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Item 2. Management’s Discussion and Analysis

2022-12-06 compared with 2022-08-09 · 175 added, 285 removed, 107 unchanged (81% of the section changed)

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The following discussion and analysis should be read in conjunction with our consolidated interim financial statements and related notes appearing elsewhere in this report.

We design, develop, manufacture and market mobile connectivity products and services for the marine and land mobile markets, and inertial navigation products for the defense and commercial markets.

Our reporting segments are as follows:

• the mobile connectivity segment and

• the inertial navigation segment.

Through these segments, we manufacture and sell our solutions in a number of major geographic areas, including internationally.

We design, develop, manufacture and market mobile connectivity products and services for the marine and land mobile markets.

We manufacture and sell our solutions in a number of major geographic areas, including internationally.

We generate a majority of our revenues from various international locations, primarily consisting of Singapore, Canada, countries in Europe, countries in Africa, other Asia/Pacific countries, the Middle East, and India.

Disposition of Assets

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.

We offer satellite communications products and services.

Our satellite-only and hybrid products enable marine customers to receive data, voice, and value-added services via satellite, cellular, and shore-based Wi-Fi networks onboard commercial, leisure, and military/government vessels.

In addition, the Company’s in-motion television terminals permit customers to receive live digital television via regional satellite services in marine vessels, recreational vehicles, buses and automobiles.

We sell our products through an extensive international network of dealers and distributors.

We also sell and lease products to service providers and end users.

Our service sales represent primarily revenue earned from satellite Internet airtime services.

We provide, for monthly fixed fees and per-usage fees, satellite connectivity encompassing broadband Internet, data and Voice over Internet Protocol (VoIP) services, to our TracNet-H series and TracPhone V-series customers via our global high-throughput satellite (HTS) network.

Cellular airtime service increasingly supplements our satellite-only airtime revenue following the mid-2022 launch of the KVH ONE hybrid network and TracNet H-series terminals.

This product and service combination integrates global satellite service with KVH-provided cellular service in more than 150 countries, along with shore-based Wi-Fi access.

These sales also include the distribution of entertainment, including news, sports, music, and movies, to commercial customers in the maritime, hotel, and retail markets through KVH Media Group, along with supplemental value-added services.

In addition, we earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose to activate their subscriptions with us.

Service sales also include sales from product repairs and extended warranty sales.

Our marine leisure business is highly seasonal, and seasonality can also impact our commercial marine business.

Historically, we have generated the majority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year, compared to the first two quarters.

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

Dispositions;

Termination of Credit Facility

On August 9, 2022, we sold our inertial navigation business to EMCORE Corporation for gross proceeds of $55.0 million, less specified deductions and a holdback of $1.0 million and subject to a working capital adjustment.

The holdback was released to us on August 17, 2022.

On August 9, 2022, we also 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 working capital adjustment is in the process of being finalized.

This adjustment will be finalized in the fourth quarter of 2022.

We do not have any continuing involvement in these operations other than short-term transition services, which are being recorded in other income in continuing operations.

We determined that the sale met the requirements for reporting as discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20.

On August 9, 2022, we also terminated our senior secured credit facility agreement (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.

On April 29, 2022, KVH Media Group Limited, our wholly owned subsidiary, sold its subsidiary KVH Media Group Entertainment Limited for net cash proceeds of approximately $2.4 million.

This transaction did not meet the criteria for reporting as discontinued operations 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.

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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.

We have incurred approximately $0.7 million of costs associated with the management transition through September 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.

Approximately $0.3 million is accrued as of September 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 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.

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

We expect to incur an additional $0.1 million in severance payments and other employee benefit costs through December 31, 2022 arising from this restructuring.

1 unchanged sentence

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

For the three months ended September 30, 2022, we restructured our foreign operations by closing our India and Cyprus offices and our Denmark warehouse to reduce costs.

Approximately $0.4 million of severance payments, other employee benefits, and legal and advisory fees were incurred for the three and nine months ended September 30, 2022.

