63% and 61% of our consolidated net sales for the six months ended June 30, 2022 and 2021, respectively.

Sales to Singapore customers represented 13% and 10% of our consolidated net sales for the three months ended June 30, 2022 and 2021, respectively.

No other individual foreign country represented 10% or more of the our consolidated net sales for the three months ended June 30, 2022 and 2021.

Sales to Singapore customers represented 13% and 10% of our consolidated net sales for the six months ended June 30, 2022 and 2021, respectively.

No other individual foreign country represented 10% or more of the our consolidated net sales for the six months ended June 30, 2022 and 2021.

See Note 11 to our consolidated interim financial statements for more information on our segments.

No other individual foreign country represented 10% or more of the our consolidated net sales for the three months ended March 31, 2022 and 2021.

Customer-Funded Research and Development

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Our management believes this information is useful because it provides a better understanding of our total expenditures on research and development activities.

Three Months Ended

(in thousands)

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

(in thousands) (in thousands)

Research and development expense presented on the statement of operations $ 3,759 $ 4,505 $ 8,408 $ 9,072

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Total consolidated statements of operations expenditures on research and development activities $ 3,812 $ 4,583 $ 8,478 $ 9,561

During the three months ended March 31, 2022, the Company continued to experience delays in the availability and delivery of certain raw material components, which has impacted our manufacturing as well as resulted in shipping delays in getting products out to our customers.

During the six months ended June 30, 2022, we continued to experience delays in the availability and delivery of certain raw material components, which has impacted our manufacturing as well as resulted in shipping delays in getting products out to our customers.

We also experienced increase in raw material costs, which we expect to continue throughout 2022.

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As described in our annual report on Form 10-K for the year ended December 31, 2021, our accounting policies for goodwill, intangible assets, and other long-lived assets were the only estimates critical to an understanding and evaluation of our consolidated financial statements.

We have reviewed our accounting policies and critical accounting estimates and determined that these remain our most critical accounting policies and estimates for the three months ended March 31, 2022.

We have reviewed our accounting policies and critical accounting estimates and determined that these remain our most critical accounting policies and estimates for the six months ended June 30, 2022.

Readers should refer to our annual report on Form 10-K for the year ended December 31, 2021 under “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Estimates” for descriptions of these policies and estimates, as well as the notes to the consolidated interim financial statements included elsewhere within this report.

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The following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Product 32.5 % 39.8 % 33.7 % 41.7 %

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Net loss (3.6) % (13.1) % (7.3) % (11.3) %

Three months ended March 31, 2022 and 2021

As discussed further under the heading "Segment Discussion" below, product sales decreased $4.1 million, or 22%, to $14.4 million for the three months ended March 31, 2022 from $18.4 million for the three months ended March 31, 2021, due to a decrease in inertial navigation product sales of $3.7 million and a decrease of $0.3 million in mobile connectivity product sales.

Service sales for the three months ended March 31, 2022 increased $2.9 million, or 12%, to $26.7 million from $23.9 million for the three months ended March 31, 2021 due to an increase in mobile connectivity service sales of $3.0 million, partially offset by a decrease in inertial navigation service sales of $0.1 million.

Three months ended June 30, 2022 and 2021

As discussed further under the heading "Segment Discussion" below, product sales decreased $3.7 million, or 21%, to $13.6 million for the three months ended June 30, 2022 from $17.3 million for the three months ended June 30, 2021, due to a decrease in inertial navigation product sales of $2.3 million and a decrease in mobile connectivity product sales of $1.4 million.

Service sales for the three months ended June 30, 2022 increased $2.2 million, or 8%, to $28.3 million from $26.1 million for the three months ended June 30, 2021, primarily due to an increase in mobile connectivity service sales of $2.2 million, partially offset by a decrease in inertial navigation service sales of $0.1 million.

Costs of Sales

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

Costs of sales decreased by $0.9 million, or 3%, in the three months ended March 31, 2022 to $25.7 million from $26.6 million in the three months ended March 31, 2021.

Costs of sales decreased by $1.5 million, or 5%, in the three months ended June 30, 2022 to $26.5 million from $28.0 million in the three months ended June 30, 2021.

The decrease in costs of sales was driven by a $0.8 million decrease in costs of product sales and a $0.7 million decrease in costs of service sales.

As a percentage of net sales, costs of sales was 63% for both the three months ended March 31, 2022 and 2021.

As a percentage of net sales, costs of sales were 63% and 65% for the three months ended June 30, 2022 and 2021, respectively.

