What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-12-06 · 91 added, 183 removed, 99 unchanged (73% of the section changed)

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In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Risk Factors” in Item 1A of Part II of this quarterly report on Form 10-Q.

These and many other factors could affect our future financial and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf.

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

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

We generate a majority of our revenues from various 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.

We offer satellite communications products and services.

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

Our 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.

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

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

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

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

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

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

Revenue from our cellular airtime service has increasingly supplemented, and we expect will continue to supplement, our satellite-only airtime revenue following the mid-2022 launch of the KVH ONE hybrid network and TracNet H-series terminals.

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

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

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

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

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

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

Dispositions;

Termination of Credit Facility

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

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

On August 9, 2022, we also entered into a Transition Services Agreement with EMCORE, pursuant to which we agreed to provide certain transition services to support the continued operation of the inertial navigation business for a specified period of time following the sale.

The working capital adjustment is in the process of being finalized.

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

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

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

On August 9, 2022, we also terminated our senior secured credit facility agreement (the 2018 Credit Agreement) and the related security and pledge agreements with Bank of America, N.A., as Administrative Agent.

At the time of termination, no borrowings were outstanding under the 2018 Credit Agreement.

With the termination of this agreement, all associated liens were released.

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

This transaction did not meet the criteria for reporting as discontinued operations under ASC 205-20.

We recorded a gain on the sale of approximately $0.6 million, which is recorded in other income, net in the accompanying consolidated statements of operations.

See Note 14 to our consolidated interim financial statements for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary.

Management Transition and Restructuring

On March 7, 2022, we announced that our President and Chief Executive Officer, Martin Kits van Heyningen, was retiring from his executive and Board roles after more than 40 years of service and assuming a consulting position with us.

Bruun, our then Chief Operating Officer, was appointed as our interim President and Chief Executive Officer.

Subsequently, on June 15, 2022, he was appointed as our President and Chief Executive Officer and as a Class II member of the Board of Directors.

We have incurred approximately $0.7 million of costs associated with the management transition through September 30, 2022, including a separation payment, consulting fees and health insurance coverage for Mr.

Kits van Heyningen, as well as professional and advisory fees, and expect to continue to incur ongoing compensation expenses until March 2023.

Approximately $0.3 million is accrued as of September 30, 2022.

We incurred approximately $0.5 million of costs associated with the management transition through March 31, 2022, including a separation payment, consulting fees and health insurance coverage for Mr.

Kits van Heyningen, as well as professional and advisory fees.

As of March 31, 2023 all payments related to the additional fees had been completed.

In March 2022, we also restructured our operations to reduce costs and better pursue a more focused strategy.

We reduced our workforce by approximately 10% and began incurring reduced expenses from these actions beginning in the second quarter of 2022.

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

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

Approximately $1.7 million of severance payments, other employee benefits, and legal and advisory fees were incurred for the three months ended March 31, 2022.

For the three months ended March 31, 2023, we did not incur any additional expenses associated with this restructuring.

We also modified impacted employee's stock option and restricted stock awards.

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

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

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

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

During the third quarter of 2022, we restructured our foreign operations by closing our India and Cyprus offices and our Denmark warehouse to reduce costs.

All costs associated with the severance payments, other employee benefits, and legal and advisory fees were incurred in the 2022.

Executive Employment Agreements

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The terms of the agreements are substantially identical except as to title, salary, target bonus and reporting responsibilities.

The agreements provide that, if the executive continues to serve as an employee through December 31, 2022 (the “Retention Date”), we will pay the executive a retention bonus equal to 75% of the executive’s base salary at the agreement date, and we will accelerate the vesting of the executive’s equity awards that would otherwise have vested in the twelve months after the Retention Date.

Please see Note 5 to our consolidated interim financial statements for further discussion regarding the equity compensation modifications.

If a Qualifying Termination occurs before December 31, 2022, the executive will receive a pro rata portion of the retention bonus.

If in connection with such a termination the executive becomes entitled to receive the change in control severance payments and benefits, the executive will also become entitled to receive the full retention bonus, and the Retention Date will be the later of the date of such change in control or such termination of employment.

The agreements provided that, if the executive continued to serve as an employee through December 31, 2022 (the “Retention Date”), we would pay the executive a retention bonus equal to 75% of the executive’s base salary at the agreement date, and we would accelerate the vesting of the executive’s equity awards that would otherwise have vested in the twelve months after the Retention Date.

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

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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).

If a Qualifying Termination occurs before December 31, 2023, Mr.

Bruun will receive a pro rata portion of the retention bonus.

If in connection with such a termination he becomes entitled to receive the change in control severance payments and benefits, he will also become entitled to receive the full retention bonus, and the Retention Date will be the later of the date of such change in control or such termination of employment.

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

Bruun remains employed by us through December 31, 2022.

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

In January 2023, we paid out all contracted benefits to Roger A.

Kuebel, Felise Feingold and Robert Balog as the conditions of their agreements were satisfied on December 31, 2022.

As of March 31, 2023, we have accrued approximately $0.2 million for the retention bonus payable to Brent Bruun.

In addition to the amendment to Mr.

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

During the nine months ended September 30, 2022, we continued to experience delays in the availability and delivery of certain raw material components, which has impacted our manufacturing as well as resulted in shipping delays in getting products out to our customers.

We also experienced increase in raw material costs, which we expect to continue throughout 2022.

During the three months ended March 31, 2023, we continued to experience delays in the availability and delivery of certain raw material components, which has impacted our manufacturing as well as resulted in shipping delays in getting products out to our customers.

We also experienced increased raw material costs, which we expect to continue throughout 2023.

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

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We operate in a number of major geographic areas across the globe.

We generate our international net sales, based upon customer location, primarily from customers located in Singapore, Canada, European Union countries, and other European countries, as well as countries in Africa, Asia/Pacific, the Middle East, and India.

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

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

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

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

We generate our international net sales, based upon customer location, primarily from customers located in Singapore, Canada, European Union countries and other European countries, as well as countries in Africa, Asia/Pacific and the Middle East, and India.

International revenues represented 64% and 61% of our consolidated net sales for the three months ended March 31, 2023 and 2022, respectively.

Sales to Singapore customers represented 18% and 16% of our consolidated net sales for the three months ended March 31, 2023 and 2022, respectively.

No other individual foreign country represented 10% or more of our consolidated net sales for the three months ended March 31, 2023 and 2022.

Critical Accounting Estimates

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C ritical accounting estimates are those estimates made that involve a significant level of estimation uncertainty and have had or are reasonably likely to have an impact on our statement of operations.

As described in our annual report on Form 10-K for the year ended December 31, 2021, our accounting policies for goodwill, intangible assets, and other long-lived assets were the only estimates critical to an understanding and evaluation of our consolidated financial statements.

We have reviewed our accounting policies and critical accounting estimates and determined that these remain our most critical accounting policies and estimates for the nine months ended September 30, 2022.

As described in our annual report on Form 10-K for the year ended December 31, 2022, our accounting policies for goodwill, intangible assets, and other long-lived assets are the estimates most critical to an understanding and evaluation of our consolidated financial statements.

We have reviewed our accounting policies and critical accounting estimates and determined that these remain our most critical accounting policies and estimates for the three months ended March 31, 2023.

Readers should refer to our annual report on Form 10-K for the year ended December 31, 2022 under “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Estimates” for descriptions of these policies and estimates, as well as the notes to the consolidated interim financial statements included elsewhere within this report.

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

Three Months Ended Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

Three Months Ended

Product 14.7 % 19.8 %

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Interest expense — —

Other income, net 1.6 20.4 1.5 6.3

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

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

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

Three months ended September 30, 2022 and 2021

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

For the three months ended September 30, 2022 vs.

Other (expense) income, net (0.7) 0.3

Income (loss) from continuing operations before income tax expense — (11.8)

Income tax expense from continuing operations 0.1 1.0

Net loss from continuing operations (0.1) % (12.8) %

Three months ended March 31, 2023 and 2022

Our net sales for the three months ended March 31, 2023 and 2022 were as follows:

For the three months ended March 31, 2023 vs.

2023 2022 $ %

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Net sales $ 33,689 $ 33,151 $ 538 2 %

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

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

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

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

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

The increase was primarily due to a $2.1 million increase in our mini-VSAT service sales, partially offset by a $1.0 million decrease in our content service sales, primarily driven by the sale of a subsidiary in April 2022.

The shutdown of our legacy Arclight network on December 31, 2021 impacted sales of mini-VSAT products in 2021 and mini-VSAT services in 2022.

During 2021, mini-VSAT product sales benefited from the demand for units needed to migrate to our HTS network before the shutdown of our legacy network.

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

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

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

Net sales increased by $0.5 million, or 2%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Product sales decreased by $1.6 million, or 25%, to $4.9 million for the three months ended March 31, 2023 from $6.6 million for the three months ended March 31, 2022.

The decrease in product sales was primarily due to a $1.5 million decrease in VSAT Broadband product sales.

The decrease in VSAT product sales was primarily due to a decrease in unit sales volume, particularly with 37cm units in our global leisure segment.

Alternative solutions offered by recent LEO entrants have heightened competition in this segment of the market.

Service sales increased by $2.2 million, or 8%, to $28.7 million for the three months ended March 31, 2023 from $26.6 million for the three months ended March 31, 2022.

The increase was primarily due to a $3.0 million increase in our VSAT

airtime sales, partially offset by a $0.8 million decrease in our content service sales, primarily driven by the sale of a subsidiary in April 2022.

Costs of Sales

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

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

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

As a percentage of net sales, costs of sales were 63% and 65% for the three months ended September 30, 2022 and 2021, respectively.

Costs of sales increased by $1.0 million, or 5%, in the three months ended March 31, 2023 to $21.3 million from $20.3 million in the three months ended March 31, 2022.

The increase in costs of sales was driven by a $1.2 million increase in costs of service sales, partially offset by a $0.2 million decrease in costs of product sales.

As a percentage of net sales, costs of sales were 63% and 61% for the three months ended March 31, 2023 and 2022, respectively.

Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products.

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

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

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

Our costs of service sales consist primarily of satellite service capacity, depreciation, service network overhead expense associated with our mini-VSAT Broadband network infrastructure, direct network service labor, Inmarsat service costs, product installation costs, media materials and distribution costs, and service repair materials.

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

This decrease was primarily driven by the shutdown of our legacy Arclight network, partially offset by an increase in costs associated with our HTS network due to increased capacity required for additional customers.

In addition, there was a $0.6 million decrease in

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

As a percentage of service sales, costs of service sales were 54% and 61% for the three months ended September 30, 2022 and 2021, respectively.

For the three months ended March 31, 2023, costs of product sales decreased by $0.2 million, or 3%, to $5.2 million from $5.4 million in the three months ended March 31, 2022, primarily due to a $0.3 million decrease in our marine cost of product sales.

As a percentage of product sales, costs of product sales were 106% and 83% for the three months ended March 31, 2023 and 2022, respectively.

Cost of product sales increased as a percentage of product sales primarily due to two factors;

the first being a write-down of inventory by $0.6 million and the second being purchase price variance of $0.3 million.

Our costs of service sales consist primarily of satellite service capacity, depreciation, service network overhead expense associated with our VSAT Broadband network infrastructure, direct network service labor, Inmarsat service costs, product installation costs, media materials and distribution costs, and service repair materials.

For the three months ended March 31, 2023, costs of service sales increased by $1.2 million, or 8%, to $16.1 million from $14.9 million for the three months ended March 31, 2022, primarily due to a $1.5 million increase in VSAT airtime costs of service sales.

The increase in airtime cost of sales is primarily related to capacity increases necessary to support growth in our airtime subscriber base.

This was partially offset by a $0.3 million decrease in content services cost of service sales, primarily driven by the sale of a subsidiary in April 2022.

As a percentage of service sales, costs of service sales were 56% for each of the three months ended March 31, 2023 and 2022.

Operating Expenses

Research and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internally funded product development and product sustaining engineering activities.

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

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

Research and development expense for the three months ended March 31, 2023 decreased by $0.4 million, or 15%, to $2.6 million from $3.0 million for the three months ended March 31, 2022.

The decrease primarily resulted from a $0.3 million decrease in salaries, benefits and taxes, which was driven by costs related to the reduction in our workforce in March 2022.

As a percentage of net sales, research and development expense was 8% and 9% for the three months ended March 31, 2023 and 2022, respectively.

Sales, marketing, and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in-house and third-party representatives, costs related to the co-development of certain content, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and support costs, warranty-related costs and bad debt expense.

Sales, marketing and support expense also includes the operating expenses of our sales office subsidiaries in Denmark, Singapore, Brazil, and Japan.

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

Sales, marketing and support expense for the three months ended March 31, 2023 decreased by $1.3 million, or 18%, to $5.7 million from $7.0 million for the three months ended March 31, 2022.

The decrease primarily resulted from a $1.5 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce in March 2022.

This decrease was partially offset by a $0.3 million increase in warranty expense.

As a percentage of net sales, sales, marketing and support expense was 16% and 18% for the three months ended September 30, 2022 and 2021, respectively.

As a percentage of net sales, sales, marketing and support expense was 17% and 21% for the three months ended March 31, 2023 and 2022, respectively.

General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources, certain outside professional services, and other administrative costs.

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

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

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

General and administrative expense for the three months ended March 31, 2023 decreased by $2.4 million, or 34%, to $4.7 million from $7.1 million, for the three months ended March 31, 2022.

The decrease primarily resulted from a $2.0 million decrease in salaries, benefits, and taxes, which was driven by the reduction in our workforce in March 2022, and the incurrence in the three months ended March 31, 2022 of $0.5 million of expenses related to the separation and retirement of Mr.

Kits van Heyningen.

In addition, during the three months ended March 31, 2023 we were reimbursed by EMCORE for $0.5 million of expenses incurred under the Transition Service Agreement relating to the sale of the inertial navigation business in 2022.

Partially offsetting these items was a $0.5 million increase in professional fees primarily related to additional accounting and consulting costs incurred to prepare our annual filings.

As a percentage of net sales, general and administrative expense was 14% and 21% for the three months ended March 31, 2023 and 2022, respectively.

Interest and Other Income, Net

Interest income represents interest earned on our cash and cash equivalents, as well as from investments and our sale-type lease receivables.

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

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

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

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

Interest income increased $0.6 million for the three months ended March 31, 2023 to $0.8 million from $0.2 million for the three months ended March 31, 2022.

Of the current period interest income of $0.8 million, $0.6 million is attributable to interest gained from cash and cash equivalents, while the remaining $0.2 million was due to interest from lease receivables.

Interest expense remained flat period-over-period at less than $0.1 million for both of the three months ended March 31, 2023 and 2022.

Other (expense) income, net decreased to other expense, net of $0.2 million for the three months ended March 31, 2023 from other income, net of $0.1 million for the three months ended March 31, 2022.

Other expense, net of $0.2 million for the three months ended March 31, 2023 primarily relates to foreign exchange losses from our UK operations.

Income Tax Expense

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

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

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

generated income, but these proceeds were not taxable.

The operating losses incurred in the U.S.

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

Nine months ended September 30, 2022 and 2021

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

For the nine months ended September 30, 2022 vs.

2022 2021 $ %

(dollars in thousands)

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

Service 83,065 76,862 6,203 8 %

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

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

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

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

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

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

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

Costs of Sales

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

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

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

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

As a percentage of product sales, costs of product sales were 88% and 78% for the nine months ended September 30, 2022 and 2021, respectively.

The increase was primarily driven by product mix within our marine mobile connectivity cost of product sales.

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

In addition, there was a $0.9 million decrease in content services cost of service sales, primarily driven by the sale of a subsidiary in April 2022.

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

Operating Expenses

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

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

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

The decrease in sales, marketing and support expense resulted primarily from a $1.6 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce in March 2022) and a $0.4 million decrease in external commission expense, partially offset by additional costs of $1.0 million related to the reduction in our workforce in March 2022 and a $0.7 million increase in warranty expense.

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

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

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

The decrease in professional fees was driven by a $3.1 million decrease in event-driven legal and advisory fees, primarily arising from a stockholder’s nomination of a competing slate of directors at our annual meeting of stockholders in 2021.

This decrease in expenses was partially offset by additional costs of $0.7 million related to the reduction in our workforce in March 2022, a $0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two recently departed members of our board of directors, a $0.5 million increase in expenses related to the separation and retirement of Mr.

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

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

Interest and Other Income, Net

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

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

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

Income Tax Expense (Benefit)

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

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

Income tax expense for the three months ended March 31, 2023 was less than $0.1 million and related to taxes on income earned in foreign jurisdictions.

Income tax expense for the three months ended March 31, 2022 was $0.3 million and related to taxes on income earned in foreign jurisdictions.

Discontinued Operations

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

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

On August 9, 2022, we sold our inertial navigation business for net proceeds $54.9 million, less specified deductions.

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

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

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

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

Please see Notes 1 and 18 for further discussion.

Results for discontinued operations are as follows:

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

2022 2021 2022 2021

Three months ended March 31,

(dollars in thousands)

Sales from discontinued operations $ 7,943

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

Net loss from discontinued operations, net of tax $ (425)

Liquidity and Capital Resources

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

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

(the Lender), under the PPP, which was established under the CARES Act.

Pursuant to the terms of the CARES Act, in August 2021, we applied for forgiveness of the full amount of the PPP Loan.

On September 24, 2021, we received notification from the bank that, on September 19, 2021, the U.S.

Small Business Administration (the SBA) had determined that the PPP Loan forgiveness application was approved, and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA.

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

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

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

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

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

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

On August 9, 2022, we sold our inertial navigation business to EMCORE Corporation for net proceeds of $54.9 million, less specified deductions.

As of March 31, 2023, we had $68.7 million in cash, cash equivalents, and marketable securities, of which $2.5 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries.

Our foreign subsidiaries held no marketable securities as of March 31, 2023.

As of March 31, 2023, we had $95.6 million in working capital.

Based upon our current working capital position, current operating plans and expected business conditions, we expect to have sufficient funds, through at least twelve months from the date that this report is filed with the SEC, to fund our short-term and long-term working capital requirements, including capital expenditures and contractual obligations.

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

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

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

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

Partially offsetting these items was a $29.2 million increase in net income, a $3.0 million decrease in cash outflows related to accounts payable, a $0.9 million decrease in cash outflows related to contract liabilities and long-term contract liabilities, a $0.8 million decrease in cash outflows related to accrued compensation, product warranty and other expenses, and a $0.4 million decrease in cash outflows related to other non-current assets and non-current contract assets.

Net cash provided by investing activities was $4.3 million for the nine months ended September 30, 2022 compared to net cash used in investing activities of $7.2 million for the nine months ended September 30, 2021.

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

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

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

The $2.0 million decrease in net cash provided by financing activities is primarily attributable to the $2.1 million decrease in cash inflows relating to proceeds from stock options exercised and the employee stock purchase plan.

Borrowing Arrangements

Paycheck Protection Program Loan

In May 2020, we received a $6.9 million loan from the Lender under the PPP, which was established under the CARES Act and is administered by the SBA.

The term of the PPP Loan was two years from the funding date, and the interest rate was 1.00%.

Interest on the loan accrued from the funding date, but was deferred.

In August 2021, we applied for forgiveness of the full amount of the PPP Loan.

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

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

Line of Credit

On August 9, 2022, we terminated the 2018 Credit Agreement and the related security and pledge agreements with Bank of America, N.A., as Administrative Agent.

At the time of termination, no borrowings were outstanding under the 2018 Credit Agreement.

With the termination of this agreement, all associated liens were released.

Net cash used in operations was $6.8 million for the three months ended March 31, 2023 compared to net cash used in operations of $3.5 million for the three months ended March 31, 2022.

The $3.3 million increase in cash used in operations is primarily driven by a net increase in cash outflows of $15.1 million related to accounts payable, an increase of $0.5 million related to non-cash items, and a $0.4 million increase in non-current assets.

Partially offsetting these items was a $5.8 million increase in accrued compensation, product warranty and other expenses, a $4.7 million decrease in net loss, a $1.6 million increase in cash inflows relating to accounts receivable, a $0.4 million decrease in cash outflows related to prepaid expenses and current assets, and a $0.3 million increase in cash inflows related to contract liabilities.

Net cash used in investing activities was $2.7 million for the three months ended March 31, 2023 compared to net cash provided by investing activities of $0.1 million for the three months ended March 31, 2022.

The $2.8 million change in net cash used in investing activities was primarily the result of a $5.1 million increase in net investment in marketable securities, partially offset by a $2.3 million decrease in capital expenditures.

Net cash provided by financing activities was $0.8 million for the three months ended March 31, 2023 compared to net cash provided by financing activities of $0.1 million for the three months ended March 31, 2022.

The $0.6 million increase in net cash provided by financing activities is primarily attributable to the $0.8 million increase in cash inflows relating to proceeds from stock options exercised and the employee stock purchase plan, partially offset by a $0.2 million increase in cash outflows related to the repurchase of common stock to satisfy specific tax withholding obligations arising from accelerated vesting of executive stock grants.

Other Matters

We intend to continue to invest in the mini-VSAT Broadband network on a global basis.

We intend to continue to invest in our global HTS network on a worldwide basis.

As part of the future potential capacity expansion, we plan to acquire additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis