KVH INDUSTRIES INC \DE\ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products and services, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Risk Factors” in Item 1A of Part II of this quarterly report on Form 10-Q. These and many other factors could affect our future financial and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. The following discussion and analysis should be read in conjunction with our consolidated interim financial statements and related notes appearing elsewhere in this report. Overview 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. 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. 28 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. 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. See Note 14 to our consolidated interim financial statements for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary. Management Transition and Restructuring On March 7, 2022, we announced that our President and Chief Executive Officer, Martin Kits van Heyningen, was retiring from his executive and Board roles after more than 40 years of service and assuming a consulting position with us. Brent C. Bruun, our then Chief Operating Officer, was appointed as our interim President and Chief Executive Officer. Subsequently, on June 15, 2022, he was appointed as our President and Chief Executive Officer and as a Class II member of the Board of Directors. We have incurred approximately $0.7 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 $0.3 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 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. We also modified impacted employee's stock option and restricted stock awards. Please see Note 5 to our consolidated interim financial statements for further discussion. 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. 29 Executive Employment Agreements In May 2022, we entered into executive employment agreements with each of Brent C. Bruun, Roger A. Kuebel, Felise Feingold and Robert Balog in order to retain their services and provide them with certain benefits in the event that we terminate the executive’s employment without cause (as defined in the agreement) or the executive terminates his or her employment for good reason (as defined in the agreement) (either such termination, a “Qualifying Termination”), including following a change of control. The terms of the agreements are substantially identical except as to title, salary, target bonus and reporting responsibilities. The agreements provide that, if the executive continues to serve as an employee through December 31, 2022 (the “Retention Date”), we will pay the executive a retention bonus equal to 75% of the executive’s base salary at the agreement date, and we will accelerate the vesting of the executive’s equity awards that would otherwise have vested in the twelve months after the Retention Date. Please see Note 5 to our consolidated interim financial statements for further discussion regarding the equity compensation modifications. If a Qualifying Termination occurs before December 31, 2022, the executive will receive a pro rata portion of the retention bonus. If in connection with such a termination the executive becomes entitled to receive the change in control severance payments and benefits, the executive will also become entitled to receive the full retention bonus, and the Retention Date will be the later of the date of such change in control or such termination of employment. 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. Supply Chain 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 The discussion and analysis of our financial condition and results of operations are based upon our consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these interim financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our interim financial statements. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2021. 30 C ritical accounting estimates are those estimates made that involve a significant level of estimation uncertainty and have had or are reasonably likely to have an impact on our statement of operations. 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 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 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 Sales: Product 18.8 % 19.9 % 19.3 % 22.1 % Service 81.2 80.1 80.7 77.9 Net sales 100.0 100.0 100.0 100.0 Cost and expenses: Costs of product sales 19.2 16.3 16.9 17.1 Costs of service sales 43.7 48.5 44.2 48.3 Research and development 7.8 8.2 8.1 8.4 Sales, marketing and support 16.2 17.9 17.8 19.3 General and administrative 15.8 19.4 19.0 22.8 Total costs and expenses 102.7 110.3 106.0 115.9 Loss from operations (2.7) (10.3) (6.0) (15.9) Interest income 1.1 0.6 0.8 0.7 Interest expense — 0.1 — 0.1 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) % 31 Three months ended September 30, 2022 and 2021 Net Sales Our net sales for the three months ended September 30, 2022 and 2021 were as follows: Change For the three months ended September 30, 2022 vs. 2021 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 $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 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 $0.6 million decrease in 32 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 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 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 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 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 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 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. 33 Nine months ended September 30, 2022 and 2021 Net Sales Our net sales for the nine months ended September 30, 2022 and 2021 were as follows: Change For the nine months ended September 30, 2022 vs. 2021 2022 2021 $ % (dollars in thousands) Product $ 19,808 $ 21,788 $ (1,980) (9) % Service 83,065 76,862 6,203 8 % Net sales $ 102,873 $ 98,650 $ 4,223 4 % 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 $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. 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. 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 $0.9 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 55% and 62% for the nine months ended September 30, 2022 and 2021, respectively. Operating Expenses 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. 34 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 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) 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 35 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 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. (the Lender), under the PPP, which was established under the CARES Act. Pursuant to the terms of the CARES Act, in August 2021, we applied for forgiveness of the full amount of the PPP Loan. On September 24, 2021, we received notification from the bank that, on September 19, 2021, the U.S. 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. 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. 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. 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. 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. 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. If our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In that event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise funds by issuing equity securities, our stockholders may experience dilution. 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. 36 Borrowing Arrangements Paycheck Protection Program Loan In May 2020, we received a $6.9 million loan from the Lender under the PPP, which was established under the CARES Act and is administered by 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, we applied for forgiveness of the full amount of the PPP Loan. 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 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 We intend to continue to invest in the mini-VSAT Broadband network on a global basis. As part of the future potential capacity expansion, we plan to acquire additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel. From time to time we have entered into multi-year agreements to lease satellite capacity, and we have also purchased numerous satellite hubs to support the added capacity. These transactions can involve millions of dollars.