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

For the three months ended March 31, 2022, costs of product sales decreased by $0.5 million, or 4%, to $10.7 million from $11.2 million in the three months ended March 31, 2021.

As a percentage of product sales, costs of product sales were 75% and 61% for the three months ended March 31, 2022 and 2021, respectively.

Inertial navigation costs of product sales

decreased by $0.8 million, or 13%, primarily due to a $1.3 million decrease in our TACNAV costs of product sales and a $0.2 million decrease in expensed material and other manufacturing period costs, partially offset by a $0.8 million increase in FOG and OEM products.

Inertial navigation costs of product sales as a percentage of inertial navigation product sales were 68% and 53% for the three months ended March 31, 2022 and 2021, respectively.

The increase was primarily driven by product mix with a decrease in higher margin TACNAV product sales.

Mobile connectivity costs of product sales increased by $0.3 million, or 6%, primarily due to an increase in our marine mobile connectivity cost of product sales.

Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 83% and 74% for the three months ended March 31, 2022 and 2021, respectively.

The increase was primarily driven by product mix within our marine mobile connectivity cost of product sales.

For the three months ended June 30, 2022, costs of product sales decreased by $0.8 million, or 7%, to $11.1 million from $11.9 million in the three months ended June 30, 2021.

As a percentage of product sales, costs of product sales were 82% and 69% for the three months ended June 30, 2022 and 2021, respectively.

Mobile connectivity costs of product sales decreased by $1.0 million, or 16%, primarily due to a $0.9 million decrease in our marine mobile connectivity cost of product sales.

Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 79% and 77% for the three months ended June 30, 2022 and 2021, respectively.

The decrease was primarily driven by sales volume and product mix within our marine mobile connectivity cost of product sales.

Inertial navigation costs of product sales increased by $0.2 million, or 4%, primarily due to a $1.3 million increase in expensed material and other manufacturing period costs, partially offset by a $0.5 million decrease in FOG and OEM costs of product sales and a $0.5 million decrease in our TACNAV costs of product sales.

As a percentage of inertial navigation product sales, costs of inertial navigation product sales were 85% and 62% for the three months ended June 30, 2022 and 2021, respectively.

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

For the three months ended March 31, 2022, costs of service sales decreased by $0.4 million, or 3%, to $15.0 million from $15.4 million for the three months ended March 31, 2021.

As a percentage of service sales, costs of service sales were 56% and 65% for the three months ended March 31, 2022 and 2021, respectively.

Inertial navigation costs of service sales decreased by $0.4 million, or 86%, due to a decrease in contract engineering services sales.

Inertial navigation costs of service sales as a percentage of inertial navigation service sales were 49% and 192% for the three months ended March 31, 2022 and 2021, respectively.

This decrease in costs of inertial navigation service sales was primarily due to a decrease in costs relating to an engineering and services development contract from a major U.S.

defense contractor.

Mobile connectivity costs of service sales decreased by less than $0.1 million year-over-year.

Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales were 56% and 63% for the three months ended March 31, 2022 and 2021, respectively.

This decrease was primarily driven by the shut down of our legacy Arclight network, partially offset by an increase in costs associated with our HTS network due to increased capacity required for additional customers.

For the three months ended June 30, 2022, costs of service sales decreased by $0.7 million, or 4%, to $15.4 million from $16.1 million for the three months ended June 30, 2021.

As a percentage of service sales, costs of service sales were 55% and 62% for the three months ended June 30, 2022 and 2021, respectively.

Mobile connectivity costs of service sales decreased by $0.8 million, or 5%, primarily due to a $0.4 million decrease in mini-VSAT airtime costs of service sales.

This decrease was primarily driven by the shutdown of our legacy Arclight network, partially offset by an increase in costs associated with our HTS network due to increased capacity required for additional customers.

In addition, there was a $0.3 million decrease in content services cost of service sales, primarily driven by the sale of a subsidiary in April 2022.

As a percentage of mobile connectivity service sales, costs of mobile connectivity service sales were 54% and 62% for the three months ended June 30, 2022 and 2021, respectively.

Inertial navigation costs of service sales increased by $0.1 million, or 73%, primarily due to an increase in repair services cost of service sales.

As a percentage of inertial navigation service sales, costs of inertial navigation service sales were 68% and 33% for the three months ended June 30, 2022 and 2021, respectively.

Operating Expenses

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

Research and development expense for the three months ended March 31, 2022 increased by $0.1 million, or 2%, to $4.6 million.

The primary reason for the increase in research and development expense was a $0.4 million increase in costs related to the reduction in our workforce in March 2022 and a $0.4 million decrease in funded engineering expenses.

Research and development expense for the three months ended June 30, 2022 decreased by $0.7 million, or 17%, to $3.8 million from $4.5 million for the three months ended June 30, 2021.

The primary reason for the decrease in research and development expense was a $0.9 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce in March 2022.

This decrease was partially offset by a $0.3 million increase in unfunded engineering expenses.

There was also a corresponding reallocation of the expense of the underlying engineering work from costs of service sales, where funded engineering expenses are reflected, to research and development expense, where unfunded engineering expenses are reflected.

These increases were partially offset by a $0.5 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in force) and a $0.3 million decrease in consulting fees.

As a percentage of net sales, research and development expense was 11% for both the three months ended March 31, 2022 and 2021.

As a percentage of net sales, research and development expense was 9% and 10% for the three months ended June 30, 2022 and 2021, respectively.

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

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

Sales, marketing and support expense for the three months ended March 31, 2022 increased by $0.8 million, or 11%, to $8.4 million from $7.5 million for the three months ended March 31, 2021.

The increase in sales, marketing and support expense resulted primarily from a $0.7 million increase in salaries, benefits and taxes, which was driven by costs related to the reduction in our workforce in March 2022.

As a percentage of net sales, sales, marketing and support expense was 20% and 18% for the three months ended March 31, 2022 and 2021, respectively.

Sales, marketing and support expense for the three months ended June 30, 2022 decreased by $1.0 million, or 12%, to $7.0 million from $7.9 million for the three months ended June 30, 2021.

The decrease primarily resulted from a $1.0 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce in March 2022.

This decrease was partially offset by a $0.3 million increase in warranty expense.

As a percentage of net sales, sales, marketing and support expense was 17% and 18% for the three months ended June 30, 2022 and 2021, respectively.

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

General and administrative expense for the three months ended March 31, 2022 decreased by $0.1 million, or 1%, to $7.1 million.

The decrease in general and administrative expense resulted primarily from a $0.5 million decrease in professional fees, primarily arising from a stockholder’s nomination of a competing slate of directors at our annual meeting of stockholders in 2021.

This decrease in expense was offset by a $0.6 million increase in salaries, benefits and taxes, which was driven by $0.5 million of expenses related to the separation and retirement of Mr.

Kits van Heyningen in March 2022.

As a percentage of net sales, general and administrative expense was 17% for both the three months ended March 31, 2022 and 2021.

General and administrative expense for the three months ended June 30, 2022 and 2021 decreased by $1.8 million, or 21%, to $6.9 million compared to $8.7 million, respectively.

The decrease primarily resulted from a $2.4 million decrease in professional fees, primarily arising from a stockholder's nomination of a completing slate of directors at our annual meeting of stockholders in 2021.

This decrease was partially offset by a $0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two departed members of our board of directors.

As a percentage of net sales, general and administrative expense was 16% and 20% for the three months ended June 30, 2022 and 2021, respectively.

Interest and Other Income (Expense), Net

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

Interest income remained flat period-over-period at $0.2 million for both the three months ended March 31, 2022 and 2021.

Interest expense remained flat period-over-period at less than $0.1 million for both the three months ended March 31, 2022 and 2021.

Other income (expense), net increased to other income of $0.1 million for the three months ended March 31, 2022 from other expense of $0.8 million for the prior period primarily due to an increase in foreign exchange gains from our UK operations.

Income Tax Expense (Benefit)

Income tax expense for the three months ended March 31, 2022 was $0.3 million and related to taxes on income earned in foreign jurisdictions.

Income tax benefit for the three months ended March 31, 2021 was $0.2 million and related to losses generated in foreign jurisdictions.

Segment Discussion - Three months ended March 31, 2022 and 2021

Our net sales by segment for the three months ended March 31, 2022 and 2021 were as follows:

For the three months ended March 31, 2022 vs.

Interest income remained flat period-over-period at $0.2 million for both of the three months ended June 30, 2022 and 2021.

Interest expense remained flat period-over-period at less than $0.1 million for both of the three months ended June 30, 2022 and 2021.

Other income (expense), net increased to other income, net of $0.9 million for the three months ended June 30, 2022 from other expense, net of less than $0.1 million for the three months ended June 30, 2021 primarily due to the sale of KVH Media Group Entertainment Limited during the three months ended June 30, 2022.

Income Tax Expense

Income tax expense for the three months ended June 30, 2022 was $0.2 million and related to taxes on income earned in foreign jurisdictions.

Income tax expense for the three months ended June 30, 2021 was $0.1 million and related to taxes on income earned in foreign jurisdictions.