We expect to incur an additional $0.1 million in severance payments and other employee benefit costs through December 31, 2022 arising from this restructuring.

Executive Employment Agreements

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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

Our mobile connectivity segment offers satellite communications products and services.

Our mobile connectivity products enable customers to receive voice and Internet services and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles.

We sell our mobile connectivity products through an extensive international network of dealers and distributors.

We also sell and lease products to service providers and directly to end users.

Our mobile connectivity service sales include sales of satellite voice and Internet airtime services, engineering services provided under development contracts, sales from product repairs, and extended warranty sales.

This segment's sales also include the distribution of entertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group.

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

We provide, for monthly fixed fees and usage-based fees, satellite connectivity services for broadband Internet, data and VoIP service to our mini-VSAT Broadband customers.

We also earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose to activate their subscriptions with us.

Within the mobile connectivity segment, our marine leisure business is highly seasonal, and seasonality can also impact our commercial marine business.

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

Inertial Navigation Segment

Our inertial navigation segment offers precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing, and guidance.

Our inertial navigation products also include TACNAV systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles.

Our inertial navigation products are sold directly to governments, both U.S.

and foreign, and government contractors, as well as through an international network of authorized independent sales representatives.

In addition, our inertial navigation products are used in numerous commercial products, such as navigation and positioning systems for various applications including precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial robotics and optical stabilization.

Our inertial navigation service sales include engineering services provided under development contracts, product repairs and extended warranty sales.

Sales by Segment

We generate sales primarily from the sale of our mobile connectivity products and services and our inertial navigation products and services.

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

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

Inertial navigation 7,284 9,608 15,227 21,393

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

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 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.

Customer-Funded Research and Development

In addition to our internally funded research and development efforts, we also conduct research and development activities that are funded by our customers.

These activities relate primarily to engineering studies, surveys, prototype development, program management, and standard product customization.

In accordance with accounting principles generally accepted in the United States of America, we account for customer-funded research as service revenue, and we account for the associated research and development costs as costs of service and product sales.

As a result, customer-funded research and development are not included in the research and development expense that we present in our statement of operations.

The following table presents our total annual research and development effort, representing the sum of research costs of service and product sales and the operating expense of research and development as described in our statement of operations.

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

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

Costs of customer-funded research and development included in costs of service sales 53 78 70 489

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

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.

On October 11, 2022, we entered into an amendment to the employment agreement with Mr.

Bruun that, among other things, increased his annual base salary to $448 per year, retroactive to July 1, 2022, increased his target annual incentive compensation for the second half of 2022 to 80% of his base salary (without changing his target annual incentive compensation for the first half of 2022), extended his Retention Date from December 31, 2022 to December 31, 2023, which effectively extended the period during which Mr.

Bruun must remain employed by us in order to earn his retention bonus, and modified the amount of the retention bonus from 75% of his base salary in effect on May 2, 2022 to 75% of the highest base salary in effect for Mr.

Bruun on or before the date he becomes entitled to receive the retention bonus or the “Partial Retention Bonus” (as defined in the employment agreement).

The amendment did not modify the terms of the employment agreement relating to acceleration of vesting of certain equity awards if Mr.

Bruun remains employed by us through December 31, 2022.

As of September 30, 2022, we accrued approximately $0.6 million for the executive employment agreements.

In addition to the amendment to Mr.

Bruun’s employment agreement, the Compensation Committee also granted Mr.

Bruun a restricted stock award and a non-statutory stock option, which together had an aggregate grant date fair value of approximately $100,000.

The restricted stock award and the non-statutory stock option have terms that are materially consistent with the previously disclosed terms of similar grants to our executive officers.

During the nine months ended September 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.

We are continuing to monitor global developments and are prepared to implement any actions that we determine to be necessary to sustain our business.

International Sales

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, European Union countries, and other European countries, as well as countries in Africa, Asia/Pacific, the Middle East, and India.

International revenues represented 62% and 58% of our consolidated net sales for the three months ended September 30, 2022 and 2021, respectively, and 61% and 58% of our consolidated net sales for the nine months ended September 30, 2022 and 2021, respectively.

Sales to Singapore customers represented 17% and 14% of our consolidated net sales for the three months ended September 30, 2022 and 2021, respectively.

Sales to Singapore customers represented 16% and 13% of our consolidated net sales for the nine months ended September 30, 2022 and 2021, respectively.

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

Critical Accounting Estimates

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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 six months ended June 30, 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 nine months ended September 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.

Results of Operations

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

Three Months Ended Six Months Ended

June 30, June 30,

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

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Interest expense — 0.1 — 0.1

Other income (expense), net 2.2 — 1.3 (0.9)

Loss before income tax expense (benefit) (3.0) (12.9) (6.6) (11.4)

Income tax expense (benefit) 0.6 0.2 0.7 (0.1)

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

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.

Other income, net 1.6 20.4 1.5 6.3

(Loss) income from continuing operations before income tax expense (benefit) — 10.6 (3.7) (9.0)

Income tax expense (benefit) from continuing operations 0.2 — 0.6 (0.1)

Net (loss) income from continuing operations (0.2) % 10.6 % (4.3) % (8.9) %

Three months ended September 30, 2022 and 2021

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

For the three months ended September 30, 2022 vs.

2022 2021 $ %

(dollars in thousands)

Product $ 6,625 $ 6,851 $ (226) (3) %

Service 28,544 27,537 1,007 4 %

Net sales $ 35,169 $ 34,388 $ 781 2 %

Net sales increased by $0.8 million, or 2%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Product sales decreased by $0.2 million, or 3%, to $6.6 million for the three months ended September 30, 2022 from $6.9 million for the three months ended September 30, 2021.

The decrease in product sales was primarily due to a $0.4 million decrease in mini-VSAT Broadband product sales and a $0.2 million decrease in land mobile connectivity product sales, partially offset by a $0.4 million increase in TracVision product sales.

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

Service sales increased by $1.0 million, or 4%, to $28.5 million for the three months ended September 30, 2022 from $27.5 million for the three months ended September 30, 2021.

The increase was primarily due to a $2.1 million increase in our mini-VSAT service sales, partially offset by a $1.0 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 to our HTS network before the shutdown of our legacy network.

During 2022, mini-VSAT service sales have been impacted by the loss of revenue from customers who did not migrate on or before December 31, 2021.

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

A number of these customers have since returned, and when combined with new customers, mini-VSAT service revenue for the three months ended September 30, 2022 was up 8% from the same quarter in 2021.

Costs of Sales

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

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 were 63% and 65% for the three months ended June 30, 2022 and 2021, respectively.

Costs of sales decreased by $0.1 million, or 1%, in the three months ended September 30, 2022 to $22.1 million from $22.3 million in the three months ended September 30, 2021.

The decrease in costs of sales was driven by a $1.3 million decrease in costs of service sales, partially offset by a $1.1 million increase in costs of product sales.

As a percentage of net sales, costs of sales were 63% and 65% for the three months ended September 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 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 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.

For the three months ended September 30, 2022, costs of product sales increased by $1.1 million, or 20%, to $6.7 million from $5.6 million in the three months ended September 30, 2021, primarily due to a $1.3 million increase in our marine cost of product sales.

As a percentage of product sales, costs of product sales were 102% and 82% for the three months ended September 30, 2022 and 2021, respectively.

The increase was primarily driven by manufacturing period costs due to supply chain issues.

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, media materials and distribution costs, and service repair materials.

For the three months ended September 30, 2022, costs of service sales decreased by $1.3 million, or 8%, to $15.4 million from $16.7 million for the three months ended September 30, 2021, primarily due to a $0.7 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.

In addition, there was a $0.6 million decrease in

content services cost of service sales, primarily driven by the sale of a subsidiary in April 2022.

As a percentage of service sales, costs of service sales were 54% and 61% for the three months ended September 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 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.

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.

Research and development expense for the three months ended September 30, 2022 decreased by $0.1 million, or 3%, to $2.7 million from $2.8 million for the three months ended September 30, 2021.

As a percentage of net sales, research and development expense was 8% for both the three months ended September 30, 2022 and 2021.

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 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.

Sales, marketing and support expense for the three months ended September 30, 2022 decreased by $0.5 million, or 7%, to $5.7 million from $6.2 million for the three months ended September 30, 2021.

The decrease primarily resulted from a $0.5 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.

As a percentage of net sales, sales, marketing and support expense was 16% and 18% for the three months ended September 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 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

General and administrative expense for the three months ended September 30, 2022 and 2021 decreased by $1.1 million, or 17%, to $5.6 million compared to $6.7 million, respectively.

The decrease primarily resulted from a $1.1 million decrease in professional fees and a $0.2 million decrease in amortization expense, partially offset by a $0.4 million increase in salaries, benefits, and taxes, including executive retention agreements and stock compensation expense.

As a percentage of net sales, general and administrative expense was 16% and 19% for the three months ended September 30, 2022 and 2021, respectively.

Interest and Other Income, 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 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.

Interest income increased $0.2 million for the three months ended September 30, 2022 to $0.4 million from $0.2 million for the three months ended September 30, 2021.

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

Other income, net decreased to other income, net of $0.6 million for the three months ended September 30, 2022 from other income, net of $7.0 million for the three months ended September 30, 2021 primarily due to the forgiveness of the PPP Loan during the three months ended September 30, 2021.

Other income, net of $0.6 million for the three months ended September 30, 2022 primarily relates to foreign exchange gains from our UK operations.

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.

Income tax expense for the three months ended September 30, 2022 was $0.1 million and related to taxes on income earned in foreign jurisdictions.

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

The PPP Loan was forgiven during the three months ended September 30, 2021, giving rise to U.S.

generated income, but these proceeds were not taxable.

The operating losses incurred in the U.S.

for the three months ended September 30, 2021 did not generate any income tax benefit during the quarter due to a full valuation allowance on our related deferred tax assets.

Nine months ended September 30, 2022 and 2021

Our net sales for the nine months ended September 30, 2022 and 2021 were as follows:

For the nine months ended September 30, 2022 vs.

2022 2021 $ %

(dollars in thousands)

Mobile connectivity sales:

Product $ 19,808 $ 21,788 $ (1,980) (9) %

1 unchanged sentence

Net sales $ 102,873 $ 98,650 $ 4,223 4 %

Inertial navigation sales:

Product $ 6,959 $ 9,223 $ (2,264) (25) %

Service 325 385 (60) (16) %

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

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 $ %

(dollars in thousands)

Mobile connectivity $ 4,525 $ 580 $ 3,945 680 %

Inertial navigation (1,289) 645 (1,934) (300) %

$ 3,236 $ 1,225 $ 2,011 164 %

Unallocated (5,568) (7,027) 1,459 21 %

Loss from operations $ (2,332) $ (5,802) $ 3,470 60 %

Mobile Connectivity Segment

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.

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 $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 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.

Net sales increased by $4.2 million, or 4%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Product sales decreased by $2.0 million, or 9%, to $19.8 million for the nine months ended September 30, 2022 from $21.8 million for the nine months ended September 30, 2021.

The decrease in product sales was primarily due to a $1.5 million decrease in mini-VSAT Broadband product sales and a $0.5 million decrease in land mobile connectivity product sales.

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

Service sales increased by $6.2 million, or 8%, to $83.1 million for the nine months ended September 30, 2022 from $76.9 million for the nine months ended September 30, 2021.

The increase was primarily due to a $7.5 million increase in our mini-VSAT service sales, partially offset by a $1.4 million decrease in our content services sales, primarily driven by the sale of a subsidiary in April 2022.

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.

Costs of sales decreased by $1.7 million, or 3%, in the nine months ended September 30, 2022 to $62.9 million from $64.5 million in the nine months ended September 30, 2021.

The decrease in costs of sales was driven by a $2.1 million decrease in costs of service sales, partially offset by a $0.5 million increase in costs of product sales.

As a percentage of net sales, costs of sales were 61% and 65% for the nine months ended September 30, 2022 and 2021, respectively.

For the nine months ended September 30, 2022, costs of product sales increased by $0.5 million, or 3%, to $17.4 million from $16.9 million in the nine months ended September 30, 2021, due to a $0.9 million increase in our marine cost of product sales, partially offset by a $0.4 million decrease in our land costs of product sales.

As a percentage of product sales, costs of product sales were 88% and 78% for the nine months ended September 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.

For the nine months ended September 30, 2022, costs of service sales decreased by $2.1 million, or 4%, to $45.5 million from $47.6 million for the nine months ended September 30, 2021, primarily due to a $1.1 million decrease in mini-VSAT airtime costs of service sales.

In addition, there was a $0.9 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.

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

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.

Research and development expense for the nine months ended September 30, 2022 increase by $0.1 million, or 1%, to $8.4 million from $8.3 million for the nine months ended September 30, 2021.

As a percentage of net sales, research and development expense was 8% for both the nine months ended September 30, 2022 and 2021.

Sales, marketing and support expense for the nine months ended September 30, 2022 decreased by $0.7 million, or 4%, to $18.4 million from $19.0 million for the nine months ended September 30, 2021.

The decrease in sales, marketing and support expense resulted primarily from a $1.6 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 external commission expense, partially offset by additional costs of $1.0 million related to the reduction in our workforce in March 2022 and a $0.7 million increase in warranty expense.

As a percentage of net sales, sales, marketing and support expense was 18% and 19% for the nine months ended September 30, 2022 and 2021, respectively.

General and administrative expense for the nine months ended September 30, 2022 decrease by $3.0 million, or 13%, to $19.5 million from $22.5 million for the nine months ended September 30, 2021.

The decrease in general and administrative expense resulted primarily from a $4.1 million decrease in professional fees, a $0.5 million decrease in amortization expense, and a $0.4 million decrease in stock compensation expenses including stock modifications.

The decrease in professional fees was driven by a $3.1 million decrease in event-driven 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 expenses was partially offset by additional costs of $0.7 million related to the reduction in our workforce 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, a $0.5 million increase in expenses related to the separation and retirement of Mr.

Kits van Heyningen in March 2022 and a $0.5 million increase in compensation expense related to executive retention agreements.

As a percentage of net sales, general and administrative expense was 19% and 23% for the nine months ended September 30, 2022 and 2021, respectively.

Interest and Other Income, Net

Interest income increased by $0.1 million to $0.8 million for the nine months ended September 30, 2022 from $0.7 million for the nine months ended September 30, 2021.

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

Other income, net decreased to other income, net of $1.6 million for the nine months ended September 30, 2022 from other income, net of $6.2 million for the prior period primarily due to the forgiveness of the PPP Loan in 2021, partially offset by an increase in foreign exchange gains from our UK operations and the sale of KVH Media Group Entertainment Limited during the nine months ended September 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.

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

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

Discontinued Operations

On August 9, 2022, we sold our inertial navigation business for gross proceeds of $55.0 million, less specified deductions and a holdback of $1.0 million and subject to a working capital adjustment.

The holdback was released to us on August 17, 2022.

We determined that the sale met the requirements for reporting as discontinued operations in accordance with ASC 205-20.

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

The working capital adjustment is expected to be finalized in the fourth quarter of 2022.

Please see Notes 1 and 18 for further discussion.

Results for discontinued operations are as follows:

Three months ended September 30, Nine months ended September 30,

2022 2021 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.

Commercial resellers for our mobile connectivity products and legacy products typically do not carry extensive inventories and rely on us to ship products quickly.

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 $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.

We do not include satellite connectivity service sales in our backlog even though many of our satellite connectivity customers have signed annual or multi-year service contracts providing for a fixed monthly fee.

Military orders included in backlog are generally subject to cancellation for the convenience of the customer.

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

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.

The complexity of planning and executing larger orders generally requires customers to order well in advance of the required delivery date, resulting in backlog.

Sales from discontinued operations $ 1,494 $ 8,596 $ 16,721 $ 29,989

Net income from discontinued operations, net of tax $ 29,741 $ 348 $ 28,061 $ 3,150

Liquidity and Capital Resources

Our primary liquidity needs have been to fund general business requirements, including working capital requirements and capital expenditures.

In recent years, we have funded our operations primarily from the sale of a business in 2019, a PPP loan, cash flows from operations, bank financings and proceeds received from exercises of stock options and the issuance of stock.

In recent years, we have funded our operations primarily from the sale of two businesses in 2022, the sale of a business in 2019, a PPP loan, cash flows from operations, bank financings and proceeds received from exercises of stock options and the issuance of stock.

In May 2020, we received a $6.9 million loan from Bank of America, N.A.

3 unchanged sentences

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 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.

The forgiveness of the PPP Loan is recognized in other income, net in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2021.

The holdback was released to us on August 17, 2022.

The working capital adjustment is expected to be finalized in the fourth quarter of 2022.

As of September 30, 2022, we had $69.6 million in cash, cash equivalents, and marketable securities, of which $2.2 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries.

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

As of September 30, 2022, we had $91.2 million in working capital.

Our funding plans for our working capital needs and other commitments may be adversely impacted if our underlying assumptions regarding our anticipated revenues and expenses are not realized.

2 unchanged sentences

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

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.

Net cash used in operations was $1.5 million for the nine months ended September 30, 2022 compared to net cash provided by operations of $1.9 million for the nine months ended September 30, 2021.

The $3.4 million change in cash used in operations is primarily due to a $26.1 million change in non-cash items, driven by the $30.9 million gain on sale of the inertial navigation business.

In addition, there was a $9.7 million increase in cash outflows relating to inventories, a $1.3 million decrease in cash inflows relating to accounts receivable, and a $0.6 million increase in cash outflows related to prepaid expenses, other current assets, and current contract assets.

Partially offsetting these items was a $29.2 million increase in net income, a $3.0 million decrease in cash outflows related to accounts payable, a $0.9 million decrease in cash outflows related to contract liabilities and long-term contract liabilities, a $0.8 million decrease in cash outflows related to accrued compensation, product warranty and other expenses, 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 $4.3 million for the nine months ended September 30, 2022 compared to net cash used in investing activities of $7.2 million for the nine months ended September 30, 2021.

The $11.5 million change in net cash provided by investing activities was primarily the result of $55.0 million in proceeds from the sale of the inertial navigation business, a $4.2 million decrease in capital expenditures, and $2.4 million in proceeds from the sale of KVH Media Group Entertainment Limited.

Partially offsetting these items was a $50.0 million net investment in marketable securities.

Net cash provided by financing activities was $0.6 million for the nine months ended September 30, 2022 compared to net cash provided by financing activities of $2.6 million for the nine months ended September 30, 2021.

The $2.0 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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On September 24, 2021, we received notification from the Lender that, on September 19, 2021, the SBA had determined that the PPP Loan forgiveness application was approved, and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA.

The forgiveness of the PPP Loan is recognized in other income, net in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2021.

Line of Credit

Effective October 30, 2018, we entered into an amended and restated three-year senior secured credit facility agreement (the 2018 Credit Agreement) with Bank of America, N.A., as Administrative Agent, and the lenders named from time to time as parties thereto (the 2018 Lenders), which included a reducing revolving credit facility (the 2018 Revolver) of up to $20.0 million initially and reducing to $15.0 million on December 31, 2019, to be used for general corporate purposes.

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 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 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.

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, we 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, we amended the 2018 Credit Agreement to maintain the $15.0 million 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 $3.0 million, 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.

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.

On August 9, 2022, we 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.

Other Matters

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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