KVH INDUSTRIES INC \DE\ 10-Q

ITEM 1. Financial Statements KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) June 30, 2022 December 31, 2021 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 10,395 $ 11,376 Marketable securities 5,157 13,147 Accounts receivable, net of allowance for doubtful accounts of $ 1,553 and $ 1,636 as of June 30, 2022 and December 31, 2021, respectively 33,408 33,648 Inventories, net 30,981 24,640 Prepaid expenses and other current assets 3,848 3,789 Current contract assets 1,225 1,230 Total current assets 85,014 87,830 Property and equipment, net 60,714 60,114 Intangible assets, net 564 1,287 Goodwill 5,313 6,570 Right of use assets 2,057 3,055 Other non-current assets 5,566 6,778 Non-current contract assets 3,032 3,104 Deferred income tax asset 56 56 Total assets $ 162,316 $ 168,794 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 10,867 $ 11,265 Accrued compensation and employee-related expenses 6,152 7,053 Accrued other 8,587 7,892 Accrued product warranty costs 1,398 1,179 Contract liabilities 4,074 3,989 Current operating lease liability 1,359 1,912 Liability for uncertain tax positions 624 592 Total current liabilities 33,061 33,882 Other long-term liabilities 8 30 Long-term operating lease liability 748 1,224 Long-term contract liabilities 4,271 4,466 Deferred income tax liability 200 215 Total liabilities $ 38,288 $ 39,817 Commitments and contingencies (Notes 2, 10, 12, and 17) Stockholders’ equity: Preferred stock, $ 0.01 par value. Authorized 1,000,000 shares; none issued — — Common stock, $ 0.01 par value. Authorized 30,000,000 shares; 20,503,438 and 20,342,695 shares issued at June 30, 2022 and December 31, 2021, respectively; and 19,070,744 and 18,910,001 shares outstanding at June 30, 2022 and December 31, 2021, respectively 205 203 Additional paid-in capital 157,996 156,199 Accumulated deficit ( 18,301 ) ( 12,165 ) Accumulated other comprehensive loss ( 4,021 ) ( 3,409 ) 135,879 140,828 Less: treasury stock at cost, common stock, 1,432,694 shares as of June 30, 2022 and December 31, 2021 ( 11,851 ) ( 11,851 ) Total stockholders’ equity 124,028 128,977 Total liabilities and stockholders’ equity $ 162,316 $ 168,794 See accompanying Notes to Unaudited Consolidated Financial Statements. 3 KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share amounts, unaudited) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Sales: Product $ 13,579 $ 17,269 $ 27,949 $ 35,701 Service 28,258 26,094 54,982 49,954 Net sales 41,837 43,363 82,931 85,655 Costs and expenses: Costs of product sales 11,115 11,894 21,844 23,114 Costs of service sales 15,422 16,124 30,414 31,547 Research and development 3,759 4,505 8,408 9,072 Sales, marketing and support 6,975 7,937 15,332 15,483 General and administrative 6,898 8,705 13,973 15,848 Total costs and expenses 44,169 49,165 89,971 95,064 Loss from operations ( 2,332 ) ( 5,802 ) ( 7,040 ) ( 9,409 ) Interest income 201 222 409 455 Interest expense 1 14 2 32 Other income (expense), net 923 ( 1 ) 1,061 ( 790 ) Loss before income tax expense (benefit) ( 1,209 ) ( 5,595 ) ( 5,572 ) ( 9,776 ) Income tax expense (benefit) 235 78 564 ( 75 ) Net loss $ ( 1,444 ) $ ( 5,673 ) $ ( 6,136 ) $ ( 9,701 ) Net loss per common share Basic $ ( 0.08 ) $ ( 0.31 ) $ ( 0.33 ) $ ( 0.54 ) Diluted $ ( 0.08 ) $ ( 0.31 ) $ ( 0.33 ) $ ( 0.54 ) Weighted average number of common shares outstanding: Basic 18,564 18,174 18,507 18,057 Diluted 18,564 18,174 18,507 18,057 See accompanying Notes to Unaudited Consolidated Financial Statements. 4 KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands, unaudited) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net loss $ ( 1,444 ) $ ( 5,673 ) $ ( 6,136 ) $ ( 9,701 ) Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment ( 419 ) 41 ( 612 ) 264 Other comprehensive (loss) income, net of tax (1) ( 419 ) 41 ( 612 ) 264 Total comprehensive loss $ ( 1,863 ) $ ( 5,632 ) $ ( 6,748 ) $ ( 9,437 ) (1) Tax impact was nominal for all periods. See accompanying Notes to Unaudited Consolidated Financial Statements. 5 KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance at March 31, 2022 20,328 $ 203 $ 157,142 $ ( 16,857 ) $ ( 3,602 ) ( 1,433 ) $ ( 11,851 ) $ 125,035 Net loss — — — ( 1,444 ) — — — ( 1,444 ) Other comprehensive loss — — — — ( 419 ) — — ( 419 ) Stock-based compensation — — 705 — — — — 705 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 175 2 149 — — — — 151 Balance at June 30, 2022 20,503 $ 205 $ 157,996 $ ( 18,301 ) $ ( 4,021 ) ( 1,433 ) $ ( 11,851 ) $ 124,028 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2021 20,343 $ 203 $ 156,199 $ ( 12,165 ) $ ( 3,409 ) ( 1,433 ) $ ( 11,851 ) $ 128,977 Net loss — — — ( 6,136 ) — — — ( 6,136 ) Other comprehensive loss — — — — ( 612 ) — — ( 612 ) Stock-based compensation — — 1,586 — — — — 1,586 Issuance of common stock under employee stock purchase plan 22 — 193 — — — — 193 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 138 2 149 — — — — 151 Taxes accrued for net share settlement of options — — ( 131 ) — — — — ( 131 ) Balance at June 30, 2022 20,503 $ 205 $ 157,996 $ ( 18,301 ) $ ( 4,021 ) ( 1,433 ) $ ( 11,851 ) $ 124,028 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance at March 31, 2021 20,165 $ 202 $ 151,657 $ ( 6,430 ) $ ( 3,009 ) ( 1,433 ) $ ( 11,851 ) $ 130,569 Net loss — — — ( 5,673 ) — — — ( 5,673 ) Other comprehensive income — — — — 41 — — 41 Stock-based compensation — — 1,055 — — — — 1,055 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 80 — 884 — — — — 884 Balance at June 30, 2021 20,245 $ 202 $ 153,596 $ ( 12,103 ) $ ( 2,968 ) ( 1,433 ) $ ( 11,851 ) $ 126,876 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2020 19,863 $ 199 $ 149,170 $ ( 2,402 ) $ ( 3,232 ) ( 1,433 ) $ ( 11,851 ) $ 131,884 Net loss — — — ( 9,701 ) — — — ( 9,701 ) Other comprehensive income — — — — 264 — — 264 Stock-based compensation — — 1,987 — — — — 1,987 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 382 3 2,439 — — — — 2,442 Balance at June 30, 2021 20,245 $ 202 $ 153,596 $ ( 12,103 ) $ ( 2,968 ) ( 1,433 ) $ ( 11,851 ) $ 126,876 See accompanying Notes to Unaudited Consolidated Financial Statements. 6 KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net loss $ ( 6,136 ) $ ( 9,701 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Provision for doubtful accounts 367 282 Depreciation and amortization 7,158 6,963 Deferred income taxes ( 15 ) — Loss on disposals of fixed assets 216 597 Compensation expense related to stock-based awards and employee stock purchase plan 1,586 1,987 Unrealized currency translation (gain) loss ( 361 ) 236 Gain on sale of KVH Media Group Entertainment Limited ( 631 ) — Changes in operating assets and liabilities: Accounts receivable ( 640 ) 426 Inventories ( 6,371 ) 2,375 Prepaid expenses, other current assets, and current contract assets ( 372 ) ( 293 ) Other non-current assets and non-current contract assets 1,252 833 Accounts payable ( 56 ) 293 Contract liabilities and long-term contract liabilities 114 ( 592 ) Accrued compensation, product warranty and other 655 1,407 Other long-term liabilities — 2 Net cash (used in) provided by operating activities $ ( 3,234 ) $ 4,815 Cash flows from investing activities: Capital expenditures ( 8,012 ) ( 10,521 ) Cash paid for acquisition of intangible asset ( 28 ) ( 32 ) Proceeds from sale of fixed assets — 100 Proceeds from the sale of KVH Media Group Entertainment Limited, net of cash sold 2,378 — Purchases of marketable securities ( 10 ) ( 4 ) Maturities and sales of marketable securities 8,000 — Net cash provided by (used in) investing activities $ 2,328 $ ( 10,457 ) Cash flows from financing activities: Proceeds from stock options exercised and employee stock purchase plan 333 2,473 Payment of finance lease ( 132 ) ( 162 ) Net cash provided by financing activities $ 201 $ 2,311 Effect of exchange rate changes on cash and cash equivalents ( 276 ) ( 24 ) Net decrease in cash and cash equivalents ( 981 ) ( 3,355 ) Cash and cash equivalents at beginning of period 11,376 12,578 Cash and cash equivalents at end of period $ 10,395 $ 9,223 Supplemental disclosure of non-cash investing and financing activities: Changes in accrued other and accounts payable related to property and equipment additions $ 188 $ 281 Taxes accrued for net share settlement of options $ 131 $ — See accompanying Notes to Unaudited Consolidated Financial Statements. 7 KVH INDUSTRIES, INC. AND SUBSIDIARIES Notes to Consolidated Interim Financial Statements (Unaudited, all amounts in thousands except per share amounts) (1) 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 its mobile connectivity products through an extensive international network of dealers and distributors. KVH also sells and leases products to service providers and 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 Voice over Internet Protocol (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, 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 are 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. 8 (2) Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated interim 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. The Company has evaluated all subsequent events through the date of this filing. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated interim financial statements have not been audited by the Company’s independent registered public accounting firm and include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods presented. These consolidated interim financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2021 filed on March 11, 2022 with the Securities and Exchange Commission. The results for the three and six months ended June 30, 2022 are not necessarily indicative of operating results for the remainder of the year. Significant Estimates and Assumptions and Other Significant Non-Recurring Transactions The preparation of interim 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 interim financial statements and the reported amounts of sales and expenses during the reporting periods. As described in the Company’s annual report on Form 10-K, the estimates and assumptions used by management affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of long-lived assets, including goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, forfeitures and key valuation assumptions for its share-based awards, estimated fulfillment costs for warranty obligations, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance, and the valuation of right-of-use assets and lease liabilities. 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. On March 7, 2022, the Company announced that its 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 the Company. Brent C. Bruun, its then Chief Operating Officer, was appointed as its interim President and Chief Executive Officer. Subsequently, on June 15, 2022, he was appointed as its President and Chief Executive Officer and as a Class II member of the Board of Directors. As of March 31, 2022, the Company accrued approximately $ 539 in consulting fees associated with a maximum of 50 hours of transition services through March 2023, which will be paid to Mr. Kits van Heyningen over the next 12 months. Approximately $ 405 is accrued as of June 30, 2022. In addition, the Company agreed to a separation payment of $ 201 , which was inclusive of any amount which he may have otherwise earned under the executive bonus plan for 2021, which was paid in April 2022. The associated expenses were included in general and administrative expenses in the accompanying consolidated statements of operations. There were also modifications to Mr. Kits van Heyningen's stock option and restricted stock awards. Please see Note 5 for further discussion. In March 2022, the Company also restructured its operations to reduce costs and better pursue a more focused strategy. The Company reduced its workforce by approximately 10 % and began incurring reduced expenses from these actions beginning in the second quarter of 2022. For the three months ended June 30, 2022, the Company incurred $ 426 in severance payments and other employee benefit costs for employees which had a severance date of June 30, 2022 and December 31, 2022 (as amended), of which $ 64 was paid as of June 30, 2022. For the six months ended June 30, 2022, the Company incurred $ 1,818 in severance and health insurance costs and $ 327 in legal and advisory fees. The combined expense of $ 2,145 was included in the financial statement line items of the accompanying consolidated statements of operations as follows: costs of product sales of $ 17 , costs of service sales of $ 55 , research and development of $ 392 , sales, marketing and support of $ 894 , and general and administrative expenses of $ 787 . The Company expects to incur an additional $ 155 in severance payments and other employee benefit costs through December 31, 2022 arising from this restructuring. The Company also modified impacted employee's stock option and restricted stock awards. Please see Note 5 for further discussion. 9 On April 29, 2022, KVH Media Group Limited, the Company's wholly owned subsidiary, sold its subsidiary KVH Media Group Entertainment Limited, which was in the KVH Media Group reporting unit of the Company's mobile connectivity segment, for net cash proceeds of $ 2,378 . This transaction did not meet the criteria as a discontinued operation under ASC 205-20. The Company recorded a gain on the sale of approximately $ 630 , which is recorded in other income, net in the accompanying consolidated statements of operations. See Note 14 for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary. In May 2022, the Company 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 the Company terminates 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”), the Company will pay the executive a retention bonus equal to 75 % of the executive’s base salary on the agreement date, and the Company 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 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, the Company accrued approximately $ 263 for the executive employment agreements. (3) Accounting Standards Issued and Not Yet Adopted 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, ASC Update No. 2020-02, and ASC Update No. 2022-02 In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Codification (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 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. 10 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. In March 2022, the FASB issued ASC update 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures . The vintage disclosure portion of this guidance is applicable to the Company, which requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must included the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination. As a smaller reporting company 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, 2020-20 and 2022-02 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. (4) Marketable Securities Marketable securities as of June 30, 2022 and December 31, 2021 consisted of the following: June 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market mutual funds $ 5,157 $ — $ — $ 5,157 Total marketable securities designated as available-for-sale $ 5,157 $ — $ — $ 5,157 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 Interest income from marketable securities was $ 9 and $ 2 during the three months ended June 30, 2022 and 2021, respectively, and $ 10 and $ 4 during the six months ended June 30, 2022 and 2021, respectively. (5) Stockholder's Equity (a) Stock Equity and Incentive Plan The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation . Stock-based compensation expense was $ 701 and $ 1,033 , excluding $ 4 and $ 22 of compensation charges related to our Amended and Restated 1996 Employee Stock Purchase Plan, or the ESPP, for the three months ended June 30, 2022 and 2021, respectively, and $ 1,560 and $ 1,957 , excluding $ 26 and $ 30 of compensation charges related to ESPP, for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was $ 3,286 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.79 years. As of June 30, 2022, there was $ 3,499 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.85 years. Stock Options During the three months ended June 30, 2022, the Company issued 18 shares of common stock upon the exercise of stock options and received $ 149 as payment for the exercise price. No shares were surrendered to the Company to satisfy minimum tax withholding obligations. Additionally, during the three months ended June 30, 2022, 398 stock options were granted and 159 stock options expired, were canceled or were forfeited. 11 During the six months ended June 30, 2022, upon the net exercise of 248 stock options, the Company issued 41 shares of common stock and received $ 149 as payment for the exercise price, 14 shares were surrendered to the Company to satisfy minimum tax withholding obligations, and 193 shares were cancelled. Additionally, during the six months ended June 30, 2022, 398 stock options were granted and 329 stock options expired, were canceled or were forfeited. During the six months ended June 30, 2021, 496 stock options were granted. The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions utilized to determine the fair value of options granted during the six months ended June 30, 2022 are as follows: Six Months Ended June 30, 2022 2021 Risk-free interest rate 2.97 % 0.92 % Expected volatility 43.16 % 44.98 % Expected life (in years) 4.24 4.28 Dividend yield 0 % 0 % During the six months ended June 30, 2022, there were accelerated vesting and extended exercise term modifications of stock options as it related to the retirement of Mr. Kits van Heyningen, which resulted in a reduction of approximately $ 85 in compensation cost. During the three and six months ended June 30, 2022, there were accelerated vesting term modifications of stock options for employees terminated as part of the Company's restructuring, which resulted in a reduction of approximately $ 81 in compensation cost. During the three months ended June 30, 2022, there were accelerated vesting term modifications of stock options for executive employment agreements, which resulted in an acceleration of compensation expense of approximately $ 48 . As of June 30, 2022, there were 1,948 options outstanding with a weighted average exercise price of $ 9.83 per share and 858 options exercisable with a weighted average exercise price of $ 10.39 per share. Restricted Stock During the three months ended June 30, 2022, 183 shares of restricted stock were granted with a weighted average grant date fair value of $ 8.29 per share and 26 shares of restricted stock were forfeited. Additionally, during the three months ended June 30, 2022, 79 shares of restricted stock vested, of which no shares of common stock were surrendered to the Company as payment by employees in lieu of cash to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock. During the six months ended June 30, 2022, 183 shares of restricted stock were granted with a weighted average grant date fair value of $ 8.29 per share and 86 shares of restricted stock were forfeited. Additionally, during the six months ended June 30, 2022, 147 shares of restricted stock vested, of which no shares of common stock were surrendered to the Company as payment by employees in lieu of cash to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock. As of June 30, 2022, there were 440 shares of restricted stock outstanding that were still subject to service-based vesting conditions. During the six months ended June 30, 2022, there were accelerated vesting term modifications of restricted stock as it related to the retirement of Mr. Kits van Heyningen, which resulted in an acceleration in compensation expense of approximately $ 186 . During the three and six months ended June 30, 2022, there were accelerated vesting term modifications of restricted stock for employees terminated as part of the Company's restructuring, which resulted in an acceleration in compensation expense of approximately $ 57 for the three months ended June 30, 2022 and approximately $ 125 for the six months ended June 30, 2022. During the three months ended June 30, 2022, there were accelerated vesting term modifications of restricted stock for executive employment agreements, which resulted in an acceleration in compensation expense of approximately $ 66 . As of June 30, 2022, the Company had no unvested outstanding options and no outstanding shares of restricted stock that were subject to performance-based or market-based vesting conditions. 12 (b) Employee Stock Purchase Plan The Company's ESPP affords eligible employees the right to purchase common stock, via payroll deductions, through various offering periods at a purchase price equal to 85 % of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the three and six months ended June 30, 2022, 0 and 22 shares were issued under the ESPP plan, respectively. During the three and six months ended June 30, 2021, no shares were issued under the ESPP plan. The Company recorded compensation charges related to the ESPP of $ 4 and $ 22 for the three months ended June 30, 2022 and 2021, respectively, and $ 26 and $ 30 for the six months ended June 30, 2022 and 2021, respectively. (c) Stock-Based Compensation Expense The following table presents stock-based compensation expense, including under the ESPP, in the Company's consolidated statements of operations for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cost of product sales $ 61 $ 70 $ 135 $ 116 Cost of service sales 3 3 5 5 Research and development 190 185 331 341 Sales, marketing and support 25 235 211 425 General and administrative 426 562 904 1,100 $ 705 $ 1,055 $ 1,586 $ 1,987 (d) Accumulated Other Comprehensive Loss (AOCL) Comprehensive loss includes net 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. The balances for the three months ended June 30, 2022 and 2021 are as follows: Foreign Currency Translation Total Accumulated Other Comprehensive Loss Balance, March 31, 2022 $ ( 3,602 ) $ ( 3,602 ) Other comprehensive loss ( 419 ) ( 419 ) Net other comprehensive loss ( 419 ) ( 419 ) Balance, June 30, 2022 $ ( 4,021 ) $ ( 4,021 ) Foreign Currency Translation Total Accumulated Other Comprehensive Loss Balance, March 31, 2021 $ ( 3,009 ) $ ( 3,009 ) Other comprehensive income 41 41 Net other comprehensive income 41 41 Balance, June 30, 2021 $ ( 2,968 ) $ ( 2,968 ) 13 The balances for the six months ended June 30, 2022 and 2021 are as follows: Foreign Currency Translation Total Accumulated Other Comprehensive Loss Balance, December 31, 2021 $ ( 3,409 ) $ ( 3,409 ) Other comprehensive loss ( 612 ) ( 612 ) Net other comprehensive loss ( 612 ) ( 612 ) Balance, June 30, 2022 $ ( 4,021 ) $ ( 4,021 ) Foreign Currency Translation Total Accumulated Other Comprehensive Loss Balance, December 31, 2020 $ ( 3,232 ) $ ( 3,232 ) Other comprehensive income 264 264 Net other comprehensive income 264 264 Balance, June 30, 2021 $ ( 2,968 ) $ ( 2,968 ) (6) 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 with the treasury stock accounting method. For the three and six months ended June 30, 2022, since there was a net loss, the Company excluded all 2,035 and 1,802 , 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. For the three and six months ended June 30, 2021, since there was a net loss, the Company excluded all 986 and 763 , 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: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Weighted average common shares outstanding—basic 18,564 18,174 18,507 18,057 Dilutive common shares issuable in connection with stock plans — — — — Weighted average common shares outstanding—diluted 18,564 18,174 18,507 18,057 (7) Inventories Inventories, net are stated at the lower of cost and net realizable value using the first-in first-out costing method. Inventories as of June 30, 2022 and December 31, 2021 include the costs of material, labor, and factory overhead. Components of inventories consist of the following: June 30, 2022 December 31, 2021 Raw materials $ 20,452 $ 15,772 Work in process 5,398 4,035 Finished goods 5,131 4,833 $ 30,981 $ 24,640 During the second quarter of 2022, the Company recorded an inventory reserve of $ 1,572 relating to a specialized component in its TACNAV product line. This component was originally purchased in anticipation of an order from a long-standing customer; however, that order never materialized. The Company has had a number of potential opportunities for the 14 sale of this component, but at this time the remaining opportunities appear limited and given the age of the component the Company determined to book a reserve for the component’s full value. (8) Property and Equipment Property and equipment, net, as of June 30, 2022 and December 31, 2021 consist of the following: June 30, 2022 December 31, 2021 Land $ 3,828 $ 3,828 Building and improvements 24,288 24,271 Leasehold improvements 463 472 Machinery and equipment 17,256 16,790 Revenue-generating assets 68,867 63,587 Office and computer equipment 15,211 15,395 Motor vehicles 31 31 129,944 124,374 Less accumulated depreciation ( 69,230 ) ( 64,260 ) $ 60,714 $ 60,114 Depreciation expense was $ 3,466 and $ 3,333 for the three months ended June 30, 2022 and 2021, respectively, and $ 6,839 and $ 6,407 for the six months ended June 30, 2022 and 2021, respectively. Certain revenue-generating hardware assets are utilized by the Company in the delivery of the Company's airtime services, media and other content. (9) 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 June 30, 2022 and December 31, 2021, the Company had accrued product warranty costs of $ 1,398 and $ 1,179 , respectively. The following table summarizes product warranty activity during 2022 and 2021: Six Months Ended June 30, 2022 2021 Beginning balance $ 1,179 $ 1,812 Charges to expense 679 224 Costs incurred ( 460 ) ( 441 ) Ending balance $ 1,398 $ 1,595 15 (10) Debt 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. 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 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 the Company’s representations and warranties and the absence of any default under the 2018 Credit Agreement. As of June 30, 2022, the full balance of the $ 15,000 facility was available for borrowing. 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 Company was 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 the Company’s business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements. 16 (11) 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 16 % and 19 % of the Company's consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 16 % and 17 % of the Company's consolidated net sales for the six months ended June 30, 2022 and 2021, respectively. Service sales of mini-VSAT Broadband airtime service accounted for 62 % and 53 % of the Company's consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 60 % and 52 % of the Company's consolidated net sales for the six months ended June 30, 2022 and 2021, 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 15 % and 17 % of the Company's consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 16 % of the Company's consolidated net sales for both the six months ended June 30, 2022 and 2021. No other single product class accounts for 10% or more of the Company's 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 63 % and 60 % of consolidated net sales for the three months ended June 30, 2022 and 2021, respectively, and 63 % and 61 % of consolidated net sales for the six months ended June 30, 2022 and 2021, respectively. Sales to Singapore customers represented 13 % and 10 % of the Company's 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 Company's consolidated net sales for the three months ended June 30, 2022 and 2021. Sales to Singapore customers represented 13 % and 10 % of the Company's 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 Company's consolidated net sales for the six months ended June 30, 2022 and 2021. As of June 30, 2022 and December 31, 2021, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets. 17 Net sales and operating income (loss) for the Company's reporting segments and the Company's loss before income tax expense (benefit) for the three and six months ended June 30, 2022 and 2021 were as follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net sales: Mobile connectivity $ 34,553 $ 33,755 $ 67,704 $ 64,262 Inertial navigation 7,284 9,608 15,227 21,393 Consolidated net sales $ 41,837 $ 43,363 $ 82,931 $ 85,655 Operating income (loss): Mobile connectivity $ 4,525 $ 580 $ 5,830 $ 183 Inertial navigation ( 1,289 ) 645 ( 1,749 ) 2,735 Subtotal 3,236 1,225 4,081 2,918 Unallocated, net ( 5,568 ) ( 7,027 ) ( 11,121 ) ( 12,327 ) Loss from operations ( 2,332 ) ( 5,802 ) ( 7,040 ) ( 9,409 ) Net interest and other income (expense), net 1,123 207 1,468 ( 367 ) Loss before income tax expense (benefit) $ ( 1,209 ) $ ( 5,595 ) $ ( 5,572 ) $ ( 9,776 ) Depreciation expense and amortization expense for the Company's reporting segments for the three and six months ended June 30, 2022 and 2021 were as follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Depreciation expense: Mobile connectivity $ 3,003 $ 2,779 $ 5,895 $ 5,300 Inertial navigation 296 384 604 768 Unallocated 167 170 340 339 Total consolidated depreciation expense $ 3,466 $ 3,333 $ 6,839 $ 6,407 Amortization expense: Mobile connectivity $ 125 $ 280 $ 319 $ 556 Inertial navigation — — — — Unallocated — — — — Total consolidated amortization expense $ 125 $ 280 $ 319 $ 556 (12) 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. 18 (13) Fair Value Measurements ASC Topic 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. 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 on the valuation techniques identified in the table below. The following tables present financial assets and liabilities at June 30, 2022 and December 31, 2021 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy: June 30, 2022 Total Level 1 Level 2 Level 3 Valuation Technique Assets Money market mutual funds $ 5,157 $ 5,157 $ — $ — (a) December 31, 2021 Total Level 1 Level 2 Level 3 Valuation Technique Assets Money market mutual funds $ 13,147 $ 13,147 $ — $ — (a) (a) Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets. 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 indications of impairment exist. There was no impairment of the Company's non-financial assets noted as of June 30, 2022. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis. (14) Goodwill and Intangible Assets Goodwill The following table sets forth the changes in the carrying amount of goodwill for the six months ended June 30, 2022: 19 Amounts Balance at December 31, 2021 $ 6,570 Sale of KVH Media Group Entertainment Limited ( 1,038 ) Foreign currency translation adjustment ( 219 ) Balance at June 30, 2022 $ 5,313 Intangible Assets The changes in the carrying amount of intangible assets during the six months ended June 30, 2022 are as follows: Amounts Balance at December 31, 2021 $ 1,287 Amortization expense ( 319 ) Intangible assets acquired in asset acquisition 28 Sale of KVH Media Group Entertainment Limited ( 352 ) Foreign currency translation adjustment ( 80 ) Balance at June 30, 2022 $ 564 Intangible assets arose from the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013. These intangible assets are being amortized on a straight-line basis over the estimated useful life of 10 years for acquired subscriber relationships. The intangible assets were recorded in pounds sterling and fluctuations in exchange rates cause these amounts to increase or decrease from time to time. As a result of the sale of KVH Media Group Entertainment Limited in April 2022, the Company determined the goodwill and intangible assets associated with this business based on an income approach which estimated the fair value of the reporting unit before and after the sale, and included such amounts in the determination of the gain on sale of the subsidiary. 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 June 30, 2022, the carrying value of the intangible assets acquired in the asset acquisition was $ 436 . 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 $ 28 and $ 32 of consideration was earned under the contingent consideration arrangement during the six months ended June 30, 2022 and 2021, respectively. 20 Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at June 30, 2022 and December 31, 2021, respectively: Gross Carrying Amount Accumulated Amortization Net Carrying Value June 30, 2022 Subscriber relationships $ 7,631 $ 7,067 $ 564 Distribution rights 315 315 — Internally developed software 446 446 — Proprietary content 153 153 — Intellectual property 2,284 2,284 — $ 10,829 $ 10,265 $ 564 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 Amortization expense related to intangible assets was $ 125 and $ 280 for the three months ended June 30, 2022, respectively, and $ 319 and $ 556 for the six months ended June 30, 2022 and 2021, respectively. Amortization expense was categorized as general and administrative expense. As of June 30, 2022, the total weighted average remaining useful lives of the definite-lived intangible assets was 3.3 years. Estimated future amortization expense remaining at June 30, 2022 for intangible assets acquired was as follows: Years ending December 31, Remainder of 2022 $ 183 2023 174 2024 65 2025 65 2026 65 Thereafter 12 Total future amortization expense $ 564 For definite-lived intangible assets, the Company assesses the carrying value of these assets whenever events or circumstances indicate that the carrying value may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset, or asset group, to the future undiscounted cash flows expected to be generated by the asset, or asset group. There were no events or changes in circumstances during the six months ended June 30, 2022 which indicated that an assessment of the impairment of goodwill and intangible assets was required. (15) 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. 21 Disaggregation of Revenue The following table summarizes net sales from contracts with customers for the three and six months ended June 30, 2022 and 2021: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Mobile connectivity product, transferred at point in time $ 5,976 $ 7,292 $ 12,083 $ 13,380 Mobile connectivity product, transferred over time 644 754 1,100 1,557 Mobile connectivity service 27,933 25,709 54,521 49,325 Inertial navigation product 6,959 9,223 14,766 20,764 Inertial navigation service 325 385 461 629 Total net sales $ 41,837 $ 43,363 $ 82,931 $ 85,655 Revenue recognized during the three months ended June 30, 2022 and 2021 from amounts included in contract liabilities at the beginning of the period was $ 621 and $ 696 , respectively. Revenue recognized during the six months ended June 30, 2022 and 2021 from amounts included in contract liabilities at the beginning of the period was $ 1,073 and $ 1,469 , 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 six months ended June 30, 2022 or 2021 or accounts receivable at June 30, 2022 or December 31, 2021. 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. (16) Income Taxes The Company’s effective tax rate for the three and six months ended June 30, 2022 was ( 19.4 )% and ( 10.1 )%, respectively, compared with ( 1.4 )% and 0.8 % for the corresponding period in the prior year. The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable periods, including retroactive changes in tax legislation, settlements of tax audits or assessments, and the resolution or identification of tax position uncertainties. For the three and six months ended June 30, 2022 and 2021, the effective tax rates were lower than the statutory tax rate primarily due to the Company maintaining a valuation allowance reserve on its US deferred tax assets, the composition of income from foreign jurisdictions taxed at lower rates and foreign withholding taxes on payments to the U.S. 22 As of June 30, 2022 and December 31, 2021, the Company had reserves for uncertain tax positions of $ 624 and $ 592 , respectively. There were no material changes during the six months ended June 30, 2022 to the Company’s reserve for uncertain tax positions. The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of June 30, 2022 may decrease $ 19 in the next twelve months as a result of a lapse of statutes of limitations 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. (17) Leases Lessee The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense was $ 537 and $ 927 for the three months ended June 30, 2022 and 2021, respectively, and was $ 1,081 and $ 1,904 for the six months ended June 30, 2022 and 2021, respectively. Short-term operating lease costs were $ 43 and $ 58 for the three months ended June 30, 2022 and 2021, respectively, and were $ 98 and $ 115 for the six months ended June 30, 2022 and 2021, respectively. Sublease income was $ 34 and $ 33 for the three months ended June 30, 2022 and 2021, respectively, and was $ 69 and $ 67 for the six months ended June 30, 2022 and 2021, respectively. Maturities of lease liabilities as of June 30, 2022 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows: Remainder of 2022 $ 988 2023 824 2024 381 2025 13 Total minimum lease payments $ 2,206 Less amount representing interest $ ( 99 ) Present value of net minimum operating lease payments $ 2,107 Less current installments of obligation under current-operating lease liabilities $ 1,359 Obligations under long-term operating lease liabilities, excluding current installments $ 748 Weighted-average remaining lease term - operating leases (years) 1.59 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 June 30, 2022, the gross cost and accumulated amortization associated with this lease for the remaining satellite hub is included in revenue generating assets and amounted to $ 1,268 and $ 800 , respectively. The obligation under capital 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 $ 46 for both the three months ended June 30, 2022 and 2021 and was $ 91 for both the six months ended June 30, 2022 and 2021. 23 The future minimum lease payments under this financing lease as of June 30, 2022 are: Remainder of 2022 $ 132 2023 22 Total minimum lease payments $ 154 Less amount representing interest $ ( 1 ) Present value of net minimum financing lease payments $ 153 Less current installments of obligation under accrued other $ 153 Obligations under other long-term liabilities, excluding current installments $ — Weighted-average remaining lease term - finance leases (years) 0.67 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 $ 3,678 as of June 30, 2022 and the non-current portion of the net investment in these leases was $ 5,565 as of June 30, 2022. 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 $ 193 and $ 221 during the three months ended June 30, 2022 and 2021, respectively, and was $ 400 and $ 452 during the six months ended June 30, 2022 and 2021, respectively. The future undiscounted cash flows from these leases as of June 30, 2022 are: Remainder of 2022 $ 2,430 2023 3,576 2024 2,649 2025 1,265 2026 445 2027 26 Total undiscounted cash flows $ 10,391 Present value of lease payments $ 9,243 Difference between undiscounted cash flows and discounted cash flows $ 1,148 24 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 June 30, 2022, the gross costs and accumulated depreciation associated with these operating leases are included in revenue generating assets and amounted to $ 1,803 and $ 325 , respectively. They are depreciated on a straight-line basis over a five-year estimated useful life. Depreciation expense for these assets was $ 89 and $ 171 for the three and six months ended June 30, 2022, respectively. Lease revenue recognized was $ 133 and $ 259 for the three and six months ended June 30, 2022, respectively. As of June 30, 2022, minimum future lease payments to be recognized on the operating leases are as follows: Remainder of 2022 $ 269 2023 538 2024 331 2025 18 Total $ 1,156 (18) Subsequent Events On August 9, 2022, the Company 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, the Company entered into a Transition Services Agreement with EMCORE, pursuant to which the Company 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, the Company 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.