KVH INDUSTRIES INC \DE\ 10-K

ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022, the end of the period covered by this annual report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2022. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is the process designed by and under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2022 and concluded that it was effective. Our independent registered public accounting firm, Grant Thornton LLP, has issued a report regarding the effectiveness of our internal control over financial reporting as of December 31, 2022, and that report is included in Item 9A in this annual report. 34 Table of Contents Evaluation of Changes in Internal Control over Financial Reporting Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated changes in our internal control over financial reporting that occurred during the fourth quarter of 2022. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Important Considerations The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. 35 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders KVH Industries, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of KVH Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated March 16, 2023 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Boston, Massachusetts March 16, 2023 36 Table of Contents ITEM 9B. Other Information None. ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III We have omitted the information required in Part III of this annual report because we intend to include that information in our definitive proxy statement for our 2023 annual meeting of stockholders, which we expect to file before 120 days after the end of fiscal 2022. We incorporate the information required in Part III of this annual report by reference to our 2023 proxy statement. ITEM 10. Directors, Executive Officers and Corporate Governance Except as set forth below, the information required by this item is incorporated by reference to our 2023 proxy statement. Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our directors, executive officers and employees. Our Code of Business Conduct and Ethics can be found on our website, which is located at www.kvh.com. We intend to make all required disclosures concerning any amendments to or waivers from, our Code of Business Conduct and Ethics on our website. Any person may request a copy of the Code of Business Conduct and Ethics, at no cost, by writing to us at the following address: KVH Industries, Inc., 50 Enterprise Center, Middletown, Rhode Island, 02842, Attention: Investor Relations. ITEM 11. Executive Compensation The information required by this item is incorporated by reference to our 2023 proxy statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to our 2023 proxy statement. ITEM 13. Certain Relationships and Related Transactions and Director Independence The information required by this item is incorporated by reference to our 2023 proxy statement. ITEM 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to our 2023 proxy statement. 37 Table of Contents PART IV ITEM 15. Exhibits and Financial Statement Schedules Page (a) 1. Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 42 Consolidated Balance Sheets as of December 31, 202 2 and 202 1 44 Consolidated Statements of Operations for the years ended December 31, 202 2 and 202 1 45 Consolidated Statements of Comprehensive Income ( Loss ) for the years ended December 31, 202 2 and 20 2 1 46 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 202 2 and 202 1 47 Consolidated Statements of Cash Flows for the years ended December 31, 202 2 and 202 1 48 Notes to Consolidated Financial Statements 49 (a) 2. Financial Statement Schedules None. 3. Exhibits Exhibit No. Description Filed with this Form 10-K Incorporated by Reference Form Filing Date Exhibit No. 2.1 Asset Purchase Agreement dated as of August 9, 2022 by and between KVH Industries, Inc., EMCORE Corporation and Delta Acquisition Sub, Inc. 8-K August 10, 2022 2.1 3.1 Amended and Restated Certificate of Incorporation, as amended 10-Q August 6, 2010 3.1 3.2 Certificate of Designations of Series A Junior Participating Cumulative Preferred Stock of KVH Industries, Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock 8-A August 19, 2022 3.1 3 .3 Amended and Restated Bylaws 10-Q November 1, 2017 3.2 4.1 Specimen certificate for the common stock 10-K March 2, 2018 4.1 4.2 Stockholder Rights Agreement, dated as of August 18, 2022, between KVH Industries, Inc. and Computershare Trusts Company, N.A., as Rights Agent 8-K August 19, 2022 4.1 4.3 Amendment No. 1 to Stockholder Rights Agreement, dated as of February 3, 2023, by and between KVH Industries, Inc. and Computershare Trust Company, N.A. 8-K February 3, 2023 4.1 4 .4 Description of Capital Stock X *10.1 Amended and Restated 1996 Employee Stock Purchase Plan DEF 14A April 25, 2016 App. B *10.2 KVH Industries, Inc. Amended and Restated 2016 Equity and Incentive Plan, as amended DEF 14A May 2, 2022 App. A *10.3 Form of Incentive Stock Option Agreement granted under the 2016 Equity and Incentive Plan 10-K March 9, 2017 10.5 *10.4 Form of Non-Statutory Stock Option Agreement granted under the 2016 Equity and Incentive Plan 10-K March 9, 2017 10.6 *10.5 Form of Restricted Stock Agreement granted under the 2016 Equity and Incentive Plan 10-K March 9, 2017 10.7 *10.6 Policy Regarding Automatic Grants to Non-Employee Directors 10-Q May 6, 2009 10.23 38 Table of Contents Exhibit No. Description Filed with this Form 10-K Incorporated by Reference Form Filing Date Exhibit No. 10.7 Amended and Restated Credit Agreement dated as of October 30, 2018 among KVH Industries, Inc., Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer, and the Lenders party hereto 10-Q October 31, 2018 10.1 10.8 Amended and Restated Security Agreement dated as of October 30, 2018 between KVH Industries, Inc. and Bank of America, N.A., as Administrative Agent 10-Q October 31, 2018 10.2 10.9 Amended and Restated Pledge Agreement dated as of October 30, 2018 between KVH Industries, Inc. and Bank of America, N.A., as Administrative Agent with respect to KVH Industries A/S 10-Q October 31, 2018 10.3 10.10 Amended and Restated Pledge Agreement dated as of October 30, 2018 between KVH Industries, Inc. and Bank of America, N.A., as Administrative Agent with respect to KVH Industries U.K. Limited 10-Q October 31, 2018 10.4 10.11 Consent dated as of May 13, 2019 among KVH Industries, Inc., as Borrower, Bank of America, N.A., as Lender and Administrative Agent, and The Washington Trust Company, as Lender, under the Amended and Restated Credit Agreement dated as of October 30, 2018 among such parties 8-K May 16, 2019 10.4 10.12 First Amendment to Amended and Restated Credit Agreement as of July 30, 2020 by and among KVH Industries, Inc., Bank of America, N.A., and The Washington Trust Company 10-Q July 31, 2020 10.3 10.13 Second Amendment to Amended and Restated Credit Agreement dated as of October 29, 2021 by and among KVH Industries, Inc., and Bank of America, N.A. 10-Q November 4, 2021 10.1 10.14 Cooperation Agreement, dated as of April 8, 2020, by and among KVH Industries, Inc., Vintage Capital Management, LLC, and Kahn Capital Management, LLC 8-K April 9, 2020 10.1 10.15 Promissory Note dated as of May 1, 2020 and executed on May 3, 2020 by KVH Industries, Inc., in favor of Bank of America, N.A. 8-K May 6, 2020 10.1 * 10.16 Separation and Consulting Agreement dated as of March 6, 2022 between KVH Industries, Inc. and Martin Kits van Heyningen 10-Q May 10, 2022 10.1 * 10.17 Executive Employment Agreement dated as of May 2, 2022 between KVH Industries, Inc. and Brent C. Bruun 10-Q August 9, 2022 10.1 * 10.18 Amendment No. 1 dated as of October 11, 2022 to Executive Employment Agreement between KVH Industries, Inc. and Brent C. Bruun 10-Q December 6, 2022 10.8 * 10.19 Executive Employment Agreement dated as of May 2, 2022 between KVH Industries, Inc. and Roger A. Kuebel 10-Q August 9, 2022 10.2 *10.20 Executive Employment Agreement dated as of May 2, 2022 between KVH Industries, Inc. and Felise B. Feingold 10-Q August 9, 2022 10.3 * 10.21 Executive Employment Agreement dated as of May 9, 2022 between KVH Industries, Inc. and Robert J. Balog 10-Q August 9, 2022 10.4 39 Table of Contents 10.22 Cooperation Agreement, dated as of February 3, 2023, by and among KVH Industries, Inc., Black Diamond Capital Management, L.L.C., Stephen H. Deckoff and the Investor Group Designees (as defined therein) 8-K February 3, 2023 10.1 21.1 List of Subsidiaries X 23.1 Consent of Grant Thornton LLP X 31.1 Rule 13a-14(a)/15d-14(a) certification of principal executive officer X 31.2 Rule 13a-14(a)/15d-14(a) certification of principal financial officer X 32.1 Rule 1350 certification X 101.1 Interactive Data File regarding (a) our Consolidated Balance Sheets as of December 31, 2022 and 2021, (b) our Consolidated Statements of Operations for the years ended December 31, 2022 and 2021, (c) our Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022 and 2021, (d) our Consolidated Statements of Stockholders' Equity for the years ended December 31, 2022 and 2021, (e) our Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021, and (e) the Notes to such Consolidated Financial Statements X 104.1 Cover Page Interactive Data File (embedded within the Inline XBRL document) X * Management contract or compensatory plan. 40 Table of Contents ITEM 16. Form 10-K Summary None. SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KVH Industries, Inc. Date: March 16, 2023 By: / S / BRENT C. BRUUN Brent C. Bruun President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Name Title Date /S/ BRENT C. BRUUN President, Chief Executive Officer and Director (Principal Executive Officer) March 16, 2023 Brent C. Bruun /S/ ROGER A. KUEBEL Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 16, 2023 Roger A. Kuebel /S/ CATHY-ANN MARTINE-DOLECKI Chair of the Board of Directors March 16, 2023 Cathy-Ann Martine-Dolecki /S/ JAMES S. DODEZ Director March 16, 2023 James S. Dodez /S/ CIELO M. HERNANDEZ Director March 16, 2023 Cielo M. Hernandez /S/ DAVID B. KAGAN Director March 16, 2023 David B. Kagan /S/ DAVID M. TOLLEY Director March 16, 2023 David M. Tolley /S/ CHARLES R. TRIMBLE Director March 16, 2023 Charles R. Trimble 41 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders KVH Industries, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of KVH Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2023 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Recognition of satellite connectivity services revenue As described further in Note 1(e) to the Company’s financial statements, the Company's satellite connectivity services revenue is recognized monthly based primarily on contracted fixed-fee schedules as well as any overages for minutes or megabytes of traffic processed. We identified satellite connectivity services revenue as a critical audit matter. The principal considerations for our determination that satellite connectivity service revenue is a critical audit matter is the complexity of the processes used by management for recognizing revenue, given the diversity of data sources and the number of IT systems involved, including third party systems. Auditing this revenue stream requires a high degree of auditor subjectivity and effort in designing and performing procedures to evaluate the appropriateness of the recorded revenue amounts. Our audit procedures related to the recognition of satellite connectivity services revenue included the following, among others. • We tested the design and operating effectiveness of controls related to management’s review and validation of data from third parties used as an input in recorded revenue amounts, as well as the controls over review of appropriate revenue recognition for this revenue stream. 42 Table of Contents • We obtained the attestation report on the design and operating effectiveness of controls at the third-party billing service provider, and tested controls over management’s review of the attestation report, including identification of controls at the Company which are responsive to the complementary user entity controls identified in the report. We also tested the design and operating effectiveness of these complementary user entity controls. • We tested the design and operating effectiveness of IT general controls over the IT system used to process and record the invoices for this stream. • We selected a sample of invoices and evaluated those invoices for proper revenue recognition based on agreement to billing rates per the signed customer contract and usage data from third party service provider reports. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2014. Boston, Massachusetts March 16, 2023 43 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 21,056 $ 11,376 Marketable securities 55,680 13,147 Accounts receivable, net of allowance for doubtful accounts of $ 1,268 and $ 1,597 as of December 31, 2022 & December 31, 2021, respectively 27,427 27,766 Inventories, net 22,730 15,833 Prepaid expenses and other current assets 3,067 2,637 Current contract assets 1,243 1,230 Current assets held for sale — 15,841 Total current assets 131,203 87,830 Property and equipment, net 53,118 52,945 Intangible assets, net 404 1,287 Goodwill 5,308 6,570 Right of use assets 2,168 3,055 Other non-current assets 5,037 6,778 Non-current contract assets 3,033 3,104 Deferred income tax asset 259 56 Non-current assets held for sale — 7,169 Total assets $ 200,530 $ 168,794 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 20,449 $ 9,501 Accrued compensation and employee-related expenses 7,621 6,139 Accrued other 4,234 6,937 Accrued product warranty costs 1,287 1,084 Contract liabilities 3,108 3,778 Current operating lease liability 1,532 1,912 Liability for uncertain tax positions 637 592 Current liabilities held for sale — 3,939 Total current liabilities 38,868 33,882 Other long-term liabilities — 22 Long-term operating lease liability 636 1,224 Long-term contract liabilities 4,315 4,466 Deferred income tax liability 55 215 Non-current liabilities held for sale — 8 Total liabilities $ 43,874 $ 39,817 Commitments and contingencies (Notes 1, 5, 6, 14 and 15) Stockholders’ equity: Preferred stock, $ 0.01 par value. Authorized 1,000,000 shares; no ne issued — — Common stock, $ 0.01 par value. Authorized 30,000,000 shares, 20,631,152 and 20,342,695 shares issued at December 31, 2022 and December 31, 2021, respectively; and 19,198,458 and 18,910,001 shares outstanding at December 31, 2022 and December 31, 2021, respectively 206 203 Additional paid-in capital 160,475 156,199 Retained earnings (accumulated deficit) 11,936 ( 12,165 ) Accumulated other comprehensive loss ( 4,110 ) ( 3,409 ) 168,507 140,828 Less: treasury stock at cost, 1,432,694 shares as of December 31, 2022 and December 31, 2021 ( 11,851 ) ( 11,851 ) Total stockholders’ equity 156,656 128,977 Total liabilities and stockholders’ equity $ 200,530 $ 168,794 See accompanying Notes to Consolidated Financial Statements. 44 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2022 2021 Sales: Product $ 26,970 $ 30,012 Service 111,908 103,899 Net sales 138,878 133,911 Costs and expenses: Costs of product sales 25,184 23,951 Costs of service sales 61,094 64,137 Research and development 10,369 11,070 Sales, marketing and support 23,229 25,554 General and administrative 24,656 28,794 Total costs and expenses 144,532 153,506 Loss from operations ( 5,654 ) ( 19,595 ) Interest income 1,507 886 Interest expense 3 56 Other income, net 772 7,111 Loss from continuing operations before income tax expense ( 3,378 ) ( 11,654 ) Income tax expense (benefit) from continuing operations 546 ( 108 ) Net loss from continuing operations ( 3,924 ) ( 11,546 ) Income from discontinued operations, net of tax 28,025 1,783 Net Income (loss) $ 24,101 $ ( 9,763 ) Net loss from continuing operations per common share Basic $ ( 0.21 ) $ ( 0.63 ) Diluted $ ( 0.21 ) $ ( 0.63 ) Net income from discontinued operations per common share Basic $ 1.50 $ 0.10 Diluted $ 1.50 $ 0.10 Net income (loss) per common share Basic $ 1.29 $ ( 0.54 ) Diluted $ 1.29 $ ( 0.54 ) Weighted average number of shares outstanding: Basic 18,632 18,217 Diluted 18,632 18,217 See accompanying Notes to Consolidated Financial Statements. 45 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Year Ended December 31, 2022 2021 Net Income (loss) $ 24,101 $ ( 9,763 ) Other comprehensive loss, net of tax: Unrealized loss on available-for-sale securities ( 12 ) — Foreign currency translation adjustment ( 689 ) ( 177 ) Other comprehensive loss, net of tax (1) ( 701 ) ( 177 ) Total comprehensive income (loss) $ 23,400 $ ( 9,940 ) (1) Tax impact was nominal for all periods. See accompanying Notes to Consolidated Financial Statements. 46 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-in Capital (Accumulated Deficit) Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2020 19,863 $ 199 $ 149,170 $ ( 2,402 ) $ ( 3,232 ) ( 1,433 ) $ ( 11,851 ) $ 131,884 Net loss — — — ( 9,763 ) — — — ( 9,763 ) Other comprehensive loss — — — — ( 177 ) — — ( 177 ) Stock-based compensation — — 4,109 — — — — 4,109 Issuance of common stock under employee stock purchase plan 26 — 215 — — — — 215 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 454 4 2,705 — — — — 2,709 Balance at December 31, 2021 20,343 $ 203 $ 156,199 $ ( 12,165 ) $ ( 3,409 ) ( 1,433 ) $ ( 11,851 ) $ 128,977 Net income — — — 24,101 — — — 24,101 Other comprehensive loss — — — — ( 701 ) — — ( 701 ) Stock-based compensation — — 3,424 — — — — 3,424 Issuance of common stock under employee stock purchase plan 41 — 308 — — — — 308 Exercise of stock options and issuance of restricted stock awards, net of forfeitures 247 3 675 — — — — 678 Taxes for net share settlement of options — — ( 131 ) — — — — ( 131 ) Balance at December 31, 2022 20,631 $ 206 $ 160,475 $ 11,936 $ ( 4,110 ) ( 1,433 ) $ ( 11,851 ) $ 156,656 See accompanying Notes to Consolidated Financial Statements. 47 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities: Net income (loss) $ 24,101 $ ( 9,763 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts 221 530 Depreciation and amortization 14,030 14,601 Deferred income taxes ( 363 ) ( 186 ) Loss on disposals of fixed assets 471 494 Compensation expense related to stock-based awards and employee stock purchase plan 3,424 4,109 Unrealized currency translation gain ( 399 ) ( 112 ) Gain on sale of KVH Media Group Entertainment Limited ( 682 ) — Gain on sale of inertial navigation business ( 30,763 ) — PPP loan forgiveness — ( 6,979 ) Changes in operating assets and liabilities: Accounts receivable 506 ( 506 ) Inventories ( 8,493 ) 33 Prepaid expenses, other current assets, and current contract assets ( 1,096 ) 147 Other non-current assets and non-current contract assets 1,731 509 Accounts payable 11,364 ( 251 ) Contract liabilities and long-term contract liabilities ( 580 ) ( 665 ) Accrued compensation, product warranty and other ( 4,578 ) 945 Other long-term liabilities — 3 Net cash provided by operating activities $ 8,894 $ 2,909 Cash flows from investing activities: Capital expenditures ( 14,390 ) ( 18,740 ) Cash paid for acquisition of intangible assets ( 54 ) ( 62 ) Proceeds from sale of fixed assets — 100 Proceeds from the sale of KVH Media Group Entertainment Limited, net of cash sold 2,378 — Proceeds from the sale of inertial navigation business 55,000 — Purchases of marketable securities ( 55,723 ) ( 6 ) Maturities and sales of marketable securities 13,164 12,000 Net cash provided by (used in) investing activities $ 375 $ ( 6,708 ) Cash flows from financing activities: Proceeds from stock options exercised and employee stock purchase plan 972 2,939 Payment of finance lease ( 264 ) ( 294 ) Net cash provided by financing activities $ 708 $ 2,645 Effect of exchange rate changes on cash and cash equivalents ( 297 ) ( 48 ) Net increase (decrease) in cash and cash equivalents 9,680 ( 1,202 ) Cash and cash equivalents at beginning of period 11,376 12,578 Cash and cash equivalents at end of period $ 21,056 $ 11,376 Supplemental disclosure of cash flow information: Cash paid for income taxes, net of refunds $ 312 $ 419 Changes in accrued other and accounts payable related to property and equipment additions $ 49 $ 384 Right of use assets (ROU) assets arising from entering into new operating lease obligations $ 1,089 $ 407 See accompanying Notes to Consolidated Financial Statements. 48 KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 and 2021 (in thousands, except per share amounts) (1) Summary of Significant Accounting Policies (a) Description of Business KVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile connectivity products and services for the marine and land markets. KVH’s satellite-only and hybrid products enable marine customers to receive data, Voice over Internet Protocol (VoIP), 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. KVH sells its products through an extensive international network of dealers and distributors. KVH also sells and leases products to service providers and end users. KVH’s service sales represent primarily revenue earned from satellite Internet airtime services. KVH provides, for monthly fixed and per-usage fees, satellite connectivity encompassing broadband Internet and VoIP services, to its TracNet H-series and TracPhone V-series customers via KVH’s global high-throughput satellite (HTS) network. Cellular airtime service increasingly supplements KVH’s satellite-only airtime revenue following the July 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. AgilePlans, KVH’s connectivity as a service offering, is a monthly subscription model that provides global connectivity to commercial maritime customers. The subscription includes the choice of satellite-only and hybrid terminals, airtime data service, VoIP, daily news, subsidized shipping and installation, and global support for a monthly fee with no minimum contract commitment. KVH offers AgilePlans subscribers a variety of airtime data plans with varying data speeds and fixed data usage levels with per megabyte overage charges. These airtime plans are similar to those the Company offers to customers who elect to purchase or lease a TracNet H-series or TracPhone V-series terminal. The Company recognizes the monthly AgilePlans subscription fee as service revenue over the service delivery period. The Company retains ownership of the hardware it provides to AgilePlans customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. KVH records the cost of the hardware used by AgilePlans customers as revenue-generating assets and depreciates the cost over an estimated useful life of five years . Since the Company is retaining ownership of the hardware, it does not accrue any warranty costs for AgilePlans hardware; however, any maintenance costs on the hardware is expensed in the period these costs are incurred. Service sales also include the distribution of commercially licensed entertainment, including news, sports, and movies to commercial customers in the maritime and hotel markets through the KVH Media Group, along with supplemental value-added services. In addition, KVH earns monthly usage fees from third-party satellite connectivity services, including VoIP, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate their subscriptions with KVH. Service sales also include sales from product repairs and extended warranty sales. 49 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) On August 9, 2022, the Company sold its inertial navigation business to EMCORE Corporation for gross proceeds of $ 55,000 , less specified deductions and a holdback of $ 1,000 and subject to a working capital adjustment. The working finalized capital adjustment, which resulted in a payment of $ 96 to EMCORE, was recorded in the fourth quarter of 2022. The holdback was released to the Company on August 17, 2022. On August 9, 2022, the Company also entered into a Transition Services Agreement with EMCORE, pursuant to which the Company agreed to provide certain transition services to support the continued operation of the inertial navigation business for six months following the sale with two extension options of three months each. The fee is comprised of both fixed monthly fees of approximately $ 100 as well as variable amounts for certain additional services with escalation increases on the fixed and variable rates for each extension option. The Company does 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. As of December 31, 2022, the company recognized $ 923 of contra-expense associated with the Transition Services Agreement. The Company determined that the sale met the requirements for reporting as discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. Please see Note 16 for the discontinued operations disclosures. (b) Principles of Consolidation The accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. All of the operating expenses of the subsidiaries that serve as the Company’s European, Singaporean, Japanese, and Brazilian international distributors are reflected within sales, marketing, and support within the accompanying consolidated statements of operations. All significant intercompany accounts and transactions have been eliminated in consolidation. The 2022 consolidated financial statements reflect the sale of the inertial navigation business as discontinued operations. See Note 16 for further information on the sale of the inertial navigation business. (c) Significant Estimates and Assumptions and Other Significant Non-Recurring Transactions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. The 2021 consolidated financial statements reflect a $ 6,979 gain in other income related to the U.S. Small Business Administration’s forgiveness of the PPP loan during the third quarter of 2021. See Note 5. On an on-going basis, the Company evaluates its significant estimates, including those related to terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill and estimated fair values of long-lived assets, including goodwill, amortization methods and periods. Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Management Transition and Restructuring On March 7, 2022, the Company announced that its President and Chief Executive Officer, Martin Kits van Heyningen, was retiring from his executive and Board roles after more than 40 years of service and assuming a consulting position with the Company. Brent C. Bruun, its then Chief Operating Officer, was appointed as its interim President and Chief Executive Officer. Subsequently, on June 15, 2022, he was appointed as its President and Chief Executive Officer and as a Class II member of the Board of Directors. As of March 31, 2022, the Company accrued approximately $ 539 in consulting fees associated with a maximum of 50 hours of transition services through March 2023, which is being paid to Mr. Kits van Heyningen over the 12 months following his retirement. Approximately $ 90 is accrued as of December 31, 2022. In addition, the Company agreed to a separation payment of $ 201 , which was inclusive of any amount which he may have otherwise earned under the executive bonus plan for 2021, which was paid in April 2022. The associated expenses were included in general and administrative expenses in the accompanying consolidated statements of operations. There were also modifications to Mr. Kits van Heyningen's stock option and restricted stock awards. Please see Note 7 for further discussion. In March 2022, the Company also restructured its operations to reduce costs and pursue a more focused strategy. The Company reduced its workforce by approximately 10 % and began incurring reduced expenses from these actions beginning in 50 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) the second quarter of 2022. For the year ended December 31, 2022, the Company incurred $ 1,844 in severance and health insurance costs and $ 327 in legal and advisory fees in connection with this restructuring. The combined expense of $ 2,171 was included in the financial statement line items of the accompanying consolidated statements of operations as follows: costs of product sales of $ 12 , costs of service sales of $ 58 , research and development of $ 365 , sales, marketing and support of $ 935 , and general and administrative expenses of $ 801 . The Company also modified impacted employee's stock option and restricted stock awards. Please see Note 7 for further discussion. During the third quarter of 2022, the Company restructured its foreign operations by closing its India and Cyprus offices and its Denmark warehouse to reduce costs. Approximately $ 388 of severance payments, other employee benefits, and legal and advisory fees were incurred in connection with this restructuring for the year ended December 31, 2022. Dispositions; Termination of Credit Facility On April 29, 2022, KVH Media Group Limited, the Company's wholly owned subsidiary, sold its subsidiary KVH Media Group Entertainment Limited for net cash proceeds of $ 2,378 . This transaction did not meet the criteria for reporting as discontinued operations under ASC 205-20. The Company recorded a gain on the sale of $ 682 , which is recorded in other income, net in the accompanying consolidated statements of operations. See Note 9 for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary. On August 9, 2022, the Company sold its inertial navigation business to EMCORE Corporation. Please see Notes 16 for further discussion. On August 9, 2022, the Company also terminated its 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. Executive Employment Agreements In May 2022, the Company entered into executive employment agreements with each of Brent C. Bruun, Roger A. Kuebel, Felise Feingold and Robert Balog in order to retain their services and provide them with certain benefits in the event that the Company terminated the executive’s employment without cause (as defined in the agreement) or the executive terminated his or her employment for good reason (as defined in the agreement), 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 continued to serve as an employee through December 31, 2022 (the “Retention Date”), the Company would pay the executive a retention bonus equal to 75 % of the executive’s base salary on the agreement date, and the Company would accelerate the vesting of the executive’s equity awards that would otherwise have vested in the twelve months after the Retention Date. Brent C. Bruun, Roger A. Kuebel, Felise Feingold and Robert Balog continued to serve as an employee as of December 31, 2022. Please see Note 7 for further discussion regarding the equity compensation modifications. On October 11, 2022, the Company 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 the Company 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 the Company through December 31, 2022. As of December 31, 2022, the Company accrued approximately $ 867 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 non-statutory stock options, which together had an aggregate grant date fair value of 51 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) approximately $ 100 . The restricted stock award and the non-statutory stock options have terms that are materially consistent with the previously disclosed terms of similar grants to the Company’s executive officers. (d) Concentration of Credit Risk and Single Source Suppliers Cash, cash equivalents and marketable securities. The Company is potentially subject to financial instrument concentration of credit risk through its cash, cash equivalent and marketable securities investments. To mitigate these risks the Company maintains cash, cash equivalents and marketable securities with reputable and nationally recognized financial institutions. As of December 31, 2022, $ 55,680 classified as marketable securities was held by Wells Fargo and substantially all of the cash and cash equivalents were held by Bank of America, N.A. See Note 2 for a description of marketable securities. Trade accounts receivable. Concentrations of risk (see Note 11) with respect to trade accounts receivable are generally limited due to the large number of customers and their dispersion across several geographic areas. Although the Company does not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes allowances for potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations for future collectability concerns. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. Activity within the Company’s allowance for doubtful accounts for the periods presented is as follows: 2022 2021 Beginning balance $ 1,597 $ 1,555 Additions (subtractions) 174 502 Deductions (write-offs/recoveries) from reserve ( 503 ) ( 460 ) Ending balance $ 1,268 $ 1,597 Revenue and operations. Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results. (e) Revenue Recognition In accordance with Accounting Standards Codification (ASC) 606, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these products and services. To achieve this core principle, the Company applies the following five steps: 1) Identify the contract with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products and services to be transferred and identifies the payment terms related to these products and services, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors, including the customer’s historical payment pattern or, in the case of a new customer, published credit and financial information pertaining to the customer. 52 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products and services, the Company must apply judgment to determine whether promised products and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised products and services are accounted for as a combined performance obligation. 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. 4) Allocate the transaction price to performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct products or services that are substantially the same qualify as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct product or service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. 5) Recognize revenue when or as the Company satisfies a performance obligation The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised product or service to a customer. Product sales Revenue from product sales is recognized when control of the goods is transferred to the customer, which generally occurs at the Company’s plant or warehouse upon delivery to the carrier for shipment. Revenue related to shipping and handling is recognized when the products are shipped and the associated costs are accrued for based on the Company’s election to account for shipping and handling activities as a fulfillment of the promise to transfer the products and not as a combined promise. The Company’s standard payment terms for product sales are generally Net 30. Under certain limited conditions, the Company, at its sole discretion, provides for the return of goods. No product is accepted for return and no credit is allowed on any returned product unless the Company has granted and confirmed prior written permission by means of appropriate authorization. The Company establishes reserves for potential sales returns, credits, and allowances, and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and expectations for the future. 53 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) Contract assets held by the Company include deferred costs related to performance under long-term contracts, including product and supporting costs associated to revenue previously billed to the client. Contract liabilities consist of advance payments and billings in excess of revenue recognized and are reported as deferred revenue in the consolidated balance sheets. The Company classifies any billings in excess of revenue recognized as deferred revenue as current or non-current based on the timing of when revenue is expected to be recognized. Contracts with multiple performance obligations The Company sells products and services through arrangements that in certain instances bundle equipment, satellite connectivity and other services. For these arrangements, the Company has determined that the performance obligations are not distinct in the context of the contracts with certain customers. The Company recognizes product revenue under these arrangements over the estimated satellite connectivity customer life, which is estimated to be five years based on historical evidence. Satellite connectivity and media content service sales Directly sold and re-sold satellite connectivity service for VoIP, data and Internet is recognized monthly based primarily on contracted fixed-fee schedules as well as any overages for minutes or megabytes of traffic processed. The Company has evaluated whether it obtains control of the services that are being transferred to the customer in assessing gross revenue reporting as principal versus net revenue reporting as agent for its satellite connectivity service sales and its payments to the applicable service providers. Based on the Company's assessment of the indicators, the Company has determined that gross revenue reporting as a principal is appropriate. The applicable indicators of gross revenue reporting include, but are not limited to, the following: • The Company is the primary obligor in its arrangements with its subscribers. The Company manages all interactions with the subscribers, while satellite connectivity service providers do not interact with the subscribers. In addition, the Company assumes the entire performance risk under its arrangements with the subscribers and in the event of a performance issue, the Company may incur reductions in fees without regard for any recourse that the Company may have with the applicable satellite connective service providers. • The Company has discretion in establishing pricing, as the pricing under its arrangements with the subscribers is negotiated through a contracting process. The Company then separately negotiates the fees with the applicable satellite service providers. • The Company has complete discretion in determining which satellite service providers it will contract with. As a result, the Company has determined that it earns revenue (as a principal) from the delivery of satellite connectivity services to its subscribers and records all satellite connectivity service sales to subscribers as gross sales. All associated regulatory service fees and costs are recorded net in the consolidated financial statements. The Company sells prepaid airtime services in the form of prepaid cards. A liability is established upon purchase equal to the cash paid for the prepaid card. The Company recognizes revenue from the prepaid services upon the use of the prepaid card by the customer. The Company does not offer refunds for unused prepaid services. Prepaid airtime services have not been a significant portion of the Company’s total sales. Media content sales include the Company's distribution of commercially licensed news, sports, movies and music content for commercial and leisure customers in the maritime, hotel, and retail markets. The Company typically recognizes revenue from media content sales ratably over the period of the service contract. The accounting estimates related to the recognition of satellite connectivity and media content service sales require the Company to make assumptions about future billing adjustments for disputes with subscribers as well as unauthorized usage. Under AgilePlans, the Company retains ownership of the hardware that it provides to these customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. In accounting for the related service revenue, the Company has applied the practical expedient allowed under ASC 606-10-55-18 to recognize 54 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) rental revenues in proportion to the amount of the right to invoice. The Company recognizes the subscription fee monthly as service revenue over the service delivery period. Product service sales Product service sales other than under development contracts are recognized when completed services are delivered to the customer. The Company also sells extended warranty contracts on mobile connectivity and inertial navigation products. Sales under these contracts are recognized ratably over the contract term. Product service sales including extended warranties are not a significant portion of the Company’s total sales. Sales-type leases Revenue is recognized on sales-type leases primarily from the TracPhone VSAT products. In accordance with ASC 842, the Company records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the net present value of all payments under these leases as product revenue, and the related costs of the product are charged to cost of sales. See Note 15. (f) Leases In accordance with ASC 842, the Company recognizes all leases greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. In ASC 842, a lease is defined as follows: “[a] contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Many of our lease agreements contain renewal options which are recognized if it is determined that the Company is reasonably certain to renew the lease at inception or when a triggering event occurs. Some of our lease agreements contain rent escalation clauses, rent holidays, capital improvement funding or other lease concessions. The Company recognizes the minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement and amortize such expense over the term of the lease beginning with the commencement date. Variable lease components that are not fixed at the beginning of the lease are recognized as incurred. Under certain third-party service agreements, the Company controls a specific space or underlying asset used in providing the service by the third-party service provider. These arrangements meet the definition under ASC 842 and therefore are accounted for under ASC 842. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when reasonably certain to be exercised. The present value of lease payments is determined using the incremental borrowing rate based on the information available at the lease commencement date. (g) Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments, which include cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to the short maturity of these instruments. See Note 2 for more information on the fair value of the Company’s marketable securities. The carrying amount of capital leases approximate fair value based on currently available quoted rates of similarly structured debt facilities. See Note 15 for the Company's finance lease. (h) Cash, Cash Equivalents, and Marketable Securities In accordance with the Company’s investment policy, cash in excess of operational needs is invested in money market mutual funds, government agency bonds, United States treasuries, municipal bonds, corporate notes, or certificates of deposit. All highly liquid investments with a maturity date of three months or less at the date of purchase are classified as cash equivalents. The Company determines the appropriate classification of marketable securities at each balance sheet date. As of December 31, 2022 and 2021, all of the Company’s marketable securities have been designated as available-for-sale and are carried at their fair value with unrealized gains and losses included in accumulated other comprehensive loss in the accompanying consolidated balance sheets. 55 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) The Company reviews investments in debt securities for other than temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it intends to sell the security, whether it expects to recover the credit loss, and if it is more likely than not that the Company will be required to sell the security prior to recovery. Evidence considered in this assessment includes the reasons for the impairment, compliance with the Company’s investment policy, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee. The Company has reviewed its securities with unrealized losses as of December 31, 2022 and 2021 and has concluded that no other-than-temporary impairments exist. (i) Inventories Inventories are stated at the lower of cost and net realizable value using the first-in first-out costing method. The Company adjusts the carrying value of its inventory based on the consideration of excess and obsolete components based on future estimate demand. The Company records inventory charges to costs of product sales. (j) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets. The principal lives used in determining the depreciation rates of various assets are: buildings and improvements, 5 - 40 years; leasehold improvements, shorter of original lease term or useful life; machinery, satellite hubs and equipment, 4 - 10 years; office and computer equipment, 3 - 7 years; and motor vehicles, 5 years. (k) Goodwill, Intangible Assets and other Long-Lived Assets The Company’s goodwill and intangible assets are associated with the purchase of Virtek Communication (now known as KVH Industries Norway AS) in September 2010 and Headland Media Limited (now known as the KVH Media Group) in May 2013. In accordance with ASC Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. (ASC 350), the Company performs a goodwill impairment test at least annually based on either an optional qualitative assessment or a quantitative analysis comparing the estimated fair value of a reporting unit to its carrying value as of the test date. Any impairment charges would be based on the quantitative analysis. For the October 1, 2022 test, the Company performed a qualitative assessment of goodwill impairment (Step 0) and concluded that for the mobile broadband reporting unit, it was more likely than not that, for this reporting unit, the fair value exceeded the carrying value. For the KVH Media Group reporting unit, the Company determined that it was necessary to perform the Step 1 quantitative analysis due to the ongoing global pandemic and its impacts. The Company utilized an income approach to estimate the fair value of the reporting unit. The Company believes that the assumptions used to estimate the fair value of its KVH Media Group reporting unit were reasonable. The Company estimated that, as of October 1, 2022, the fair value of its KVH Media Group exceeded its carrying value by more than 140 %. A negative trend of operating results or material changes to forecasted operating results could result in the requirement for additional interim goodwill impairment tests and the potential of future goodwill impairment charges, which could be material. The Company did not identify any impairment indicators that required an interim goodwill impairment test as of December 31, 2022. Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. During 2022, there were no events or changes in circumstances that indicated any of the carrying amounts of the Company’s intangible assets or other long-lived assets may not be recoverable. See Note 9 for further discussion of goodwill and intangible assets. 56 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (l) Other Non-Current Assets Other non-current assets are primarily comprised of long-term lease receivables, prepaid expenses, and deposits. (m) Product Warranty The Company’s products carry standard limited warranties that range from one to two years and vary by product. The warranty period begins on the date of retail purchase or lease by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include the number of units sold or leased, historical and anticipated rates of warranty repairs and the cost per repair. Warranty and related costs are reflected within sales, marketing and support in the accompanying consolidated statements of operations. As of December 31, 2022 and 2021, the Company had accrued product warranty costs of $ 1,287 and $ 1,084 , respectively. The followin g table summarizes product warranty activity during 2022 and 2021: 2022 2021 Beginning balance $ 1,084 $ 1,725 Charges to expense 1,127 400 Costs incurred ( 924 ) ( 1,041 ) Ending balance $ 1,287 $ 1,084 (n) Shipping and Handling Costs Shipping and handling costs are expensed as incurred and included in cost of sales. Billings for shipping and handling are reflected within net sales in the accompanying consolidated statements of operations. (o) Research and Development Expenditures for research and development are expensed as incurred. (p) Advertising Costs Costs related to advertising are expensed as incurred. Advertising expense was $ 482 and $ 919 for the years ended December 31, 2022 and 2021, respectively, and is included in sales, marketing, and support expense in the accompanying consolidated statements of operations. (q) Foreign Currency Translation The financial statements of the Company’s foreign subsidiaries located in Denmark and Singapore are maintained using the United States dollar as the functional currency. Exchange rates in effect on the date of the transaction are used to record monetary assets and liabilities. Revenue and other expense elements are recorded at rates that approximate the rates in effect on the transaction dates. Foreign currency exchange gains and losses are recognized within “other income, net” in the accompanying consolidated statements of operations. For the years ended December 31, 2022 and 2021, the Company recorded a total of net foreign currency exchange gains (losses) in its accompanying consolidated statements of operations of $ 517 and $( 3 ), respectively, which is comprised of both realized and unrealized foreign currency exchange gains and losses. The financial statements of the Company’s foreign subsidiaries located in the United Kingdom, Brazil, Norway, Cyprus, India and Japan use the foreign subsidiaries’ respective local currencies as the functional currency. The Company translates the assets and liabilities of these foreign subsidiaries at the exchange rates in effect at year-end. Net sales, costs and expenses are translated using average exchange rates in effect during the year. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive loss included in stockholders' equity in the accompanying consolidated balance sheets. 57 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (r) Income Taxes The Company is subject to income taxes in the U.S. and in numerous foreign jurisdictions. The Company accounts for income taxes following ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of a deferred tax asset will not be realized. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes interest and penalties within the income tax expense line in the accompanying consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. See Note 8 for further discussion of income taxes. (s) Net Loss per Common Share Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined in accordance with the treasury stock accounting method. For the years ended December 31, 2022 and 2021 since there was a net loss from continuing operations, the Company excluded all 1,359 and 747 shares, respectively, in outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these securities would have reduced the net loss per share. A reconciliation of the basic and diluted weighted average common shares outstanding is as follows: December 31, 2022 2021 Weighted average common shares outstanding—basic 18,632 18,217 Dilutive common shares issuable in connection with stock plans — — Weighted average common shares outstanding—diluted 18,632 18,217 (t) Contingent Liabilities The Company estimates the amount of potential exposure it may have with respect to claims, assessments and litigation in accordance with ASC 450, Contingencies . As of December 31, 2022 and 2021, the Company was not party to any lawsuit or proceeding that, in management's opinion, was likely to materially harm the Company's business, results of operations, financial condition or cash flows. It is not always possible to predict the outcome of litigation, as it is subject to many uncertainties. Additionally, it is not always possible for management to make meaningful estimates of the potential loss or range of loss associated with such litigation. 58 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (u) Operating Segments The Company operates in one reportable segment as a result of the sale of its inertial navigation business on August 9, 2022. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its President, Chief Executive Officer and Director. The Company operates in a number of major geographic areas, including internationally. Revenues are generated from international locations, primarily consisting of Singapore, Canada, European Union countries and other European countries, countries in Africa, Asia/Pacific and the Middle East, and India (see Note 12, " Segment Reporting "). (v) Recently Issued Accounting Standards From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies. Recently issued standards typically do not require adoption until a future effective date. Prior to their effective date, the Company evaluates the pronouncements to determine the potential effects of adoption on our consolidated financial statements. Standards to be Implemented ASC Update No. 2016-13, ASC Update No. 2018-19, ASC Update No. 2019-04, ASC Update No. 2019-05, ASC Update No. 2019-10, ASC Update No. 2019-11, ASC Update No. 2020-02, ASC Update No. 2022-02 and ASC Update No. 2017-04. In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The purpose of Update No. 2016-13 is to replace the incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses . This update introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost. The amendment also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASC Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments . This update introduced clarifications of the Board’s intent with respect to accrued interest, the transfer between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projects of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures, and extension and renewal options. In May 2019, the FASB issued ASC Update No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief . The amendments in the update ease the transition for entities adopting ASC Update 2016-13 and increase the comparability of financial statement information. With the exception of held-to-maturity debt securities, the amendments allow entities to irrevocably elect to apply the fair value option to financial instruments that were previously recorded at amortized cost basis within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost . In November 2019, the FASB issued ASC Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The amendments in this update change some effective dates for certain new accounting standards including those pertaining to Topic 326 discussed above, for certain types of entities. 59 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) In November 2019, the FASB issued ASC Update No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (Topic 326). The update is effective for entities that have adopted ASU 2016-13. The purpose of Update No. 2019-11 is to clarify the scope of the recovery guidance to purchased financial assets with credit deterioration. In February 2020, the FASB issued ASC Update No. 2020-02, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842). The purpose of Update No. 2020-02 is to clarify the scope and interpretation of the standard. In March 2022, the FASB issued ASC update 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures . The vintage disclosure portion of this guidance is applicable to the Company, which requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must included the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination. As a smaller reporting company, the effective date for Topic 326 will be the fiscal year beginning after December 15, 2022. The adoption of Update Nos. 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2022-02 is not expected to have a material impact on the Company's financial position or results of operations. In January 2017, the FASB issued ASC Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment . The purpose of Update No. 2017-04 is to eliminate Step 2 from the goodwill impairment test and instead an entity should perform its annual, or interim, goodwill impairment quantitative test by comparing the fair value of a reporting unit with its carrying amount. An entity will then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, to the extent of the amount of goodwill allocated to that reporting unit. As a smaller reporting company, the effective date for Topic 350 will be the fiscal year beginning after December 15, 2022. The adoption of Update No. 2017-04 is not expected to have a material impact on the Company's financial position or results of operations. There are no other recent accounting pronouncements issued by the FASB that the Company expects would have a material impact on the Company's financial statements. (2) Marketable Securities Marketable securities as of December 31, 2022 and 2021 consisted of the following: December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market mutual funds $ 30,977 $ — $ — $ 30,977 United States treasuries 24,715 — ( 12 ) 24,703 Total marketable securities designated as available-for-sale $ 55,692 $ — $ ( 12 ) $ 55,680 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market mutual funds $ 13,147 $ — $ — $ 13,147 Total marketable securities designated as available-for-sale $ 13,147 $ — $ — $ 13,147 The effective maturity date of the United States treasuries is less than one year. Interest income from marketable securities was $ 723 and $ 6 for the years ended December 31, 2022 and 2021, respectively. 60 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (3) Inventories Inventories are stated at the lower of cost and net realizable value using the first-in first-out costing method. Inventories as of December 31, 2022 and 2021 include the costs of material, labor, and factory overhead. Components of inventories consist of the following: December 31, 2022 2021 Raw materials $ 14,203 $ 9,412 Work in process 4,164 2,861 Finished goods 4,363 3,560 $ 22,730 $ 15,833 (4) Property and Equipment Property and equipment, net, as of December 31, 2022 and 2021 consist of the following: December 31, 2022 2021 Land $ 2,833 $ 2,833 Building and improvements 18,869 18,822 Leasehold improvements 513 472 Revenue-generating assets 72,527 63,587 Machinery and equipment 5,948 5,233 Office and computer equipment 14,652 14,633 Motor vehicles 31 31 115,373 105,611 Less accumulated depreciation ( 62,255 ) ( 52,666 ) $ 53,118 $ 52,945 Depreciation expense for the years ended December 31, 2022 and 2021 amounted to $ 12,909 and $ 12,005 , respectively. Certain revenue-generating hardware assets are utilized by the Company in the delivery of the Company's airtime services, media, and other content. (5) Debt and Line of Credit Paycheck Protection Program Loan In May 2020, the Company received a $ 6,927 loan (the PPP Loan) from Bank of America, N.A., (the Lender) under the Paycheck Protection Program (PPP), which was established under the Coronavirus Aid, Relief, and Economic Security Act (as modified by the Paycheck Protection Flexibility Act of 2020, the CARES Act) and is administered by the U.S. Small Business Administration (the SBA). The term of the PPP Loan was two years from the funding date, and the interest rate was 1.00%. Interest on the loan accrued from the funding date, but was deferred. In August 2021, the Company applied for forgiveness of the full amount of the PPP Loan and related interest. On September 24, 2021, the Company received notification from the Lender that, on September 19, 2021, the SBA had determined that the PPP Loan forgiveness application was approved, and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA. The forgiveness of the PPP Loan including all interest accrued of $ 6,979 is recognized in other income, net in the accompanying consolidated statements of operations for the year ended December 31, 2021. 61 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) Line of Credit On August 9, 2022, the Company terminated its 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. (6) Commitments and Contingencies The Company has certain operating leases and other commitments for satellite capacity, various equipment, and facilities. The following reflects future minimum payments under operating leases and other commitments that have initial or remaining non-cancelable terms at December 31, 2022: Years ending December 31, Commitments (a) 2023 $ 41,082 2024 7,097 2025 61 2026 50 2027 48 Thereafter 33 Total minimum payments $ 48,371 (a) Includes the future minimum lease payments for the Company's operating leases as seen in Note 15. Total rent expense incurred under facility operating leases for the years ended December 31, 2022 and 2021 amounted to $ 829 and $ 868 , respectively. Total expense incurred under satellite capacity and equipment operating leases and other commitments for the years ended December 31, 2022 and 2021 amounted to $ 37,166 and $ 39,216 , respectively, which also includes payments for usage charges in excess of the minimum contractual requirements. In the normal course of business, the Company enters into unconditional purchase order obligations with its suppliers for inventory and other operational purchases. Outstanding and unconditional purchase order obligations were $ 15,841 as of December 31, 2022, of which the Company expects to fulfill $ 15,048 in 2023 and $ 793 in 2024. Except for certain satellite service capacity obligations that are not considered operating or financing leases under ASC 842, the Company did not have any off-balance sheet commitments, guarantees, or standby repurchase obligations as of December 31, 2022. 62 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (7) Stockholders’ Equity The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation . Stock-based compensation expense was $ 3,320 and $ 4,053 , excluding $ 104 and $ 56 of compensation charges related to our Amended and Restated 1996 Employee Stock Purchase Plan, or the ESPP, for the years ended December 31, 2022 and 2021, respectively. The Company is authorized to grant stock options, restricted stock awards and other stock-based awards under its Amended and Restated 2016 Equity and Incentive Plan (the 2016 Plan) with respect to up to 6,080 shares of common stock (excluding rollover shares), an increase of 1,280 shares reserved for issuance under the previous 2016 Plan as approved by our shareholders on June 8, 2022. Options have generally been granted with an exercise price equal to the fair market value of the common stock on the date of grant and have generally provided for vesting in equal annual amounts over four years beginning on the first anniversary of the date of the grant. No options are exercisable for periods of more than five years after date of grant. Under the 2016 Plan, each share issued under awards other than options and stock appreciation rights will reduce the number of shares reserved for issuance by two shares. Shares issued under options or stock appreciation rights will reduce the shares reserved for issuance on a share-for-share basis. The 2016 Plan and earlier equity compensation plans, pursuant to which an aggregate of 15,495 shares of the Company’s common stock were reserved for issuance, were all approved by the Company's shareholders. As of December 31, 2022, 1,513 shares were available for future grants. The Compensation Committee of the Board of Directors administers the equity compensation plans, approves the individuals to whom awards will be granted and determines the number of shares and other terms of each award. Outstanding options under the Company's equity compensation plans at December 31, 2022 expire from June 2023 through October 2027. None of the Company’s outstanding options includes performance-based or market-based vesting conditions as of December 31, 2022. (a) Employee Stock Options The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The expected volatility assumption is based on the historical daily price data of the Company’s common stock over a period equivalent to the weighted average expected life of the Company’s options. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns and represents the period of time the options granted are expected to be outstanding. The risk-free interest rate is based on the actual U.S. Treasury zero-coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend yield of zero is based upon the fact that the Company has not historically declared or paid cash dividends, and does not expect to declare or pay dividends in the foreseeable future. The per share weighted-average fair values of stock options granted during 2022 and 2021 were $ 3.13 and $ 4.70 , respectively. The weighted-average assumptions used to value options as of their grant date were as follows: Year Ended December 31, 2022 2021 Risk-free interest rate 3.02 % 0.92 % Expected volatility 43.19 % 44.98 % Expected life (in years) 4.24 4.28 Dividend yield 0 % 0 % 63 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) The changes in outstanding stock options for the year ended December 31, 2022 and 2021 are as follows: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at December 31, 2021 2,127 $ 9.93 Granted 414 $ 8.12 Exercised ( 307 ) $ 8.05 Expired, canceled or forfeited ( 483 ) $ 10.14 Outstanding at December 31, 2022 1,751 $ 9.77 2.19 $ 1,948 Exercisable at December 31, 2022 939 $ 9.98 1.65 $ 814 Options vested or expected to vest at December 31, 2022 1,751 $ 9.77 2.19 $ 1,948 Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 2,034 $ 9.25 Granted 497 $ 12.68 Exercised ( 274 ) $ 9.86 Expired, canceled or forfeited ( 130 ) $ 9.96 Outstanding at December 31, 2021 2,127 $ 9.93 2.68 $ 931 Exercisable at December 31, 2021 858 $ 9.41 1.65 $ 453 Options vested or expected to vest at December 31, 2021 2,127 $ 9.93 2.68 $ 931 During 2022, upon the net exercise of 307 stock options, the Company issued 100 shares of common stock, 14 shares were surrendered to the Company to satisfy minimum tax withholding obligations, and 193 shares were cancelled. The total aggregate intrinsic value of options exercised was $ 387 and $ 914 in 2022 and 2021, respectively. As of December 31, 2022, there was $ 2,525 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.43 years. In 2022 and 2021, the Company recorded compensation charges of $ 1,023 and $ 1,740 , respectively, related to stock options. Compensation costs for options subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for the entire award. During 2022 and 2021, cash received under stock option plans for exercises was $ 664 and $ 2,709 , respectively. During 2022, there were accelerated vesting and extended exercise term modifications of stock options as it related to the retirement of Mr. Kits van Heyningen, which resulted in a reduction of approximately $ 317 in compensation cost. During 2022, there were accelerated vesting term modifications of stock options for employees terminated as part of the Company's restructuring, which resulted in a reduction of approximately $ 26 in compensation cost. During 2022, there were accelerated vesting term modifications of stock options for executive employment agreements, which resulted in an acceleration of compensation expense of approximately $ 182 . During 2022, there were accelerated vesting term modifications of stock options for employees transitioned as part of the sale of the Company's inertial navigation business, which resulted in a reduction of compensation expense of approximately $ 46 , included in discontinued operations. 64 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (b) Restricted Stock The Company granted 249 and 217 restricted stock awards to employees under the terms of the 2016 Plan or the Amended and Restated 2006 Stock Incentive Plan (2006 Plan) for the years ended December 31, 2022 and 2021, respectively. The restricted stock awards have generally provided for vesting annually over four years from the date of grant subject to the recipient remaining an employee through the applicable vesting dates. Compensation expense for restricted stock awards is measured at fair value on the date of grant based on the number of shares granted and the quoted market closing price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of forfeitures. The weighted-average grant-date fair value of restricted stock granted during 2022 and 2021 was $ 8.51 and $ 12.23 per share, respectively. As of December 31, 2022, there was $ 2,656 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.28 years. Compensation costs for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for the entire award. Compensation cost for awards initially subject to certain performance conditions are recognized on a ratable basis over the requisite service period for the entire award. In 2022 and 2021, the Company recorded compensation charges of $ 2,297 and $ 2,313 , respectively, related to restricted stock awards. During 2022, there were accelerated vesting term modifications of restricted stock as it related to the retirement of Mr. Kits van Heyningen, which resulted in a reduction in compensation expense of approximately $ 83 . During 2022, there were accelerated vesting term modifications of restricted stock for employees terminated as part of the Company's restructuring, which resulted in an acceleration in compensation expense of approximately $ 134 . During 2022, there were accelerated vesting term modifications of restricted stock for executive employment agreements, which resulted in an acceleration in compensation expense of approximately $ 189 . During 2022, there were accelerated vesting term modifications of restricted stock for employees transitioned as part of the sale of the Company's inertial navigation business, which resulted in an acceleration in compensation expense of approximately $ 287 , included in discontinued operations. Restricted stock activity under the 2006 Plan and the 2016 Plan for 2022 is as follows: Number of Shares Weighted- average grant date fair value Outstanding at December 31, 2021, unvested 489 $ 10.19 Granted 249 8.51 Vested ( 311 ) 9.93 Forfeited ( 101 ) 9.72 Outstanding at December 31, 2022, unvested 326 $ 9.30 (c) Employee Stock Purchase Plan Under the Company's ESPP, an aggregate of 1,650 shares of common stock have been reserved for issuance, of which 780 shares remain available as of December 31, 2022. The ESPP covers all of the Company’s employees. Under the terms of the ESPP, eligible employees can elect to have up to six percent of their pre-tax compensation withheld to purchase shares of the Company’s common stock on a semi-annual basis at 85 % of the market price on the first or last day of each purchase period, whichever is lower. During 2022 and 2021, shares issued under this plan were 41 and 26 shares, respectively. The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of these discounted purchases. The fair value of the 15 % discount is recognized as compensation expense over the purchase period. The Company applies a graded vesting approach because the ESPP provides for multiple purchase periods and is, in substance, a series of linked awards. In 2022 and 2021, the Company recorded compensation charges of $ 104 and $ 56 , respectively, related to the ESPP. During 2022 and 2021, cash received under the ESPP was $ 308 and $ 230 , respectively. 65 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (d) Stock-Based Compensation Expense The following presents stock-based compensation expense, including expense for the ESPP, in the Company's consolidated statements of operations for the years ended December 31, 2022 and 2021. 2022 2021 Cost of product sales $ 415 $ 271 Cost of service sales 11 10 Research and development 837 644 Sales, marketing and support 362 898 General and administrative 1,799 2,286 $ 3,424 $ 4,109 (e) Accumulated Other Comprehensive Loss (AOCL) Comprehensive income (loss) includes net income (loss) and unrealized gains and losses from foreign currency translation. The components of the Company’s comprehensive income (loss) and the effect on earnings for the periods presented are detailed in the accompanying consolidated statements of comprehensive income (loss). Foreign Currency Translation Unrealized Loss on Available for Sale Marketable Securities Total Accumulated Other Comprehensive Loss Balance, December 31, 2020 $ ( 3,232 ) $ — $ ( 3,232 ) Other comprehensive loss ( 177 ) — ( 177 ) Net other comprehensive loss ( 177 ) — ( 177 ) Balance, December 31, 2021 ( 3,409 ) — ( 3,409 ) Other comprehensive loss ( 689 ) ( 12 ) ( 701 ) Net other comprehensive loss ( 689 ) ( 12 ) ( 701 ) Balance, December 31, 2022 $ ( 4,098 ) $ ( 12 ) $ ( 4,110 ) 66 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (8) Income Taxes Income tax expense (benefit) for the years ended December 31, 2022 and 2021 attributable to loss from continuing operations is presented below. Current Deferred Total Year ended December 31, 2022 Federal $ 404 $ — $ 404 State ( 13 ) — ( 13 ) Foreign 500 ( 345 ) 155 $ 891 $ ( 345 ) $ 546 Year ended December 31, 2021 Federal $ 27 $ — $ 27 State — — — Foreign 44 ( 179 ) ( 135 ) $ 71 $ ( 179 ) $ ( 108 ) Actual income tax expense (benefit) differs from the “expected” income tax expense (benefit) computed by applying the United States Federal statutory income tax rate of 21% for both 2022 and 2021 to loss from continuing operations before tax (benefit) expense, as follows: Year Ended December 31, 2022 2021 Income tax benefit at Federal statutory income tax rate $ ( 710 ) $ ( 2,447 ) Increase (decrease) in income taxes resulting from: State income tax benefit, net of federal benefit ( 17 ) ( 386 ) State research and development, investment credits 265 ( 137 ) Non-deductible meals & entertainment 8 1 Non-deductible stock compensation expense 133 ( 194 ) Non-deductible compensation under 162(m) 7 35 Prior Period Prepaid Tax 276 — Foreign Withholding Taxes 139 — Foreign tax rate differential ( 3 ) 58 Federal research and development credits ( 55 ) ( 607 ) Uncertain tax positions ( 99 ) 32 Provision to tax return adjustments 110 33 Change in valuation allowance 530 5,066 PPP loan forgiveness — ( 1,455 ) Sale of KVH Media Group Entertainment Limited ( 206 ) — Prior period adjustments — ( 117 ) Other 168 10 Income tax expense (benefit) $ 546 $ ( 108 ) 67 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) Loss from continuing operations before income tax expense (benefit) determined by tax jurisdiction, are as follows: Year Ended December 31, 2022 2021 United States $ ( 4,616 ) $ ( 11,823 ) Foreign 1,238 169 Total $ ( 3,378 ) $ ( 11,654 ) Deferred tax assets and liabilities for the periods presented consisted of the following: December 31, 2022 2021 Deferred tax assets: Accounts receivable, due to allowance for doubtful accounts $ 221 $ 364 Inventories 1,335 858 Operating loss carry-forwards 4,546 5,784 Stock-based compensation expense 881 1,106 Property and equipment, due to difference in depreciation 283 1,944 Research and development tax credit carry-forwards 5,743 6,247 Foreign tax credit carry-forwards 2,345 2,345 State tax credit carry-forwards 3,710 3,975 Capitalized research and development 5,003 2,690 Warranty reserve 302 255 Accrued expenses 1,486 1,089 Lease liability 483 700 Gross deferred tax assets 26,338 27,357 Less valuation allowance ( 22,094 ) ( 26,542 ) Total deferred tax assets 4,244 815 Deferred tax liabilities: Purchased intangible assets ( 39 ) ( 199 ) Property and equipment, due to differences in depreciation ( 3,514 ) ( 86 ) Right of use asset ( 487 ) ( 689 ) Total deferred tax liabilities ( 4,040 ) ( 974 ) Net deferred tax asset (liability) $ 204 $ ( 159 ) Deferred income tax asset $ 259 $ 56 Deferred income tax liability $ ( 55 ) $ ( 215 ) As of December 31, 2022 the Company has federal and state tax loss carryforwards of approximately $ 17,731 and $ 8,974 , respectively. The federal loss carryforward has no expiration date. The state losses expire through the year 2042. As of December 31, 2022, the Company had federal research and development tax credit carry-forwards in the amount of $ 5,734 and other general business credits of $ 9 that expire in years 2029 through 2042. As of December 31, 2022, the Company had foreign tax credit carry-forwards in the amount of $ 2,345 that expire in years 2026 through 2027. As of December 31, 2022, the Company had state research and development tax credit carry-forwards in the amount of $ 4,562 that expire in years 2023 through 2029. The Company also had other state tax credit carry-forwards of $ 134 available to reduce future state tax expense that expire in years 2023 through 2029. The Company’s ability to utilize these net operating loss carry-forwards and tax credit carry-forwards may be limited in the future if the Company experiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders change by more than 50% over a three-year period. 68 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) In assessing the realizability of its net deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2022, the valuation decreased by $ 4,448 . The change was primarily the result of the utilization of domestic tax credits and net operating losses to offset the gain on discontinued operations as well as the movement in other temporary items. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating tax losses and its near-term forecasts of future taxable income or losses. As of December 31, 2022, unremitted foreign earnings, which were not significant, have been retained by the Company's foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to state tax and withholding taxes payable to various foreign countries. The Company establishes reserves for uncertain tax positions based on management’s assessment of exposure associated with tax deductions, permanent tax differences, and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur that warrant adjustment to the reserve. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The aggregate changes in the total gross amount of unrecognized tax benefits, excluding penalties and interest, are as follows: Year Ended December 31, 2022 2021 Unrecognized tax benefits as of January 1 $ 1,653 $ 1,771 Gross decrease in unrecognized tax benefits - prior year tax positions ( 160 ) ( 104 ) Lapse of statute of limitations ( 11 ) ( 14 ) Unrecognized tax benefits as of December 31 $ 1,482 $ 1,653 All unrecognized tax benefits as of December 31, 2022 and 2021, if recognized, would result in a reduction of the Company's effective tax rate. The Company recorded interest and penalties of $ 56 and $ 46 in its consolidated statement of operations for the years ended December 31, 2022 and 2021, respectively. Total accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $ 311 and $ 255 as of December 31, 2022 and 2021, respectively. The timing of any resolution of income tax examinations is highly uncertain, as are the amounts and timing of any settlement payment. These events could cause fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2022 may decrease approximately $ 35 in the next twelve months as a result of a lapse of statutes of limitation and settlements with taxing authorities. The Company’s tax jurisdictions include the United States, the United Kingdom, Denmark, Cyprus, Norway, Brazil, Singapore, Japan, and India. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to 2019, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state and foreign taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding year. 69 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (9) Goodwill and Intangible Assets Intangible assets arose from the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013. These intangible assets are being amortized on a straight-line basis over the estimated useful life of 10 years for acquired subscriber relationships. The intangible assets were recorded in pounds sterling and fluctuations in exchange rates cause these amounts to increase or decrease from time to time. As a result of the sale of KVH Media Group Entertainment Limited in April 2022, the Company determined the goodwill and intangible assets associated with this business based on an income approach which estimated the fair value of the reporting unit before and after the sale, and included such amounts in the determination of the gain on sale of the subsidiary. In January 2017, the Company completed the acquisition of certain subscriber relationships from a third party. This acquisition did not meet the definition of a business under ASC 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business , which the Company adopted on October 1, 2016. The Company ascribed $ 100 of the initial purchase price to the acquired subscriber relationships definite-lived intangible assets with an initial estimated useful life of 10 years. Under the asset purchase agreement, the purchase price includes a component of contingent consideration under which the Company is required to pay a percentage of recurring revenues received from the acquired subscriber relationships through 2026 up to a maximum annual payment of $ 114 . As of December 31, 2022, the carrying value of the intangible assets acquired in the asset acquisition was $ 462 . As the acquisition did not represent a business combination, the contingent consideration arrangement is recognized only when the contingency is resolved and the consideration is paid or becomes payable. The amounts payable under the contingent consideration arrangement, if any, will be included in the measurement of the cost of the acquired subscriber relationships. An additional $ 54 and $ 62 of consideration was earned under the contingent consideration arrangement during the years ended December 31, 2022 and 2021, respectively. Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at December 31, 2022 and 2021, respectively: Gross Carrying Amount Accumulated Amortization Net Carrying Value December 31, 2022 Subscriber relationships $ 7,649 $ 7,245 $ 404 Distribution rights 315 315 — Internally developed software 446 446 — Proprietary content 153 153 — Intellectual property 2,284 2,284 — $ 10,847 $ 10,443 $ 404 December 31, 2021 Subscriber relationships $ 8,033 $ 6,746 $ 1,287 Distribution rights 315 315 — Internally developed software 446 446 — Proprietary content 153 153 — Intellectual property 2,284 2,284 — $ 11,231 $ 9,944 $ 1,287 Amortization expense related to intangible assets was $ 499 and $ 1,027 for years ended December 31, 2022 and 2021, respectively, and was categorized as general and administrative expense. As of December 31, 2022, the total weighted average remaining useful lives of the definite-lived intangible assets was 1.2 and the weighted average remaining useful lives by the definite-lived intangible asset category are as follows: 70 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) Intangible Asset Weighted Average Remaining Useful Life in Years Subscriber relationships 1.2 Estimated future amortization expense for intangible assets recorded by the Company at December 31, 2022 is as follows: Years ending December 31, Amortization Expense 2023 $ 179 2024 71 2025 71 2026 71 2027 5 Thereafter 7 Total amortization expense $ 404 The changes in the carrying amount of intangible assets during the year ended December 31, 2022 is as follows: 2022 Balance at December 31, 2021 $ 1,287 Amortization expense ( 499 ) Intangible assets acquired in asset acquisition 54 Sale of KVH Media Group Entertainment Limited ( 352 ) Foreign currency translation adjustment ( 86 ) Balance at December 31, 2022 $ 404 Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. No ne of the Company's goodwill is deductible for tax purposes. The changes in the carrying amount of goodwill during the year ended December 31, 2022 is as follows: Goodwill Balance at December 31, 2021 $ 6,570 Sale of KVH Media Group Entertainment Limited ( 1,038 ) Foreign currency translation adjustment ( 224 ) Balance at December 31, 2022 $ 5,308 (10) 401(k) Plan The Company has a 401(k) Plan (the Plan) for all eligible employees. Participants may defer a portion of their pre-tax or post-tax earnings subject to limits determined by the Internal Revenue Service. Participants age 50 or older may be eligible to make additional contributions. The Company matches contributions by the Plan participants up to 6 %. The Company’s contributions vest over a five-year period from the date of hire. The Company matching contributions were $ 486 and $ 711 for the years ended December 31, 2022 and 2021, respectively. In addition, the Company may make additional contributions to the Plan at the discretion of the Compensation Committee of the Board of Directors. There were no discretionary contributions in 2022 and 2021. 71 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (11) Revenue from Contracts with Customers (ASC 606) In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these products and services. Disaggregation of Revenue The following table summarizes net sales from contracts with customers for the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 2021 Product, transferred at point in time $ 24,482 $ 27,490 Product, transferred over time 2,488 2,522 Service 111,908 103,899 Total net sales $ 138,878 $ 133,911 Revenue recognized during the years ended December 31, 2022 and 2021 from amounts included in contract liabilities at the beginning of the fiscal year was approximately $ 2,177 and $ 2,281 , respectively. For product sales, the delivery of the Company’s performance obligations are generally transferred to the customer, and associated revenue is recognized, at a point in time, with the exception of certain VSAT contracts which are transferred to customers over time. For service sales, the delivery of the Company’s performance obligations are transferred to the customer, and associated revenue is recognized, over time. Business and Credit Concentrations No single customer accounted for 10% or more of consolidated net sales for the years ended December 31, 2022 or 2021. Two customers accounted for approximately 16 % and 12 % of accounts receivable at December 31, 2022. Two customers accounted for approximately 16 % and 14 % of accounts receivable at December 31, 2021. One customer accounted for 66 % and 54 % of long-term accounts receivable included in other non-current assets on the consolidated balance sheets related to sales-type leases at December 31, 2022 and December 31, 2021, respectively. Customer Contract Balances The following table provides the balance sheet location and amounts of contract assets, or unbilled accounts receivable, and contract liabilities, or deferred revenue, from contracts with customers as of December 31, 2022 and 2021: Year Ended December 31, Contract Balance Type Balance Sheet Location 2022 2021 Current portion of deferred costs Current contract assets $ 1,243 $ 1,230 Non-current portion of deferred costs Non-current contract assets 3,033 3,104 Current portion of deferred revenues Contract liabilities* 1,743 1,720 Non-current portion of deferred revenues Long-term contract liabilities 4,315 4,466 *Management notes that the remaining “Contract liabilities” balance not included in the above table (as of December 31, 2022 and 2021 is $ 1,365 and $ 2,058 , respectively) relates to deferred income unaffiliated with the Company’s primary revenue streams. These values are therefore excluded from the contract assets and contract liabilities from contracts with customers. 72 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) There were no material changes to contract asset balances for the year ended December 31, 2022 as a result of changes in estimates or impairments. The change in the contract liability balance from December 31, 2021 to December 31, 2022 was primarily due to recognition of revenues in the current year related to prior year upfront support billings. (12) Segment Reporting The Company operates as one reportable segment as a result of the sale of its inertial navigation business on August 9, 2022. The Company's performance is impacted by the levels of activity in the marine and land mobile markets, among others. Performance in any particular period could be impacted by the timing of sales to certain large customers. The Company primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to television, the Internet and VoIP services while on the move. Product sales accounted for 19 % and 22 % of our consolidated net sales for 2022 and 2021, respectively. Service sales of VSAT airtime service accounted for approximately 74 % and 69 % of our consolidated net sales for 2022 and 2021, respectively. The balance of service sales are comprised of distribution of commercially licensed entertainment, product repairs, and extended warranty sales. No other single product class accounts for 10% or more of consolidated net sales. The Company operates in a number of major geographic areas, including internationally. Revenues from international locations primarily include Singapore, Canada, European Union countries and other European countries, countries in Africa, Asia/Pacific and the Middle East, and India. Revenues are based upon customer location and internationally represented 62 % and 58 % of consolidated net sales for 2022 and 2021, respectively. Sales to Singapore customers represented 16 % of the Company's consolidated net sales for 2022. No other individual foreign country represented 10% or more of the Company's consolidated net sales for 2022. Sales to Singapore customers represented 13 % of the Company's consolidated net sales for 2021. No other individual foreign country represented 10% or more of the Company's consolidated net sales for 2021. As of December 31, 2022 and 2021, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets and were deemed not material. (13) Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures (ASC 820), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments in money market mutual funds and United States treasuries. Level 2: Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based on directly or indirectly market-corroborated inputs. The Company has no Level 2 assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity, and are developed based on the best information available given the circumstances. The Company has no Level 3 assets. Assets and liabilities measured at fair value are based the valuation techniques identified in the table below. The valuation techniques are: 73 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (a) Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets. The following tables present financial assets and liabilities at December 31, 2022 and December 31, 2021 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy: December 31, 2022 Total Level 1 Level 2 Level 3 Valuation Technique Assets Money market mutual funds $ 30,977 $ 30,977 $ — $ — (a) United States treasuries 24,703 24,703 — — (a) December 31, 2021 Total Level 1 Level 2 Level 3 Valuation Technique Assets Money market mutual funds $ 13,147 $ 13,147 $ — $ — (a) The carrying amount of certain financial instruments approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of the Company's operating and financing lease liabilities approximates fair value based on currently available quoted rates of similarly structured borrowings. Assets Measured and Recorded at Fair Value on a Nonrecurring Basis The Company's non-financial assets, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if an impairment exists. There was no impairment of the Company's non-financial assets noted during the twelve months prior to December 31, 2022. See Note 1(k) and Note 9 for additional details. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis. (14) Legal Matters In the ordinary course of business, the Company is a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. The Company is not a party to any lawsuit or proceeding that, in management's opinion, is likely to materially harm the Company's business, results of operations, financial condition, or cash flows. 74 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) (15) Leases Lessee The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense was $ 2,103 and $ 3,963 for the year ended December 31, 2022 and 2021, respectively. Short-term operating lease costs was $ 182 and $ 237 for the years ended December 31, 2022 and 2021, respectively. Maturities of lease liabilities as of December 31, 2022 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows: Years ending December 31, 2023 $ 1,610 2024 493 2025 53 2026 46 2027 and thereafter 78 Total undiscounted lease payments $ 2,280 Less amount representing interest $ ( 112 ) Present value of operating lease liabilities $ 2,168 Less current installments of obligation under current-operating lease liabilities $ 1,532 Obligations under long-term operating lease liabilities, excluding current installments $ 636 Weighted-average remaining lease term - operating leases (years) 1.08 Weighted-average discount rate - operating leases 5.50 % During the first quarter of 2018, the Company entered into a five-year financing lease for three satellite hubs for its HTS network. During the first quarter of 2021, the terms of this lease were adjusted and the Company discontinued use of two satellite hubs and was released from the related payment obligation in exchange for additional satellite service capacity. As of December 31, 2022, the gross costs and accumulated depreciation associated with this lease are included in revenue generating assets and amounted to $ 1,268 and $ 891 , respectively. The obligations under financing leases are stated at the present value of minimum lease payments. The property and equipment held under this financing lease are amortized on a straight‑line basis over the seven-year estimated useful life of the asset, since the lease meets the bargain purchase option criteria . Amortization of assets held under financing leases is included within depreciation expense. Depreciation expense for the remaining capital assets was $ 181 for both the years ended December 31, 2022 and 2021. 75 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) The future undiscounted lease payments under this financing lease as of December 31, 2022 are: 2023 $ 22 Total undiscounted lease payments $ 22 Less amount representing interest $ — Present value of financing lease liabilities $ 22 Less current installments of obligation under accrued other $ 22 Obligations under other long-term liabilities, excluding current installments $ — Weighted-average remaining lease term - finance leases (years) 0.17 Weighted-average discount rate - finance leases 1.53 % Lessor The Company enters into leases with certain customers primarily for the TracPhone VSAT systems. These leases are classified as sales-type leases as title of the equipment transfers to the customer at the end of the lease term. The Company records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the net present value of all payments under these leases as product revenue, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the lease term (typically three to five years ) using an implicit interest rate. The sales-type leases do not have unguaranteed residual assets. The current portion of the net investment in these leases was $ 3,811 as of December 31, 2022 and the non-current portion of the net investment in these leases was $ 5,036 as of December 31, 2022. The current portion of the net investment in the leases is included in accounts receivable, net of allowance for doubtful accounts on the accompanying consolidated balance sheets and the non-current portion of the net investment in these leases is included in other non-current assets on the accompanying consolidated balance sheets. Interest income from sales-type leases was $ 764 and $ 882 during the year ended December 31, 2022 and 2021, respectively. The future undiscounted cash flows from these leases as of December 31, 2022 are: 2023 $ 4,365 2024 2,955 2025 1,591 2026 738 2027 257 Total undiscounted cash flows $ 9,906 Present value of lease payments $ 8,847 Difference between undiscounted cash flows and discounted cash flows $ 1,059 76 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) The Company entered into three-year leases for its TracPhone VSAT systems, in which ownership of the hardware does not transfer to the lessee by the end of the lease term. As a result, and in light of other factors indicated in ASC 842, these leases are classified as operating leases. As of December 31, 2022, the gross costs and accumulated depreciation associated with these operating leases are included in revenue generating assets and amounted to $ 1,873 and $ 516 , respectively. They are depreciated on a straight-line basis over a five-year estimated useful life. Depreciation expense for these assets was $ 360 for the year ended December 31, 2022. For the year ended December 31, 2022, lease revenue of $ 537 was recognized in service sales in the statements of operations. As of December 31, 2022, minimum future lease payments to be received on the operating leases are as follows: 2023 552 2024 342 2025 23 Total $ 917 (16) Discontinued Operations During the third quarter of 2022, the Company sold its inertial navigation business. The Company determined that the sale met the requirements for reporting as discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. Please see Note 1 for further discussion. The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the amounts presented separately in the Company's consolidated balance sheet: December 31, 2021 Accounts receivable, net $ 5,882 Inventories, net 8,807 Prepaid expenses and other current assets 1,152 Current assets held for sale $ 15,841 Property and equipment, net 7,169 Non-current assets held for sale $ 7,169 Accounts payable 1,764 Accrued compensation and employee-related expenses 914 Accrued other 955 Accrued product warranty costs 95 Contract liabilities 211 Current liabilities held for sale $ 3,939 Other long-term liabilities 8 Non-current liabilities held for sale $ 8 Net assets held for sale 19,063 77 Table of Contents KVH INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2022 and 2021 (in thousands, except per share amounts) The following table presents a reconciliation of the major financial line items constituting the results for discontinued operations to the net income from discontinued operations, net of tax, presently separately in the Company's consolidated statements of operations (through August 9, 2022, the date the inertial navigation business was sold): Year Ended December 31, 2022 2021 Sales: Product $ 16,042 $ 36,858 Service 679 998 Net sales 16,721 37,856 Costs, expenses and other income, net: Costs of product sales 12,732 22,859 Costs of service sales 457 1,025 Research & development 3,147 6,696 Sales, marketing and support 3,035 5,627 Other income, net 81 134 (Loss) income from discontinued operations before income tax expense ( 2,569 ) 1,783 Gain on sale of discontinued operations before tax expense 30,763 — Total income from discontinued operations before tax expense $ 28,194 $ 1,783 Income tax expense on discontinued operations 169 — Net income from discontinued operations, net of taxes $ 28,025 $ 1,783 Net income from discontinued operations per common share Basic and diluted $ 1.50 $ 0.10 Weighted average number of common shares outstanding: Basic and diluted $ 18,632 $ 18,217 The following table presents supplemental cash flow information of the discontinued operations: Year Ended December 31, 2022 2021 Cash (used in) provided by operating activities—discontinued operations $ ( 3,853 ) $ 3,416 Cash used in investing activities—discontinued operations $ ( 307 ) $ ( 824 ) The following table presents non-cash expenses from discontinued operations: Year Ended December 31, 2022 2021 Depreciation $ 622 $ 1,569 Compensation expense related to stock-based awards and employee stock purchase plan $ 475 $ 580 Provision for doubtful accounts $ 47 $ 28 78