Segment Discussion - Three months ended June 30, 2022 and 2021

Our net sales by segment for the three months ended June 30, 2022 and 2021 were as follows:

For the three months ended June 30, 2022 vs.

2022 2021 $ %

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Net sales $ 7,284 $ 9,608 $ (2,324) (24) %

Operating income (loss) by segment for the three months ended March 31, 2022 and 2021 were as follows:

For the three months ended March 31, 2022 vs.

Operating income (loss) by segment for the three months ended June 30, 2022 and 2021 were as follows:

For the three months ended June 30, 2022 vs.

2022 2021 $ %

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Mobile Connectivity Segment

Net sales in the mobile connectivity segment increased by $2.6 million, or 9%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Mobile connectivity product sales decreased by $0.3 million, or 5%, to $6.6 million for the three months ended March 31, 2022 from $6.9 million for the three months ended March 31, 2021.

The decrease in mobile connectivity product sales was primarily due to a $0.5 million decrease in TracVision product sales.

The decrease in TracVision product sales was primarily due to a decrease in sales volume.

Mobile connectivity service sales increased by $3.0 million, or 13%, to $26.6 million for the three months ended March 31, 2022 from $23.6 million for the three months ended March 31, 2021.

The increase was primarily due to an $2.7 million increase in our mini-VSAT service sales compared to the three months ended March 31, 2021.

Consistent with our previously disclosed plans, we shut down our legacy Arclight network at midnight on December 31, 2021.

Virtually all costs associated with that network have ceased.

Although we expect to incur additional costs on our HTS network to service the customers who have migrated from the legacy network, during the three months ended March 31, 2022 we saw margin improvement in our mini-VSAT services.

We are continuing with the migration/transition of legacy network customers who did not migrate by December 31, 2021.

Net sales in the mobile connectivity segment increased by $0.8 million, or 2%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Mobile connectivity product sales decreased by $1.4 million, or 18%, to $6.6 million for the three months ended June 30, 2022 from $8.0 million for the three months ended June 30, 2021.

The decrease in mobile connectivity product sales was primarily due to a $1.3 million decrease in mini-VSAT Broadband product sales.

The decrease in mini-VSAT product sales was primarily due to a decrease in unit sales volume.

Mobile connectivity service sales increased by $2.2 million, or 9%, to $27.9 million for the three months ended June 30, 2022 from $25.7 million for the three months ended June 30, 2021.

The increase was primarily due to a $2.7 million increase in our mini-VSAT service sales, partially offset by a $0.6 million decrease in our content service sales, primarily driven by the sale of a subsidiary in April 2022.

The shutdown of our legacy Arclight network on December 31, 2021 impacted sales of mini-VSAT products in 2021 and mini-VSAT services in 2022.

During 2021, mini-VSAT product sales benefited from the demand for units needed to migrate from the legacy network to our HTS network.

During 2022, mini-VSAT service sales have been impacted by the loss of revenue from customers who did not migrate.

As of December 31, 2021, the monthly recurring revenue associated with those customers was approximately $0.3 million.

During the three months ended March 31, 2022, we re-signed a total of $0.1 million of recurring monthly revenue from former legacy network customers.

We expect to continue re-signing former legacy network customers throughout 2022, particularly in the spring as seasonal leisure customers commission their vessels for the summer.

However, we do not expect that we will succeed in re-signing all of them.

For the full year, we expect airtime revenue growth but at a lower rate than we saw in 2021.

Operating income for the mobile connectivity segment increased by $1.7 million for the three months ended March 31, 2022 to operating income of $1.3 million as compared to an operating loss of $0.4 million for the three months ended March 31, 2021.

This increase resulted primarily from an increase in sales less associated costs of $2.4 million, partially offset by a $0.7 million increase in salaries, benefits and taxes, which was primarily driven by $1.0 million of costs related to the reduction in our workforce in March 2022.

A number of these customer have since returned, and when combined with new customers, mini-VSAT service revenue for the three months ended June 30, 2022 was up 12% from the same quarter in 2021.

Operating income for the mobile connectivity segment increased $3.9 million for the three months ended June 30, 2022 to operating income of $4.5 million as compared to operating income of $0.6 million for the three months ended June 30, 2021.

This increase resulted primarily from an increase in sales less associated costs of $2.6 million and a $1.2 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce in March 2022.

Inertial Navigation Segment

Net sales in the inertial navigation segment decreased $3.8 million, or 33%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Inertial navigation product sales decreased by $3.7 million, or 32%, to $7.8 million for the three months ended March 31, 2022 from $11.5 million for the three months ended March 31, 2021.

This decrease was primarily due to a $4.5 million decrease in TACNAV product sales, partially offset by a $0.8 million increase in sales of our FOG and OEM products.

Inertial navigation service sales decreased $0.1 million, or 44%, to $0.1 million for the three months ended March 31, 2022 from $0.2 million for the three months ended March 31, 2021.

Our operating loss for the inertial navigation segment increased by $2.6 million to an operating loss of $0.5 million for the three months ended March 31, 2022 as compared to operating income of $2.1 million for the three months ended March 31, 2021.

This increase was primarily due to the decrease in sales less associated costs of $2.6 million and a $0.2 million increase in costs related to the reduction in our workforce in March 2022.

These increases were partially offset by a $0.4 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in force).

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

Net sales in the inertial navigation segment decreased $2.3 million, or 24%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Inertial navigation product sales decreased $2.3 million, or 25%, to $7.0 million for the three months ended June 30, 2022 from $9.2 million for the three months ended June 30, 2021, primarily as a result of a $1.3 million decrease in our TACNAV product sales and a $1.0 million decrease in FOG and OEM product sales.

Inertial navigation service sales decreased $0.1 million, or 16%, to $0.3 million for the three months ended June 30, 2022 from $0.4 million for the three months ended June 30, 2021.

The decrease was due to a $0.1 million decrease in repair services revenue.

Our operating loss for the inertial navigation segment changed by $1.9 million to an operating loss of $1.3 million for the three months ended June 30, 2022 as compared to operating income of $0.6 million for the three months ended June 30, 2021.

This change resulted primarily from a decrease in sales less associated costs of $2.6 million, partially offset by a $0.9 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce in March 2022.

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

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

Unallocated operating loss increased $0.3 million, or 5%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily due to a $0.8 million increase in salaries, benefits and taxes, which was primarily driven by $0.5 million of expenses related to the separation and retirement of Mr.

Kits van Heyningen in March 2022.

This increase was partially offset by a $0.5 million decrease in non-recurring legal and advisory fees.

Unallocated operating loss decreased $1.5 million, or 21%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a $2.6 million decrease in non-recurring legal and advisory fees.

In 2021, these fees were incurred as a result of a stockholder’s nomination of a competing slate of directors for our annual meeting of stockholders.

Partially offsetting this decrease was a $0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two departed members of our board of directors, and $0.3 million of one-time costs related to the reduction in our workforce in March 2022.

Six months ended June 30, 2022 and 2021

As discussed further under the heading "Segment Discussion" below, product sales decreased $7.8 million, or 22%, to $27.9 million for the six months ended June 30, 2022 from $35.7 million for the six months ended June 30, 2021, due to a decrease in inertial navigation product sales of $6.0 million and a decrease in mobile connectivity product sales of $1.8 million.

Service sales for the six months ended June 30, 2022 increased $5.0 million, or 10%, to $55.0 million from $50.0 million for the six months ended June 30, 2021 due to an increase in mobile connectivity service sales of $5.2 million, partially offset by a decrease in inertial navigation service sales of $0.2 million.

Costs of Sales

Costs of sales decreased by $2.4 million, or 4%, in the six months ended June 30, 2022 to $52.3 million from $54.7 million in the six months ended June 30, 2021.

The decrease in costs of sales was driven by a $1.3 million decrease in costs of product sales and a $1.1 million decrease in costs of service sales.

As a percentage of net sales, costs of sales were 63% and 64% for the six months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022, costs of product sales decreased by $1.3 million, or 5%, to $21.8 million from $23.1 million in the six months ended June 30, 2021.

As a percentage of product sales, costs of product sales were 78% and 65% for the six months ended June 30, 2022 and 2021, respectively.

Mobile connectivity costs of product sales decreased by $0.7 million, or 6%, due to a $0.5 million decrease in our marine mobile connectivity cost of product sales and a $0.2 million decrease in our land mobile connectivity costs of product sales.

Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 81% and 76% for the six months ended June 30, 2022 and 2021, respectively.

The increase was primarily driven by product mix within our marine mobile connectivity cost of product sales.

Inertial navigation

costs of product sales decreased by $0.6 million, or 5%, primarily due to a $1.8 million decrease in our TACNAV costs of product sales, partially offset by a $1.0 million increase in expensed material and other manufacturing period costs.

Inertial navigation costs of product sales as a percentage of inertial navigation product sales were 76% and 57% for the six months ended June 30, 2022 and 2021, respectively.

The increase was primarily driven by product mix with a decrease in higher margin TACNAV product sales.

For the six months ended June 30, 2022, costs of service sales decreased by $1.1 million, or 4%, to $30.4 million from $31.5 million for the six months ended June 30, 2021.

As a percentage of service sales, costs of service sales were 55% and 63% for the six months ended June 30, 2022 and 2021, respectively.

Mobile connectivity costs of service sales decreased by $0.8 million, or 3%, primarily due to a $0.4 million decrease in mini-VSAT airtime costs of service sales.

This decrease was primarily driven by the shutdown of our legacy Arclight network, partially offset by an increase in costs associated with our HTS network due to increased capacity required for additional customers.

In addition, there was a $0.3 million decrease in content services cost of service sales, primarily driven by the sale of a subsidiary in April 2022.

Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales were 55% and 63% for the six months ended June 30, 2022 and 2021, respectively.

Inertial navigation costs of service sales decreased by $0.3 million, or 52%, due to a decrease in contract engineering services sales.

Inertial navigation costs of service sales as a percentage of inertial navigation service sales were 62% and 95% for the six months ended June 30, 2022 and 2021, respectively.

This decrease in costs of inertial navigation service sales was primarily due to a decrease in costs relating to an engineering and services development contract from a major U.S.

defense contractor.

Operating Expenses

Research and development expense for the six months ended June 30, 2022 decreased by $0.7 million, or 7%, to $8.4 million from $9.1 million for the six months ended June 30, 2021.

The primary reason for the decrease in research and development expense was a $1.4 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in force) and a $0.4 million decrease in consulting fees.

These decreases were partially offset by a $0.7 million increase in unfunded engineering expenses and $0.4 million in one-time costs related to the reduction in our workforce in March 2022.

With respect to the decrease in funded engineering expenses, there was also a corresponding reallocation of the expense of the underlying engineering work from costs of service sales, where funded engineering expenses are reflected, to research and development expense, where unfunded engineering expenses are reflected.

As a percentage of net sales, research and development expense was 10% and 11% for the six months ended June 30, 2022 and 2021, respectively.

Sales, marketing and support expense for the six months ended June 30, 2022 decreased by $0.2 million, or 1%, to $15.3 million from $15.5 million for the six months ended June 30, 2021.

The decrease in sales, marketing and support expense resulted primarily from a $1.2 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce in March 2022), a $0.2 million decrease in marketing expense and a $0.2 million decrease in external commission expense, partially offset by $0.9 million in one-time costs related to the reduction in our workforce in March 2022 and a $0.5 million increase in warranty expense.

As a percentage of net sales, sales, marketing and support expense was 18% for both the six months ended June 30, 2022 and 2021.

General and administrative expense for the six months ended June 30, 2022 decreased by $1.9 million, or 12%, to $14.0 million from $15.8 million for the six months ended June 30, 2021.

The decrease in general and administrative expense resulted primarily from a $3.1 million decrease in non-recurring legal and advisory fees, primarily arising from a stockholder’s nomination of a competing slate of directors at our annual meeting of stockholders in 2021.

This decrease in expense was partially offset by a $0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two recently departed members of our board of directors, $0.5 million in expenses related to the separation and retirement of Mr.

Kits van Heyningen in March 2022, and $0.5 million in one-time costs related to the reduction in our workforce in March 2022.

As a percentage of net sales, general and administrative expense was 17% and 19% for the six months ended June 30, 2022 and 2021, respectively.

Interest and Other Income (Expense), Net

Interest income decreased by less than $0.1 million to $0.4 million for the six months ended June 30, 2022 from $0.5 million for the six months ended June 30, 2021.

Interest expense remained flat period-over-period at less than $0.1 million for both the six months ended June 30, 2022 and 2021.

Other income (expense), net increased to other income, net of $1.1 million for the six months ended June 30, 2022 from other expense, net of $0.8 million for the prior period primarily due to an increase in foreign exchange gains from our UK operations and the sale of KVH Media Group Entertainment Limited during the six months ended June 30, 2022.

Income Tax Expense (Benefit)

Income tax expense for the six months ended June 30, 2022 was $0.6 million and related to taxes on income earned in foreign jurisdictions.

Income tax benefit for the six months ended June 30, 2021 was $0.1 million and related to losses generated in foreign jurisdictions.

Segment Discussion - Six months ended June 30, 2022 and 2021

Our net sales by segment for the six months ended June 30, 2022 and 2021 were as follows:

For the six months ended June 30, 2022 vs.

2022 2021 $ %

(dollars in thousands)

Mobile connectivity sales:

Product $ 13,183 $ 14,937 $ (1,754) (12) %

Service 54,521 49,325 5,196 11 %

Net sales $ 67,704 $ 64,262 $ 3,442 5 %

Inertial navigation sales:

Product $ 14,766 $ 20,764 $ (5,998) (29) %

Service 461 629 (168) (27) %

Net sales $ 15,227 $ 21,393 $ (6,166) (29) %

Operating income (loss) by segment for the six months ended June 30, 2022 and 2021 were as follows:

For the six months ended June 30, 2022 vs.

2022 2021 $ %

(dollars in thousands)

Mobile connectivity $ 5,830 $ 183 $ 5,647 3,086 %

Inertial navigation (1,749) 2,735 (4,484) (164) %

$ 4,081 $ 2,918 $ 1,163 40 %

Unallocated (11,121) (12,327) 1,206 10 %

Loss from operations $ (7,040) $ (9,409) $ 2,369 25 %

Mobile Connectivity Segment

Net sales in the mobile connectivity segment increased by $3.4 million, or 5%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Mobile connectivity product sales decreased by $1.8 million, or 12%, to $13.2 million for the six months ended June 30, 2022 from $14.9 million for the six months ended June 30, 2021.

The decrease in mobile connectivity product sales was primarily due to a $1.1 million decrease in mini-VSAT Broadband product sales and a $0.3 million decrease in TracVision product sales.

The decrease in mini-VSAT Broadband product sales was primarily due to a decrease in unit sales volume.

Mobile connectivity service sales increased by $5.2 million, or 11%, to $54.5 million for the six months ended June 30, 2022 from $49.3 million for the six months ended June 30, 2021.

The increase was primarily due to a $5.4 million increase in our mini-VSAT service sales, partially offset by a $0.4 million decrease in our content services sales, primarily driven by the sale of a subsidiary in April 2022.

Operating income for the mobile connectivity segment increased by $5.6 million to $5.8 million for the six months ended June 30, 2022 as compared to $0.2 million for the six months ended June 30, 2021.

This increase resulted primarily from an increase in sales less associated costs of $4.9 million, a $1.5 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce in March 2022) and a $0.4 million decrease in legal and professional fees, partially offset by $1.1 million in one-time costs related to the reduction in our workforce in March 2022 and a $0.4 million increase in warranty expense.

Inertial Navigation Segment

Net sales in the inertial navigation segment decreased $6.2 million, or 29%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Inertial navigation product sales decreased by $6.0 million, or 29%, to $14.8 million for the six months ended June 30, 2022 from $20.8 million for the six months ended June 30, 2021.

This decrease was primarily due to a $5.8 million decrease in TACNAV product sales.

Inertial navigation service sales decreased $0.2 million, or 27%, to $0.5 million for the six months ended June 30, 2022 from $0.6 million for the six months ended June 30, 2021.

The decrease was primarily due a decrease in contract engineering service revenues.

Our operating loss for the inertial navigation segment changed by $4.5 million to an operating loss of $1.7 million for the six months ended June 30, 2022 as compared to operating income of $2.7 million for the six months ended June 30, 2021.

This change resulted primarily from a decrease in sales less associated costs of $5.3 million and $0.3 million in one-time costs related to the reduction in our workforce in March 2022, partially offset by a $1.4 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce in March 2022).

Unallocated operating loss decreased $1.2 million, or 10%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 primarily due to a $3.1 million decrease in non-recurring legal and advisory fees.

In 2021, these fees were incurred as a result of a stockholder’s nomination of a competing slate of directors for our annual meeting of stockholders.

Partially offsetting this decrease was $0.6 million of expenses related to the separation and retirement of Mr.

Kits van Heyningen in March 2022, a $0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two recently departed members of our board of directors, and $0.4 million in one-time costs related to the reduction in our workforce in March 2022.

Backlog is not a meaningful indicator for predicting revenue in future periods.

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Generally, due to rapid delivery of our commercial products, our backlog for those products is not significant.

Our backlog for all products and services was $25.1 million and $23.9 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, $17.0 million of our backlog was scheduled for fulfillment in 2022, $1.6 million was scheduled for fulfillment in 2023, and $6.4 million was scheduled for fulfillment in 2024 through 2026.

Our backlog for all products and services was $3.5 million and $23.9 million as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022, $3.5 million of our backlog was scheduled for fulfillment in 2022 and $0.1 million was scheduled for fulfillment in 2023.

Backlog consists of orders evidenced by written agreements and specified delivery dates for customers who are acceptable credit risks.

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When orders are canceled, we generally recover actual costs incurred through the date of cancellation and the costs resulting from termination.

As of March 31, 2022, our backlog included $9.3 million in orders that are subject to cancellation for convenience by the customer.

As of June 30, 2022, our backlog included $0.0 million in orders that are subject to cancellation for convenience by the customer.

Individual orders for inertial navigation products are often large and may require procurement of specialized long-lead components and allocation of manufacturing resources.

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Small Business Administration (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.

As of March 31, 2022, we had $16.7 million in cash, cash equivalents, and marketable securities, of which $2.6 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries.

Our foreign subsidiaries held no marketable securities as of March 31, 2022.

As of March 31, 2022, we had $50.7 million in working capital.

As of June 30, 2022, we had $15.6 million in cash, cash equivalents, and marketable securities, of which $2.7 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries.

Our foreign subsidiaries held no marketable securities as of June 30, 2022.

As of June 30, 2022, we had $52.0 million in working capital.

Based upon our current working capital position, current operating plans and expected business conditions, we expect to have sufficient funds, through at least twelve months from the date that this report is filed with the SEC, to fund our short-term and long-term working capital requirements, including capital expenditures and contractual obligations, primarily using our existing cash, cash equivalents and marketable securities and any operating cash flow.

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In addition, if we raise funds by issuing equity securities, our stockholders may experience dilution.

Net cash used in operations was $3.5 million for the three months ended March 31, 2022 compared to net cash provided by operations of $5.0 million for the three months ended March 31, 2021.

The $8.5 million increase in cash used in operations is primarily due to a $4.3 million decrease in cash inflows relating to accounts receivable, a $2.9 million increase in cash outflows relating to inventories, a $1.3 million increase in cash outflows related to accounts payable and accrued expenses, a $0.7 million increase in net loss, a $0.4 million decrease in non-cash items, and a $0.3 million increase in cash outflows related to other non-current assets and non-current contract assets.

Partially offsetting these items was a $1.2 million increase in cash inflows related to contract liabilities and long-term contract liabilities.

Net cash provided by investing activities was $0.1 million for the three months ended March 31, 2022 compared to net cash used in investing activities of $5.1 million for the three months ended March 31, 2021.

The $5.2 million increase in net cash provided by investing activities was primarily the result of a $4.5 million increase in net cash inflows relating to the purchase and sale of marketable securities and a $0.8 million decrease in capital expenditures.

Net cash provided by financing activities was $0.1 million for the three months ended March 31, 2022 compared to net cash provided by financing activities of $1.5 million for the three months ended March 31, 2021.

Net cash used in operations was $3.2 million for the six months ended June 30, 2022 compared to net cash provided by operations of $4.8 million for the six months ended June 30, 2021.

The $8.0 million change in cash used in operations is primarily due to an $8.7 million increase in cash outflows relating to inventories, a $1.7 million decrease in non-cash items, a $1.1 million increase in cash outflows related to accounts payable and accrued expenses, and a $1.1 million decrease in cash inflows relating to accounts receivable.

Partially offsetting these items was a $3.6 million decrease in net loss, a $0.7 million decrease in cash outflows related to contract liabilities and long-term contract liabilities, and a $0.4 million decrease in cash outflows related to other non-current assets and non-current contract assets.

Net cash provided by investing activities was $2.3 million for the six months ended June 30, 2022 compared to net cash used in investing activities of $10.5 million for the six months ended June 30, 2021.

The $12.8 million change in net cash provided by investing activities was primarily the result of an $8.0 million increase in net cash inflows relating to the purchase and sales of marketable securities and a $2.5 million decrease in capital expenditures, as well as $2.4 million in proceeds from the sale of KVH Media Group Entertainment Limited.

Net cash provided by financing activities was $0.2 million for the six months ended June 30, 2022 compared to net cash provided by financing activities of $2.3 million for the six months ended June 30, 2021.

The $2.1 million decrease in net cash provided by financing activities is primarily attributable to the $2.1 million decrease in cash inflows relating to proceeds from stock options exercised and the employee stock purchase plan.

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

As of March 31, 2022, no amounts were outstanding under the 2018 Revolver.

As of June 30, 2022, 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 our representations and warranties and the absence of any default under the 2018 Credit Agreement.

As of March 31, 2022, we were only able to draw on $12.4 million of the $15.0 million facility due to covenant restrictions.

As of June 30, 2022, the full balance of the $15.0 million facility was available for borrowing.

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

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In addition, Bank of America became the sole lender under the 2018 Credit Agreement.

We were in compliance with these financial covenants as of March 31, 2022.

We were in compliance with these financial covenants as of June 30, 2022.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis