KVH INDUSTRIES INC \DE\ 10-K

ITEM 1. Business Cautionary Statement Regarding Forward-Looking Information In addition to historical facts, this annual report contains forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed in this annual report under the headings “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 1A. Risk Factors.” We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this annual report and in the other documents that we file with the Securities and Exchange Commission. Additional Information Available Our principal Internet address is www.kvh.com . Our website provides a hyperlink to a third-party website through which our annual, quarterly, and current reports, as well as amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. We do not provide any information regarding our SEC filings directly to the third-party website, and we do not check its accuracy or completeness. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Introduction We are a leading provider of innovative and technology-driven connectivity solutions to primarily maritime customers globally. We provide global high-speed Internet and Voice over Internet Protocol (VoIP) services via satellite to mobile users at sea and on land. We are also a leading provider of commercially licensed entertainment, including news, sports, music, and movies, to commercial customers in the maritime and hotel markets, along with supplemental value-added services. We manufacture our products in Middletown, Rhode Island and sell our solutions in a number of major geographic areas, including internationally. We generate revenues from various international locations, primarily consisting of Singapore, Canada, European Union countries and other European countries, countries in South America, Africa, Asia/Pacific and the Middle East and India. During the second quarter of 2022, KVH Media Group Limited, our wholly owned subsidiary, sold its subsidiary KVH Media Group Entertainment Limited. On August 9, 2022, we sold our inertial navigation business, which offered a portfolio of innovative digital compass and fiber optic gyro based systems, to EMCORE Corporation. We are headquartered in Middletown, Rhode Island, with active operations in Denmark, the United Kingdom, the Philippines, and Singapore. KVH is a Delaware corporation formed in 1985. 3 Table of Contents Our Business We operate as one reportable segment as a result of the sale of our inertial navigation business on August 9, 2022. Please see Notes 1 and 16 to our accompanying audited consolidated financial statements for additional information. We provide integrated, end-to-end hardware, software, and services that support our customers’ need for access to the Internet, VoIP, operations content, and entertainment services. On the hardware side of our business, we primarily manufacture and distribute a comprehensive family of mobile satellite antenna products that provide two-way access to the Internet and VoIP services outside the range of cellular phone service, along with in-motion, stabilized antennas that provide receive-only satellite television services. Product sales accounted for 19% and 22% of our consolidated net sales for 2022 and 2021, respectively. On the services side of our business, sales of our global high-throughput satellite (HTS) airtime service accounted for 74% and 69% of our consolidated net sales for 2022 and 2021, respectively. Sales of content services accounted for 4% and 6% of our consolidated net sales for 2022 and 2021, respectively. In the global maritime market, we believe that there is significant demand for mobile access to the Internet, operational data, voice services, entertainment content, and satellite television. For both maritime and onshore customers who want to access live television while on the move, we offer a comprehensive family of mobile satellite antenna products marketed under the TracVision brand. For mobile access to the Internet and VoIP services, which we refer to collectively as our airtime services, we offer a family of hybrid mobile satellite antenna products and communication services using global VSAT service, 5G/LTE cellular service, and shore-based Wi-Fi, which are marketed under the TracNet hybrid terminal and KVH ONE hybrid network brands, respectively. In addition, we actively market and sell a 37 cm VSAT-only TracPhone V30 antenna and support our legacy family of other VSAT-only terminals marketed under the TracPhone brand and using our global HTS network. The network infrastructure that we have developed to support our airtime services also supports the delivery of other value-added services, such as our KVH Link content service, with country-specific news, entertainment, music, and other crew welfare content delivered using our IP-MobileCast multicast delivery service. Our mobile satellite antenna products use sophisticated robotics, stabilization, and control software, sensing technologies, transceiver integration, and advanced antenna designs to automatically search for, identify, and point directly at the optimal television and communications satellite while the vessel or vehicle is in motion. Our antennas use digital inertial measurement units, gyroscopes, and inclinometers to measure the movement of an antenna platform in relation to the earth in three different axes. Microprocessors and our proprietary stabilization and control software use that data to compute the antenna movement necessary for the antenna’s motors to point the antenna properly and maintain contact with the satellite. If an obstruction temporarily blocks the satellite signal, our products either automatically switch to an available, alternate satellite beam or, if no other beam is available, continue to track the satellite’s location according to the movement of the antenna platform in order to carry out automatic, rapid reacquisition of the signal when a direct line of sight to the satellite is restored. Our certified support network offers our TracVision, TracNet, and TracPhone customers an international network of skilled technical dealers and support centers in many locations where our customers are likely to travel or conduct business. We have selected technical dealers based on their technical expertise, professionalism, and commitment to quality, and regularly provide them with extensive training in the sale, installation, and support of our products. Maritime Products In the marine market, we offer a range of mobile satellite TV and communications products. Satellite Internet and Phone. Our TracNet hybrid terminals and KVH ONE hybrid network offer an end-to-end, multichannel connectivity solution. Every TracNet terminal includes an integrated Ku-band VSAT antenna, high-efficiency 5G/LTE cellular antenna, and high-powered Wi-Fi bridge for connections to shore-based Wi-Fi channels. TracNet systems offer intelligent hybrid channel switching based on factors such as service availability, costs, and the quality of data transfer. In addition, TracNet systems also offer the option to add two additional third-party services and their companion terminals to serve as alternate primary or backup services. In addition, we continue to service and support our legacy TracPhone VSAT-only terminals. All of these products and services provide an end-to-end solution for offshore mobile connectivity to commercial, leisure, and government customers seeking an integrated hardware and service solution for mobile communications and seamless region-to-region roaming. We design and manufacture the TracNet and TracPhone terminals, acquire bandwidth through third-party providers such as Intelsat, manage our network operations, and provide 24/7/365 after-sale support. Because we manufacture the onboard hardware, we can integrate the full rack of discrete belowdecks equipment typically used on traditional VSAT systems into a single, streamlined unit that is significantly easier to deploy than competing VSAT solutions. 4 Table of Contents In July 2022, we introduced our TracNet H-series terminals with three options: the 37 cm TracNet H30, the 60 cm TracNet H60, and the 1 meter TracNet H90. These systems all offer multi-channel hybrid connectivity, KVH’s global SIM card, and the option to use customer-supplied SIMs for local cellular service. In addition, each antenna contains the modem in the dome for higher efficiency and reduced signal loss, along with single-cable installation. VSAT data speeds offered by the TracNet systems vary by antenna diameter: TracNet H30 offers maximum speeds of 6/2 Mbps (down/up), TracNet H60 offers maximum speeds of 10/3 Mbps (down/up), and the TracNet H90 offers maximum speeds of 20/3 Mbps (down/up). These sizes and speeds ensure that we offer a suite of products and services to support a wide range of vessels from leisure craft as small as 40 feet long and small fishing vessels to superyachts and large commercial vessels. In addition to the TracNet systems, we also continue to offer our TracPhone V30 marine VSAT antenna, which was introduced in March 2021. The TracPhone V30 combines the small 37 cm antenna size, easy installation, and fast data speed to make Internet connectivity, content streaming, and social media use possible on sailboats, center console boats, and recreational boats. In addition, the TracPhone V30 is well-suited to commercial vessels that don’t voyage globally, including fishing boats, tugboats, and offshore service vessels. For leisure and commercial vessels, the TracPhone V30 offers the advantages of advanced satcom technology as a replacement for legacy L-band systems that typically provide data speeds up to 432 Kbps. LTE Broadband. In June 2018, we introduced the TracPhone LTE-1, which is a high-gain dual antenna array, modem, GPS, and Wi-Fi router inside a 34 cm diameter dome. The TracPhone LTE-1 is equipped with a U.S-only SIM card that provides Internet access in U.S. waters as far as 20 miles or more (32 kilometers or more) offshore. In June 2021, we introduced the LTE-1 Global marine communications system, which is equipped with a global SIM card that supports cellular data service in more than 150 countries with Internet access as far as 20 miles or more (32 kilometers or more) offshore. The system utilizes LTE Advanced cellular network technology, which is faster than regular 4G LTE. Other Marine Solutions. For our legacy TracPhone systems, we offer CommBox, a ship-to-shore network management product that comprises shipboard hardware, a KVH-hosted or privately-owned shore-based hub, and a suite of software applications. Our CommBox offerings are generally integrated into the majority of our VSAT product offerings. We do not generate significant revenue from sales of standalone CommBox hardware. We also offer Iridium OpenPort hardware and service to be used in conjunction with our VSAT service. Iridium OpenPort service provides data rates up to 128 kilobits per second (Kbps) and covers the entire world, including the polar regions. We offer the Iridium hardware and service along with our own hybrid and VSAT solutions with the integrated CommBox functionality, which will switch over to the Iridium service if KVH’s VSAT, 5G/LTE, or shore Wi-Fi services are not available. Some of our customers add the Iridium service to expand the geographic coverage of the system or as a backup service. In September 2019, we began offering Iridium Certus, a next-generation L-band solution providing pole-to-pole global coverage. We currently offer three terminals compatible with Iridium Certus service – the Thales VesseLINK 200 (data speeds as fast as 176/176 Kbps down/up), the VesseLINK 700 (data speeds as fast as 704/352 Kbps down/up), and the Cobham Sailor 4300 (data speeds as fast as 704/176 Kbps down/up), which is only available to AgilePlans subscribers (described below). Optional routing enables onboard data to switch between our KVH ONE hybrid network services and Iridium Certus. In addition to our TracNet hybrid and TracPhone VSAT-only products and associated airtime services service, we also offer a family of Inmarsat-compatible TracPhone products that provide in-motion access to global satellite communications. These products rely on services offered by Inmarsat, a satellite service provider that supports links for phone, fax, and data communications as fast as 432 Kbps. The TracPhone FB250, FB500, and FleetOne antennas use the Inmarsat FleetBroadband service to offer VoIP and Internet service. The TracPhone FB250, FB500 and FleetOne products are manufactured by Cobham and distributed on an original equipment manufacturer basis by us in North America under our TracPhone brand and distributed in other markets on a non-exclusive basis. Unlike our VSAT airtime, where we control and sell the airtime, we purchase Inmarsat and Iridium airtime directly from these companies and resell it to our customers. In March 2023, we informed our distribution channel that we will be selling Starlink terminals as companion terminals for new TracNet installations as well as for existing TracNet and TracPhone systems. While Starlink offers a simple data pipe, we believe that a KVH/Starlink companion deployment offers a more robust solution thanks to our intelligent hybrid switching, KVH ONE global hybrid network, integrated services, enterprise-grade cybersecurity, and other features. Customers who 5 Table of Contents purchase a Starlink companion terminal will be required to also have an active KVH VSAT airtime plan to activate the hybrid switching license. Customers will be activating their Starlink airtime through and receiving technical support from Starlink, not from KVH. We anticipate shipping Starlink units at the end of March 2023 or early April 2023. We will be distributing these Starlink terminals on a non-exclusive basis and are not receiving any airtime commission. Maritime Satellite TV . Our TracVision TV-series satellite TV antennas are designed with the full spectrum of vessel sizes in mind, ranging from recreational vessels as small as 20 to 25 feet to large commercial vessels. The TV-series incorporate an Internet Protocol (IP)-enabled control unit to allow access to system information from any Wi-Fi device. Our family of marine TracVision products includes the 32 cm diameter TracVision TV1, 37 cm diameter TracVision TV3, 45 cm diameter TracVision TV5, 60 cm diameter TracVision TV6, 81 cm TracVision TV8, and 1 meter TracVision TV10. These products are compatible with Ku-band SDTV and HDTV programming as well as high-powered regional satellite TV services around the globe, based on the available signal strength and antenna size requirements. TracVision TV-series products also offer configuration, status, and service capabilities via the optional, free TracVision application for use on iOS and Android mobile devices. Our TracVision HD-series satellite TV antennas are designed to offer a high-definition TV experience comparable to that available to a home DIRECTV HDTV subscriber. Our TracVision UHD7, launched in October 2019, uses a 60 cm diameter satellite TV antenna to receive signals from two DIRECTV Ka-band satellites and one DIRECTV Ku-band satellite simultaneously. It also supports Ku-band DISH Network in the United States, select portions of the Caribbean, and DISH Mexico in Central America, along with Bell TV in Canada. It includes an IP-enabled antenna control unit and, as with the TracVision TV-series, the TracVision UHD7 offers configuration, status, and service capabilities via the optional, free TracVision application for use on iOS and Android mobile devices. The TracVision UHD7 is the successor to our original award-winning TracVision HD7, which we believe was the first marine antenna to offer this combination tri-satellite reception capabilities. Our TracVision HD11 offers a worldwide satellite TV capability through the use of a 1-meter diameter antenna and a global low noise block (LNB) designed for use with the majority of direct-to-home satellite TV services. As a result, it is able to receive all Ku-band and DIRECTV Ka-band satellite television signals without changing hardware elements. The Ku-band also works with modern satellite television services currently available throughout the world. The Ka-band receives DIRECTV HDTV. Like the TracVision UHD7, the TracVision HD11 features an optional application for iOS mobile devices to provide easy control of the system. Land Mobile Products We design, manufacture, and sell a range of TracVision satellite TV antenna systems for use on a broad array of vehicles, including recreational vehicles (RV), buses, conversion vans, and automobiles. In the RV and bus markets, we offer Ku-band TracVision satellite TV products, intended for both stationary and in-motion use. Our TracVision R1 delivers standard-definition DIRECTV and high-definition DISH network service through a small 32 cm diameter dome. Our TracVision A9 uses hybrid phased-array antenna technology to provide in-motion reception of satellite TV programming in the continental United States using either the standard-definition DIRECTV or high-definition DISH Network services. The TracVision A9 stands approximately five inches high and mounts either to a vehicle’s roof rack or directly to the vehicle’s roof, making it practical for use aboard minivans, SUVs and other passenger vehicles. The TracVision A9 includes a mobile satellite television antenna and an IP-enabled TV hub for easy system configuration and control via Wi-Fi devices, such as an Apple iPhone or iPad. The TracVision A9 is also suitable for tall motor coaches and buses. Airtime Services In conjunction with our mobile satellite antenna hardware and software, we provide airtime plans that enable customers to obtain Internet and VoIP services. We offer a variety of rate plans that are flexible to meet customer needs. The key features of KVH’s airtime services are a choice of high-speed and unlimited use airtime plans, a network management portal, and a comprehensive global customer support program. Our high-speed plans offer simple, usage-based monthly data bundles. When the high-speed data bundle is consumed, subscribers have the option to maintain high data speed at all times with low per MB overage rates or to shift to a slower unlimited use data speed for the remainder of the month. Our unlimited use data plans offer plans based on maximum upload and download speeds. All TracNet and TracPhone 60 cm and 1 meter antennas support simultaneous high-speed and unlimited use plans for optimal flexibility while all 37 cm terminals offer a single high-speed data channel. Our customer portal, myKVH, is a secure site that offers KVH customers easy access to technical support, product warranty and user documentation, billing, and our VSAT Manager and next-generation KVH Manager system and network tools. Available tools and reports include, among other features, terminal status, real-time data reporting and the ability to 6 Table of Contents manage data access by application category, configure the KVH terminal, optimize performance with Tracking Avoidance Zones, set data usage alerts and get real-time vessel tracking reports with up to one year of historical data. AgilePlans, one of our options for commercial maritime customers, offers an all-inclusive Connectivity as a Service, or CaaS, usage-based pricing model. Under this all-in-one CaaS model, we charge subscribers a single monthly fee in exchange for which we provide either TracNet or TracPhone satellite communication hardware, subsidized shipping and installation, maintenance and support, airtime and VoIP services, a service management portal and certain basic content services with no minimum commitment and no long-term contract required. We offer AgilePlans customers a variety of airtime data plans with varying data allotments and fixed data usage levels with our exclusive dual-channel configuration with dual channel airtime plans delivering both a high-speed channel and an unlimited use data channel. Under our CaaS model, we retain ownership of the hardware and do not sell it to subscribers, who must return it to us if they terminate our service. We expect that, as customers subscribe to our AgilePlans service, our revenues from product sales will continue to decline, and our provision of this equipment to subscribers will continue to increase our capital expenditures, which over time will continue to increase our costs of service sales as we depreciate these assets. In October 2017, we launched our next-generation, advanced maritime broadband network with Intelsat. The HTS high-speed network incorporates Intelsat Epic satellite services and the IntelsatOne Flex platform, a global managed service designed to optimize bandwidth allocations and provide flexible coverage where it is needed. Our global HTS network also benefits from Asian satellite capacity provided by SKY Perfect JSAT. Overall, our global HTS network currently uses a combination of 159 Ku-band transponders (5 of which we directly contract for) on 22 satellites to provide Ku-band coverage throughout the northern and southern hemispheres. Of the 22 satellites, 3 are considered high-throughput satellites that provide coverage via overlapping high-powered spot beams. Of the 159 Ku-band transponders, 136 are on high-throughput satellites. During the first quarter of 2018, we entered into a five-year capital lease for three satellite hubs for the HTS network. During the first quarter of 2021, the terms of this lease were adjusted and we discontinued use of two satellite hubs in exchange for additional satellite service capacity. In the first quarter of 2022, we expanded our satellite connectivity services that will allow vessels to use KVH connectivity while operating in Indian territorial waters. In addition, KVH now offers satellite connectivity services to Indian-flagged vessels. It is our long-term plan to continue to maintain and enhance our global HTS network. On December 31, 2021, we closed down our legacy mini-VSAT Broadband network, which had used a combination of 20 Ku-band transponders on 15 satellites to provide Ku-band coverage throughout the northern hemisphere and around the continents in the southern hemisphere. The majority of our existing customers on the legacy network were migrated to the new global HTS network. Content Services We offer a variety of value-added services to our maritime customers as well as news content to our hotel customers. The vast majority of these value-added services are subscription-based. Our KVH Media Group, which is based in the United Kingdom, distributes commercially licensed entertainment, including news, sports, and movies to commercial customers in the maritime and hotel markets, along with supplemental value-added services. Sales from KVH Media Group are included as part of content service sales. Our "news from home" digital newspaper service includes more than 100 daily newspapers in more than 20 languages that at the end of 2022 was delivered to more than 6,000 commercial ships, hotels, and cruise ships. The digital content can be printed onboard or viewed on a tablet, smartphone, or laptop. For movie and television content, we are an approved distributor of licensed content for certain Hollywood, Bollywood, and independent studios worldwide. We offer a content subscription service called KVH Link, delivered by IP-MobileCast wherein content and data files are transmitted using multicast technology across our global satellite networks to every vessel that has an active, compatible TracPhone V-series terminal. This delivery mechanism reduces the amount of bandwidth required to transmit large files to a large population of customers. Before multicasting, large data files were generally transmitted across satellite networks “on demand” or unicast, which consumes significant bandwidth. The content is either stored on the terminal itself or on a KVH-supplied media server, which is required for digital rights managed content such as movies. Copyright law requires permission from the rights holder for exhibitions of copyrighted film and television. Historically, studios have granted KVH Media Group permission to license non-theatrical exhibitions aboard ships. While traditionally we licensed this content to commercial maritime customers primarily through the distribution of DVDs, we have now also automated the transmission of this type of entertainment via KVH Link. In June 2020, we also launched our standalone digital service, linkHUB, as an alternative to DVDs. The linkHUB unit allows for a digital rights managed entertainment service without the need for a TracPhone V series or V-HTS series terminal. Customers that subscribe to one of our entertainment packages generally receive a variety of movie and television content that is cached locally onboard. We transmit local "news from home" and international news segments in a variety of languages on a daily, weekly or monthly basis, a library of movies plus daily sports, news clips and special programming such 7 Table of Contents as the highlights of sporting events. Value-added Services We also recognize that our customers desire more than just a simple pipe for data and connectivity. Our TracNet and TracPhone systems are designed to support an expanding suite of value-added services that both increase the capabilities of our customers' systems as well as generate additional recurring revenue for KVH. Among these value-added services are a new enterprise-grade Managed Firewall powered by industry leader Fortinet, a cloud email system for commercial fleets and seafarers, real-time vessel tracking, and our KVH Link content service. Sale of KVH Media Group Entertainment Limited 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 $2.4 million. This transaction did not meet the criteria for reporting as discontinued operations under Financial Accounting Standards Board Accounting Standards Codification (ASC) 205-20. We recorded a gain on the sale of approximately $0.7 million, which is recorded in other income, net in the accompanying consolidated statements of operations. See Note 9 to our accompanying audited consolidated 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. Sale of Inertial Navigation Business - Discontinued Operations 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 finalized working capital adjustment, which resulted in a $0.1 million payment to EMCORE, was recorded in the fourth quarter of 2022. 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 six months following the sale with two extension options of three months each. The fee is comprised of both fixed monthly fees of approximately $0.1 million as well as variable amounts for certain additional services with escalation increases on the fixed and variable rates for each extension option. We do not have any continuing involvement in these operations other than short-term transition services, which are being recorded as an offset to general and administrative expenses in continuing operations. We determined that the sale met the requirements for reporting as discontinued operations in accordance with ASC 205-20. Please see Notes 1 and 16 of our accompanying audited consolidated financial statements for further information. Sales, Marketing and Support Our sales, marketing, and support efforts target markets that are substantial and complex, and require, in many cases, networks of intermediaries, such as dealers, distributors, airtime service providers, and manufacturers’ representatives, to reach our end-user customers. These sales channels vary and evolve from time to time, but currently include targeted efforts to reach the commercial and leisure maritime markets; the RV, high-end automotive, and bus markets; and the commercial, industrial, and government markets. As our business evolves, we may pursue additional sales channels, including direct sales, in various markets. We believe our brands are well-known and well-respected by customers within their respective niches. These brands include: • TracVision® - satellite television systems for vessels and vehicles • TracNet™ – integrated hybrid two-way communication terminals with VSAT, 5G/LTE, and shore-based Wi-Fi • KVH ONE™ - global hybrid communication network supporting Internet, VoIP, content delivery, and more • TracPhone® - two-way VSAT-only satellite communications systems • KVH Link – crew wellbeing content subscription service with delivery by IP-Mobilecast • NEWSlink™ - maritime news delivery service through a variety of means • SPORTSlink TM - sporting content delivered through a variety of means • TVlink TM - television programming delivered through a variety of means • MOVIElink TM - movie distribution through a variety of means • MUSIClink™ - music and karaoke delivered through a v • CommBox™ - data management software for maritime communications • KVH OneCare™ - global services and support for TracNet and TracPhone systems 8 Table of Contents • AgilePlans® - Connectivity as a Service Program • KVH Elite TM – unlimited HD-quality streaming service for leisure yachts We sell our products directly and through an international network of independent retailers, chain stores, distributors, and service providers as well as to manufacturers of vessels, maritime equipment, and vehicles. We sell news, sports, and entertainment media content directly through our KVH Media Group, headquartered in Leeds, England. Our European headquarters, which is located in Denmark, coordinates our sales, marketing, and support efforts for our products in Europe, the Middle East, and Africa. Our Asia-Pacific headquarters are managed through our office in Singapore. 9 Table of Contents Intellectual Property We currently hold a collection of intellectual property rights relating to various aspects of our hardware products, software and services. We believe that our ability to compete effectively depends to a significant extent on our ability to protect these intellectual property rights and our proprietary information. We rely primarily on patent, copyright and trade secret laws, trademarks, service marks, trade dress, confidentiality procedures, and licensing arrangements to protect our intellectual property rights in the U.S. and a select number of other countries where we determine that such protection is beneficial. When appropriate, we seek to file patent applications to protect innovations arising from our research, development and design activities. As of December 31, 2022, our patent portfolio included approximately 12 U.S. and foreign issued patents, including utility patents, design patents and others and one pending U.S. patent application. We also register our trademarks in the United States and other key international markets where we do business. Our patents will expire at various dates between January 2024 and May 2037. We enter into confidentiality agreements with our consultants, key employees, and sales representatives and maintain controls over access to and distribution of our technology, software, and other proprietary information. From time to time, we have faced claims by third parties that our products or technologies infringe their patents or other intellectual property rights. We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. 10 Table of Contents Manufacturing Manufacturing operations for our products consist of light manufacture, final assembly and testing. We manufacture, warehouse and distribute our products at our facilities in Middletown, Rhode Island. Our manufacturing processes are controlled by an ISO 9001:2015-certified quality standards program. Raw Materials, Components and Services We purchase raw materials and most of the components used in our various manufacturing processes, such as printed circuit boards, injection-molded plastic parts, machined metal components, connectors and housings. In addition, we purchase certain services, predominantly networking and mobile broadband services, to support the delivery of our solutions. The materials, molds and dies, subassemblies and components purchased from other manufacturers, and other materials and supplies used in our manufacturing processes have generally been available from a variety of sources. We believe there are a number of acceptable vendors for the components we purchase. We regularly evaluate both domestic and foreign suppliers for quality, dependability and cost effectiveness. From time to time the cost and availability of materials and services is affected by the demands of other industries, as well as other factors. Whenever practical, we seek to establish multiple sources for the purchase of raw materials, components and services to achieve competitive pricing, maintain flexibility, reduce tariff exposure, and protect against supply disruption. When possible, we employ a company-wide procurement strategy designed to reduce the purchase price of materials, purchased components and services. For reasons of quality assurance, scarcity or cost effectiveness, certain components and raw materials used in the manufacturing of our products, as well as certain services utilized in the delivery of our solutions, are available only from a limited number of suppliers or from a sole source supplier. We work with our suppliers to develop contingency plans intended to assure continuity of supply while maintaining high quality and reliability, and in some cases, we have established long-term supply contracts with our suppliers. Due to the nature of certain raw materials, purchased components and services, we may not be able to quickly establish additional or replacement sources for certain components, materials or services. In the event that we are unable to obtain sufficient quantities of raw materials or components or unable to obtain sufficient access to the services needed to deliver our solutions on commercially reasonable terms or in a timely manner, our ability to manufacture and deliver our products and services on a timely and cost-competitive basis may be compromised, which may have a material adverse effect on our business, financial condition and results of operations. In 2022, we continued to experience delays in the availability and delivery of certain raw material components, which impacted our manufacturing and resulted in shipping delays in getting products out to our customers. We also experienced increases in raw material costs, which we expect to continue into 2023. We are continuing to monitor global developments and are prepared to implement any actions that we determine to be necessary to sustain our business, including expanding our sources of supply and modifying product designs to accommodate product availability. Competition We encounter significant competition in the markets we serve, and we expect this competition to intensify in the future. Many of our primary competitors are well-established companies and some have substantially greater financial, managerial, technical, marketing, operational, and other resources than we do. In the marine market for satellite TV equipment, we compete primarily with Intellian, Cobham SATCOM and Raymarine (Intellian made). In the marine market for voice, fax, data, and Internet communications equipment, we compete primarily with Intellian and Cobham SATCOM. In the marine market for high-speed Internet, voice, fax, and data services, we compete primarily with Inmarsat, Marlink, Speedcast, Viasat and Network Innovations. Additionally, we are starting to face competition from new low earth orbit (LEO) networks such as SpaceX's Starlink and OneWeb. We also face competition from providers of low-speed data services, which include Inmarsat and Iridium Satellite LLC. In the market for land mobile satellite TV equipment, we compete primarily with King Controls and Winegard Company. In the markets for media content, we compete primarily with Swank Motion Pictures, Baze Technology, and 11 Table of Contents Newspapersdirect Inc. In the markets for mobile satellite connectivity products, the principal competitive factors are product size, features, design, performance, reliability, and price. In the markets for airtime services, the principal competitive factors are geographic coverage, data speed, value-added services, and price. In the markets for media content, the principal competitive factors are license rights, distribution, and price. Although we believe that we compete favorably with respect to these factors, there can be no assurance that we will continue to do so. We encounter substantial competition in most of our product lines, although no single competitor competes with us across all product lines. Research and Development Focused, efficient investments in research and development are critical to our future growth and competitive position in the marketplace. Our research and development efforts are directly related to timely development of new and enhanced products and services that are central to our core business strategy and our ability to drive profitable, sustainable growth. The industries in which we compete are subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new product and service introductions and enhancements. As a result, our success depends in part upon our ability, on a cost-effective and timely basis, to continue to enhance our existing products and to develop and introduce new products and services that improve performance and meet customers’ operational and cost requirements. Our current research and development efforts include projects to achieve additional cost reductions in our products and the development of new products and services for our existing marine and land mobile communications markets. For example: • In March 2021, we released the TracPhone V30 VSAT Broadband antenna featuring single-cable, DC-powered design, integrated modem in the dome for higher signal strength and efficiency, and compact below decks unit with built-in Wi-Fi. • In July 2022, we introduced the TracNet H30, H60 and H90 in our H-Series product line. • In October 2022, we introduced DC-powered versions of the TracNet H30 and H60 in our H-Series product line. We strive to be the first company to bring new products to market in order to maintain our market leadership position, and we use our own funds when necessary to accelerate new product development efforts. Government Regulation Our manufacturing operations are subject to various laws governing the protection of the environment and our employees. These laws and regulations are subject to change, and any such change may require us to improve our technologies, incur expenditures, or both, in order to comply with such laws and regulations. We are also subject to the laws and regulations of the U.S. and foreign jurisdictions in which we offer and sell our satellite communication products and services, including those of the European Union, Brazil, Norway, Singapore, and Japan. M any of the countries where our customers use our products and services have licensing and regulatory requirements for the importation and use of satellite communications and reception equipment, including the use of such equipment in territorial waters, the transmission of satellite signals on certain radio frequencies, the transmission of VoIP services using such equipment, and, in some cases, the reception of certain video programming services. In the U.S., many of these matters are regulated by the Federal Communications Commission. As a result of our international operations, we are subject to a number of additional legal requirements, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the customs, export, trade sanctions and anti-boycott laws of the United States, including those administered by the U.S. Customs and Border Protection, the Bureau of Industry and Security, the Department of Commerce, the Department of State, and the Office of Foreign Assets Control of the Treasury Department, as well as those of other nations in which we do business. Our operations are also subject to various domestic and international privacy laws, including the European Union’s General Data Protection Regulation. These laws and regulations, as well as the interpretation and application of these laws and regulations, are subject to change, and any such change may affect our ability to offer and sell existing and planned satellite communications products and services. 12 Table of Contents For more information, see “Risk Factors – Risks related to government regulation.” KVH Team Demographics KVH team members are essential to the success of KVH. We had 397 team members as of December 31, 2022, including full-time employees, part-time employees, and long-term contractors. The figures in this section provide information as of December 31, 2022. KVH Team Member Headcount Category # Full-Time Employees 351 Part-Time Employees 34 Long-term Contractors 12 Total 397 Our team members are directly responsible for the creation, development, manufacture, marketing, sale, repair and support of our products and services. Because we sell and support our products globally, we have a globally distributed workforce to manufacture products in the U.S. and support our customers in the U.S. and internationally: KVH Team Member Headcount Country # Brazil 2 Cyprus 1 Denmark 15 Germany 1 Greece 2 Hong Kong 2 India 28 Italy 1 Japan 1 Netherlands 1 Norway 5 Philippines 66 Poland 1 Singapore 13 South Africa 1 United Kingdom 65 United States 192 Total 397 Approximately 128 team members, or 32%, are directly involved in supporting our technology in positions such as engineers, technicians, or software developers. 13 Table of Contents Employee Engagement We believe we have strong relationships with our workforce. In 2022, our global turnover rate was 18%, including voluntary and involuntary separations. Among our 65 key executive leaders and most critical individual technology contributors, our turnover rate was 12% in 2022. These turnover rates exclude the reductions related to the sales of our inertial navigation business and our media subsidiary, and also exclude the approximately 10% reduction in our workforce in connection with our March 2022 restructuring. The average length of employee service is 9.5 years. The continuity of our employee base is important to the success of our business, as our employees have deep knowledge of our products and are critical to the services that we provide to our customers. KVH surveys team member engagement at least annually. The survey standardizes how KVH measures engagement across our organization and affords us an opportunity to address areas for improvement. By listening to employees, we gain a better understanding of what our employees need in order to succeed, enabling us to develop programs that create a stronger and more committed workforce. Inclusion and Diversity KVH actively cultivates the diverse talents of our team and strives to recruit a diverse and inclusive workforce everywhere we operate. We believe this enables better business decisions, enhanced product development, and superior customer service. Our diversity and inclusion principles are also reflected in our employee training, in particular with respect to our policies against harassment in the workplace. Competitive Pay and Benefits KVH’s compensation programs are designed to align the compensation of our employees with KVH’s performance and provide incentives to attract, retain and motivate employees to achieve superior results. The structure of our compensation programs balances incentive earnings for both short-term and long-term performance. Specifically: • We provide employee wages that we believe are competitive and consistent with employee positions, skill levels, experience, knowledge, and geographic location. • We review compensation and benefits surveys to obtain relevant industry data in order to benchmark our practices against those of industry peers. • We seek to align the interests of our executives with those of our shareholders by paying a significant portion of our executives’ total compensation in the form of equity awards, which increase in value as the price of our common stock increases. • Annual salary increases and incentive compensation include adjustments based on merit, which is communicated to employees through our annual review process and upon internal transfers and/or promotions. • All employees are eligible for health insurance, paid and unpaid leaves, a retirement plan and life and disability/accident coverage, subject to applicable regulations. Health and Safety We are committed to protecting the health and safety of our employees and others who enter any of our facilities, wherever located. In 2022, KVH’s Occupational Safety and Health Administration (OSHA) total recordable incident rate was 0.73% which is favorable compared to the 2022 OSHA national average of 2.9. In 2020, we introduced a range of new safety protocols in our facilities in an effort to protect our employees and support appropriate health and safety protocols in response to COVID-19 and the global pandemic. These safety protocols have since been relaxed to align with federal and state mandates, but will return if the COVID-19 pandemic worsens. We are committed to continued improvements to our safety, health, and wellness programs to meet our employees’ needs, which we believe is critical to attract and retain talent. We believe that creating a safe and supportive workplace is vital to our success. 14 Table of Contents KVH Team Member Recruitment We work diligently to attract the best available talent from a diverse range of sources to meet the current and future demands of our business. We have established relationships with major universities, professional associations, and industry groups to proactively attract talent. In 2022, we hired 17 professional level team members. Working Capital and Seasonality We hold significant inventory to support our customers and provide prompt delivery of finished goods. As a consequence, we expend substantial working capital in advance of receipt of customer orders. Our leisure marine 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. 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.