What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-16 · 154 added, 163 removed, 102 unchanged (76% of the section changed)

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Risk Factors” and elsewhere in this annual report.

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

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

We generate a majority of our revenues from various international locations, primarily consisting of Singapore, Canada, 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 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.

We are a leading global provider of innovative and technology-driven connectivity solutions to primarily maritime commercial, leisure, and military/government customers.

We provide global high-speed Internet and Voice over Internet Protocol (VoIP) services via satellite to mobile users at sea and on land.

We are also a leading provider of commercially licensed entertainment, including news, sports, music, and movies, to commercial customers in the maritime and hotel markets, along with supplemental value-added cybersecurity, email, and crew internet services.

We generate revenues in the United States and various international locations, including primarily Singapore, Canada, South American countries, European Union countries and other European countries, and countries in Africa, the Middle East and Asia/Pacific, including India.

Sales to customers outside the United States accounted for 68% and 63% of our consolidated net revenues for 2023 and 2022, respectively.

We generate a substantial majority of our revenues from sales of satellite Internet airtime services.

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

Sales of our global HTS airtime services accounted for 81% and 75% of our consolidated net sales for 2023 and 2022, respectively.

In mid-2022, we launched our KVH ONE hybrid network, which integrates global satellite service with KVH-provided cellular service in more than 150 countries, along with shore-based Wi-Fi access.

Revenue from our cellular airtime service has increasingly supplemented, and we expect will continue to supplement, our satellite-only airtime revenue.

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

We expect to earn usage fees from OneWeb service upon the launch of that service in 2024.

We also generate service revenue from product repairs and extended warranty sales.

Our service 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.

Sales of content services accounted for 3% and 4% of our consolidated net revenues for 2023 and 2022, respectively.

Historically, we have also offered satellite communications products, but these products have represented a declining percentage of our revenues in recent years.

Our satellite-only and hybrid products enable marine customers to receive data,

VoIP, and value-added services via satellite, cellular, and shore-based Wi-Fi networks onboard commercial, leisure, and military/government vessels.

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

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

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

Our service sales 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 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.

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

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

Product sales accounted for 13% and 19% of our consolidated net sales for 2023 and 2022, respectively.

In February 2024, we announced a staged wind-down of our product manufacturing operations at our Middletown, Rhode Island location.

The wind-down was driven by reduced demand for our hardware products in the face of intensifying competition in the third and fourth quarters of 2023.

We concluded that we should discontinue our c apital-intensive manufacturing activities and concentrate our efforts on growing sales of our multi-orbit, multi-channel, integrated communications solutions .

We expect that we will continue our product manufacturing activities in order to generate a targeted amount of inventory of maritime satellite connectivity and satellite television terminals to meet anticipated demand and that we will cease substantially all manufacturing activity by the end of the second quarter of 2024.

We expect to continue to facilitate customer transition to third-party hardware products compatible with our mobile satellite communications services.

We also plan to continue to conduct maintenance, service, warehousing, shipping and receiving activities at the Middletown location.

As part of the restructuring, we expect to reduce our headcount by approximately 75 employees, or approximately 20% of our total workforce as of the time we announced the restructuring.

Approximately one-third of the employee terminations have been completed, and the remaining terminations are expected to be completed by the end of the second quarter of 2024.

We expect to incur aggregate severance charges of approximately $3.3 million, consisting of approximately $3.0 million of cash charges and approximately $0.3 million of non-cash charges arising from pre-existing contractual obligations to accelerate vesting of certain outstanding equity compensation awards.

In the fourth quarter of 2023, we also recorded a $2.1 million charge related to the write-off of certain costs for a new accounting system intended for use in connection with our manufacturing operations.

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

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

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 finalized working capital adjustment, which resulted in a $0.1 million payment to EMCORE, was recorded in the fourth quarter of 2022.

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

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

We do not have any continuing involvement in these operations other than short-term transition services, which are being recorded as an offset to general and administrative expenses in continuing operations.

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

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.

Impairment Charge

During the year ended December 31, 2023, aggregate impairment charges of $6.0 million were taken against goodwill and long-lived assets for the Mobile Broadband reporting unit and the KVH Media Group reporting unit.

The $6.0 million impairment charges were driven by the significant decline in our stock price that followed the August 9, 2023 announcement of our financial results for the second quarter of 2023.

Under applicable accounting rules, this circumstance required us to evaluate our goodwill and long-lived assets for impairment.

Given the sustained decline in the market value of our outstanding equity and the uncertain impact of ongoing competition, we concluded that this impairment charge was appropriate as of September 30, 2023.

Please see Note 8 of our accompanying financial statements for further information.

Excess and Obsolete Inventory and Excess Purchase Orders

In 2023, we recorded a $5.2 million charge related to the inventory write-down and a $3.6 million charge for excess purchase order obligations, both relating to the reduced demand for our hardware products, which has led to the staged wind-down of our manufacturing activities at our facility in Middletown, Rhode Island noted above.

Please see Note 15 of our accompanying financial statements for additional details surrounding the wind-down of our manufacturing activities.

During 2022 and 2023, we continued to experience delays in the availability and delivery of certain raw material components.

We also experienced increased raw material costs.

We are continuing to monitor global developments, including the impact of inflation, and are prepared to implement actions that we determine to be necessary to sustain our business.

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

We also agreed to provide certain transition services for six months following the sale with two extension options of three months each.

We received both fixed monthly fees of approximately $0.1 million as well as variable amounts for certain additional services with escalation increases on the fixed and variable rates for each extension option.

We did not have any continuing involvement in these operations other than short-term transition services, which were recorded as an offset to general and administrative expenses in continuing operations.

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

Please see Notes 1 and 14 of our accompanying audited consolidated financial statements for further information.

On April 29, 2022, we sold KVH Media Group Entertainment Limited for net cash proceeds of $2.4 million.

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

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See Note 8 to our accompanying audited consolidated financial statements for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary.

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 December 31, 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 $0.1 million is accrued as of December 31, 2022.

Management Transition and Restructurings

On March 7, 2022, we announced the retirement of our President and Chief Executive Officer, Martin Kits van Heyningen.

We negotiated a separation and consulting agreement with Mr.

Kits van Heyningen, pursuant to which we provided a separation payment, consulting fees and health insurance coverage, as well as reimbursement of certain professional and advisory fees.

We incurred aggregate costs relating to the separation agreement of $0.5 million.

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

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Approximately $2.2 million 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.

We did not incur any additional expenses associated with this restructuring for the year ended December 31, 2023.

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

Please see Note 7 to our accompanying audited consolidated financial statements for further discussion.

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.

Approximately $0.4 million 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.

We did not incur any additional expenses associated with this restructuring for the year ended December 31, 2023.

Executive Employment Agreements

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Bruun, Roger A.

Kuebel, Felise Feingold and Robert Balog in order to retain their services and provide them with certain benefits in the event that we 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.

Kuebel, Felise Feingold and Robert Balog in order to retain their services and provide them with certain termination and change of control benefits.

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”), 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.

Bruun, Roger A.

Kuebel, Felise Feingold and Robert Balog continued to serve as an employee as of December 31, 2022.

Please see Note 7 to our accompanying audited consolidated financial statements for further discussion regarding the equity compensation modifications.

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

Bruun that, among other things, increased his annual base salary to $448,360 per year, retroactive to July 1, 2022, increased his target annual incentive compensation for the second half of 2022 to 80% of his base salary (without changing his target annual incentive compensation for the first half of 2022), extended his Retention Date from December 31, 2022 to December 31, 2023, which effectively extended the period during which Mr.

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

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

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

Bruun remains employed by us through December 31, 2022.

As of December 31, 2022, we accrued approximately $0.9 million for the executive employment agreements.

In addition to the amendment to Mr.

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

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

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 our executive officers.

During the year ended December 31, 2022, we continued to experience delays in the availability and delivery of certain raw material components, which has impacted our manufacturing and resulted in shipping delays in getting products out to our customers.

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

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

PPP Loan Forgiveness

In September 2021, the U.S.

Small Business Administration approved our application for the forgiveness of the $6.9 million loan (the PPP Loan), including related interest, that we received in May 2020 pursuant to the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (as modified by the Paycheck Protection Flexibility Act of 2020, the CARES Act).

As a result, we recognized $7.0 million of other income during the three months ended September 30, 2021.

International Sales

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

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

Revenues are based upon customer location and internationally represented 62% and 58% of our consolidated net sales for 2022 and 2021, respectively.

Sales to Singapore customers represented 16% of our consolidated net sales for 2022.

No other individual foreign country represented 10% or more of our consolidated net sales for 2022.

Sales to Singapore customers represented 13% of our consolidated net sales for 2021.

No other individual foreign country represented 10% or more of our consolidated net sales for 2021.

See Note 12 to our accompanying audited consolidated financial statements for more information on our segments.

In October 2022, we entered into an amendment to the agreement with Mr.

Pursuant to these agreements, Messrs.

Kuebel and Balog and Ms.

Feingold earned aggregate retention bonuses of $0.7 million by remaining employed with us through December 31, 2022, and Mr.

Bruun earned a retention bonus of $0.4 million by remaining employed with us through December 31, 2023.

On December 31, 2022, all four executives also became entitled to one year of accelerated vesting of their outstanding equity awards.

Results of Operations

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General and administrative 14.3 17.8

Goodwill impairment charge 4.0 —

Long-lived assets impairment charge 0.5 —

Total costs and expenses 113.1 104.1

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Interest expense — —

Other income, net 0.6 5.3

Loss from continuing operations before income taxes (benefit) expense (2.4) (8.7)

Income tax expense (benefit) from continuing operations 0.4 (0.1)

Other (expense) income, net (1.1) 0.6

Loss from continuing operations before income taxes expense (11.4) (2.4)

Income tax expense from continuing operations 0.2 0.4

Net loss from continuing operations (11.6) % (2.8) %

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Net sales 132,379 138,750 (6,371) (5) %

Net sales increased by $5.0 million, or 4%, in 2022 as compared to 2021.

Net sales decreased by $6.4 million, or 5%, in 2023 as compared to 2022.

Product sales decreased by $9.1 million, or 34%, to $17.8 million in 2023 from $26.8 million in 2022.

The decrease in product sales was primarily the result of a $3.1 million decrease in VSAT product sales.

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

The decrease in product sales was primarily the result of a $6.2 million decrease in TracVision product sales and a $4.2 million decrease in VSAT Broadband product sales, partially offset by a $1.7 million increase in Starlink product sales.

The decline in product sales was primarily due to a decrease in unit sales volume, particularly in our global leisure segment.

Competition from low-cost alternatives to VSAT, which include streaming capabilities, has had a significant impact on sales of both TracVision and VSAT Broadband products in the leisure segment.

Service sales increased by $2.7 million, or 2%, to $114.6 million in 2023 from $111.9 million in 2022.

The increase was primarily due to a $10.4 million increase in VSAT service sales, partially offset by a decrease in our content services sales of $2.6 million, primarily driven by the sale of KVH Media Group Entertainment Limited in April 2022.

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

During 2021, 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, 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, VSAT service revenue in 2022 was up 11% from 2021.

The increase was primarily due to a $3.9 million increase in our VSAT service sales driven by an increase in average subscribers, partially offset by a $1.0 million decrease in our content services sales, primarily driven by the sale of a subsidiary in April 2022.

While service sales grew in 2023, alternative solutions offered by recent LEO entrants have heightened competition in the global leisure segment, and in commercial and government markets.

As a result, service sales declined in the fourth quarter of 2023.

In the first quarter of 2024, the U.S.

Coast Guard, which accounted for approximately $11 million of our service sales in 2023, advised us that it intends to transition its primary satellite service relationship on the vessels we currently serve to Starlink.

We are in the process of negotiating a revision to our contract with the Coast Guard to continue our service as a backup system, but we are unable to anticipate the final outcome.

Because our current agreement is structured as an indefinite delivery/indefinite quantity contract, the Coast Guard can modify the terms of future deliveries at any time and in any amount.

As a result of these developments, we currently anticipate a material decline in revenue from the Coast Guard starting in the second quarter of 2024.

Costs of Sales

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

Costs of sales decreased by $1.8 million, or 2%, in 2022 to $86.3 million from $88.1 million in 2021.

The decrease in costs of sales was driven by a $3.0 million decrease in costs of service sales, which was partially offset by a $1.2 million increase in costs of product sales.

Costs of sales increased by $8.3 million, or 10%, in 2023 to $94.5 million from $86.3 million in 2022.

The increase in costs of sales was driven by a $4.3 million increase in costs of service sales and a $4.0 million increase in costs of product sales.

As a percentage of net sales, costs of sales were 71% and 62% for 2023 and 2022, respectively.

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

For 2022, costs of product sales increased by $1.2 million, or 5%, to $25.2 million from $24.0 million in 2021, primarily due to a $1.6 million increase in our marine cost of product sales and a $0.4 million decrease in our land costs of product sales.

For 2023, costs of product sales increased by $4.0 million, or 16%, to $29.1 million from $25.2 million in 2022, primarily due a $6.8 million increase in various manufacturing and other unabsorbed expenses, $3.6 million of excess purchase order obligations, a $1.7 million increase in Starlink cost of product sales and a $0.3 million increase in accessories cost of product sales, partially offset by a $4.7 million decrease in TracVision cost of product sales and a $3.3 million decrease in VSAT Broadband cost of product sales.

The manufacturing and other unabsorbed costs included a $6.6 million inventory write-down, as well as lower unit volume, resulting in less absorption of overhead.

The excess purchase order obligations relate to unconditional purchase orders outstanding as of December 31, 2023 that we determined, in connection with the preparation of our audited financial statements for 2023, would exceed our anticipated needs.

Please see Note 15 to our accompanying audited financial statements for further information.

As a percentage of product sales, costs of product sales were 164% and 94% for 2023 and 2022, respectively.

The increase was primarily driven byproduct mix within our marine costs of product sales, as well as increased component costs and manufacturing inefficiencies due to supply chain shortages, as well as increased general inflation.

Our costs of service sales consist primarily of satellite service capacity, depreciation, service network overhead expense associated with our global HTS network infrastructure, direct network service labor, Inmarsat service costs, product installation costs, engineering and related direct costs associated with customer-funded research and development, media materials and distribution costs, and service repair materials.

For 2022, costs of service sales decreased by $3.0 million, or 5%, to $61.1 million from $64.1 million in 2021.

Costs of service sales decreased primarily due to a $1.5 million decrease in 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 $1.4 million decrease in content and training cost of service sales, primarily driven by the sale of a subsidiary in April 2022.

Cost of product sales increased as a percentage of product sales primarily due to the increase in the excess and obsolescence reserve, the write-down of inventory, excess purchase order obligations and $0.8 million of higher unit component costs.

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

For 2023, costs of service sales increased by $4.3 million, or 7%, to $65.4 million from $61.1 million in 2022.

Costs of service sales increase primarily due to a $4.4 million increase in VSAT Broadband airtime costs of service sales.

The increase in airtime cost of sales is primarily related to capacity increases 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 57% and 55% for 2023 and 2022, respectively.

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Research and development expense for 2023 decreased by $1.0 million, or 9%, to $9.4 million from $10.4 million in 2022.

The primary reason for the decrease in research and development expense was a $0.4 million decrease in salaries and associated compensation due to the March restructuring and a $0.4 million decrease in professional fees.

As a percentage of net sales, research and development expense was 8% for each of 2022 and 2021.

The decrease in research and development expense resulted primarily from a $0.8 million decrease in salaries, benefits and taxes driven by the reduction in our workforce in March 2022.

As a percentage of net sales, research and development expense was 7% and 8% in 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.

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Sales, marketing, and support expense decreased by $2.3 million, or 10%, to $20.9 million in 2023 from $23.2 million in 2022.

The decrease in sales, marketing and support expense resulted primarily from a $1.5 million decrease in salaries and associated compensation due to the March restructuring, a $0.5 million decrease in marketing expenses, a $0.3 million decrease in bad debt expenses, a $0.3 million decrease in external commissions expense and a $0.2 million decrease in professional fees, partially offset by a $0.6 million increase in warranty expenses and a $0.3 million increase in travel expenses.

The decrease in sales, marketing and support expense resulted primarily from a $2.9 million decrease in salaries, benefits and taxes driven by the reduction in our workforce in March 2022 and a $0.7 million decrease in external commission expense, partially offset by a $0.9 million increase in facilities expense and a $0.2 million increase in travel expense.

As a percentage of net sales, sales, marketing and support expense was 16% and 17% in 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 and public company costs.

General and administrative expense for 2023 decreased by $5.8 million, or 23%, to $18.9 million from $24.7 million for 2022.

The decrease in general and administrative expense resulted primarily from a $3.4 million decrease in professional fees, primarily arising from a stockholder’s nomination of a competing slate of directors at our annual meeting of stockholders in 2021 and $0.9 million of contra-expense associated with the Transition Services Agreement with EMCORE as a result of the sale of the inertial navigation business in 2022.

The decrease in general and administrative expense resulted primarily from a $5.7 million decrease in salaries, benefits and taxes driven by the reduction in our workforce in March 2022, as well as a reduction in expenses related to the separation and retirement of our former President and Chief Executive Officer in March 2022.

There was also a $0.6 million decrease in recruiting expense, which was driven by professional fees incurred during 2022 associated with the search for a new Chief Executive Officer and replacements for two departed members of our board of directors.

Lastly, there was a $0.5 million decrease in facilities expense, a $0.5 million decrease in depreciation and amortization expense, a $0.3 million decrease in software license expense and a $0.3 million decrease in bank fees.

Partially offsetting these items were a $2.1 million charge for the discontinuation of a project for implementing a new manufacturing-centric accounting system and a $0.3 million reduction in reimbursements made by EMCORE for expenses incurred under the transition services agreement relating to the sale of the inertial navigation business in 2022.

As a percentage of net sales, general and administrative expense was 14% and 18% for 2023 and 2022, respectively.

Interest and Other Income, Net

Interest and Other (Expense) 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 by $0.6 million to $1.5 million from $0.9 million for 2021, primarily due to an increase in our marketable securities.

Interest expense remained flat period-over-period at less than $0.1 million for 2022 and 2021.

Other income, net for 2022 decreased to $0.8 million from other income, net of $7.1 million for 2021 primarily due to the forgiveness of the PPP Loan in 2021.

Income Tax (Benefit) Expense

Income tax expense for 2022 was $0.5 million and related to current U.S.

taxes as a result of net operating use limitations and the release of a portion of the valuation allowance, taxes on income earned in foreign jurisdictions and discrete adjustments.

Income tax benefit for 2021 was $0.1 million and related to losses generated in foreign jurisdictions.

There was no associated tax benefit related to losses incurred in the U.S.

due to a full valuation allowance on our related deferred tax assets.

The effective tax rate for 2022 was (16.2)% on continued operations.

The primary driver of the difference between our effective tax rate as compared to the United States federal statutory rate was the change in the valuation reserve against the U.S.

deferred tax assets, international rate differences, research tax credits, state taxes and discrete tax adjustments.

The effective income tax rate of 0.9% for 2021 differs from the U.S.

federal statutory rate due to the change in the valuation reserve against the U.S.

deferred tax assets, research tax credits, state taxes and the non-taxability of the forgiveness of the PPP Loan.

Interest income increased by $2.1 million to $3.6 million from $1.5 million for 2022.

Of the current period interest income of $3.6 million, $3.0 million is attributable to interest earned on cash and cash equivalents, while the remaining $0.6 million was attributable to interest from lease receivables.

Other (expense) income, net changed to other expense, net of $1.4 million for 2023 from other income, net of $0.8 million for 2022 primarily due to the $0.7 million gain on sale of KVH Media Group Entertainment Limited in 2022, a $0.6 million increase in foreign exchange losses from our UK operations, a $0.5 million increase in the loss on disposal of fixed assets, and a $0.3 million loss in 2023 on an unfavorable future contract.

Income Tax Expense

Income tax expense for 2023 and 2022 was $0.3 million and $0.5 million, respectively, and related to taxes on income earned in foreign jurisdictions.

The effective tax rate from continuing operations for 2023 and 2022 was (2.1)% and (15.8)%, respectively.

For 2023 and 2022, the effective tax rates from continuing operations differed from the statutory tax rate primarily due to our maintaining a valuation allowance reserve on our U.S.

deferred tax assets, impairment of goodwill, discrete tax adjustments and the composition of income from foreign jurisdictions taxed at lower rates.

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 finalized working capital adjustment, which resulted in a $0.1 million payment to EMCORE, was recorded in the fourth quarter of 2022.

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

On August 9, 2022, we sold our inertial navigation business for net proceeds of $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.

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

Please see Notes 1 and 14 to our accompanying audited consolidated financial statements for further information.

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The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financial statements.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets

and liabilities, revenues and expenses, and related disclosure at the date of our financial statements.

Our significant accounting policies are summarized in Note 1 to our accompanying audited consolidated financial statements.

Critical 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.

We believe that our accounting policies for goodwill, intangible assets, and other long-lived assets contain the only estimates critical to an understanding and evaluation of our financial results for 2022, as discussed below.

We believe that our accounting estimates for goodwill, intangible assets, and other long-lived assets are the only estimates critical to an understanding and evaluation of our financial results for 2023, as discussed below.

Goodwill, Intangible Assets, and other Long-Lived Assets

We follow Accounting Standards Codification (ASC) Update No.

In accordance with ASC Update No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test of Goodwill Impairment .

ASC 350 requires the completion of 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, we performed a qualitative assessment of goodwill impairment (Step 0) and concluded that for our 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, we determined that it was necessary to perform the Step 1 quantitative analysis due to the operating trends identified within the reporting unit.

We utilized an income approach to estimate the fair value of the reporting unit.

We believe that the assumptions used to estimate the fair value of our KVH Media Group reporting unit were reasonable.

We estimated that, as of October 1, 2022, the fair value of 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.

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.

Simplifying the Test of Goodwill Impairment (ASC 350), we perform a goodwill impairment test at least annually, or more frequently if certain events occur, or circumstances change, that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount (frequently referred to as impairment indicators or triggering events).

A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

Intangible assets with finite lives and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of intangible assets with finite lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows expected to be generated by the asset or asset group.

Asset groups are determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

If these comparisons indicate that an asset is not recoverable, we 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 our intangible assets or other long-lived assets may not be recoverable.

See Note 9 to our accompanying audited consolidated financial statements for further discussion of goodwill and intangible assets.

In the third quarter of 2023, we observed a sustained stock price decline resulting in a significant shortfall in market capitalization when compared to the aggregate carrying value of our net assets.

These circumstances led us to conclude that quantitative goodwill impairment assessments of the Mobile Broadband (MBB) and KVH Media Group (Media) reporting units were required.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.

Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding future plans, as well as industry and economic conditions.

These assumptions and estimates include estimated future cash flows, income tax rates, discount rates, growth rates, and other market factors.

In performing the quantitative assessment, we estimated the fair value of its reporting units using the income approach, also known as the discounted cash flow ("DCF") method, which utilizes the present value of cash flows to estimate fair value.

The DCF method involves estimating the discounted cash flows of a reporting unit by forecasting cash flows each year, calculating a terminal value, and discounting all of the cash flows to present value at an appropriate discount rate (in consideration of the time value of money, the risk inherent in the cash flow stream, and in the context of current rates of return for equity and debt capital).

The final determination of fair value was based on a probability-weighted approach comparing management’s forecasts with a market expectation forecast.

As of September 30, 2023, the determined fair values of the MBB and Media reporting units were lower than their carrying values.

After recognition of a long-lived asset impairment charge (as discussed below), we recognized goodwill impairment charges equal to the total amount of goodwill attributed to the MBB and Media reporting units, which were approximately $4.4 million and $0.9 million, respectively.

We also determined that the sustained decrease in stock price and shortfall in market capitalization indicated that the carrying amounts of our asset groups (MBB and Media) may not be recoverable.

We therefore performed impairment tests on the long-lived assets in each asset group, including definite-lived intangible assets using an undiscounted cash flow analysis over the estimated remaining useful life of the primary asset, to determine whether the carrying amounts of each asset group are recoverable.

As of September 30, 2023, our analysis indicated that the carrying amount of the MBB asset group is recoverable, and therefore no fair value estimate was required.

The Media asset group failed the undiscounted cash flow recoverability test and therefore we estimated the fair value of the asset group to determine whether any asset impairment was present.

Our estimation of the fair value of the long-lived assets included the use of discounted cash flow and cost analyses, reflecting estimates of future revenues, cost factors, cash flows, discount rates, and obsolescence.

Based on these analyses, we concluded that the fair values of certain assets were lower than their carrying amounts.

As of September 30, 2023, we recognized long-lived asset impairment charges totaling $0.4 million and $0.3 million for the KVH Media Group’s internally developed software assets and acquired subscriber relationships, respectively, reducing the carrying amounts to zero.

Please see Note 8 of our accompanying financial statements for further discussion.

Liquidity and Capital Resources

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

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

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

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

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

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 year ended December 31, 2021.

The finalized working capital adjustment, which resulted in a $0.1 million payment to EMCORE, was recorded in the fourth quarter of 2022.

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

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 that was subsequently forgiven, cash flows from operations and proceeds received from exercises of stock options and the issuance of stock.

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

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

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

If our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements.

In that event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations.

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

We believe that our primary long-term capital requirements relate to AgilePlans revenue-generating assets, as well as servicing and repaying our satellite service capacity and equipment lease obligations.

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Operating Activities

Operating activities provided $8.9 million of net cash in 2022 and provided $2.9 million of net cash in 2021, an increase in net cash provided by operating activities of $6.0 million.

The $6.0 million increase is primarily due to a $33.9 million increase in net income, an increase in cash inflows of $6.1 million related to accounts payable and accrued expenses, an increase in cash inflows of $1.2 million related to other non-current assets and non-current contract assets, an increase in cash inflows of $1.0 million related to accounts receivable, and a decrease in cash outflows of $0.1 million related to contract liabilities and long-term contract liabilities.

Partially offsetting these items was a $26.5 million change in other non-cash items, driven by the $30.8 million gain on sale of the inertial navigation business, the $7.0 million PPP loan forgiveness in 2021, and the $0.7 million gain on sale of KVH Media Group Entertainment Limited.

In addition, there was an increase in cash outflows of $8.5 million related to inventories and an increase in cash outflows of $1.2 million related to prepaid expenses, other current assets and current contract assets.

Operating activities provided $2.5 million of net cash in 2023 and provided $8.9 million of net cash in 2022, a decrease in net cash provided by operating activities of $6.4 million.

The $6.4 million decrease in net cash provided by operations was primarily the result of a $39.5 million increase in net loss and a $27.0 million increase in cash outflows related to accounts payable.

Partially offsetting these items were a change of $37.9 million related to non-cash items, driven by the $30.8 million gain on sale of the inertial navigation business in 2022 and the $6.0 million impairment of goodwill and long-lived assets, a $12.2 million decrease in cash outflows relating to inventories, a $8.4 million decrease in cash outflows relating to accrued compensation, product warranty and other expenses, a $1.2 million increase in cash inflows relating to accounts receivable, and a $0.8 million increase in cash inflows related to deferred revenue.

Investing Activities

Net cash provided by investing activities for 2022 was $0.4 million as compared to net cash used in investing activities of $6.7 million for 2021.

The $7.1 million change in net cash provided by investing activities was primarily the result of a $55.0 million increase in cash inflows from the proceeds of the sale of the inertial navigation business, a $2.4 million increase in cash inflows from the proceeds of the sale of the KVH Media Group Entertainment Limited subsidiary, and a $4.4 million decrease in cash outflows relating to capital expenditures.

Partially offsetting these items was a $54.6 million increase in net cash outflows relating to the purchase and sale of marketable securities.

Net cash used in investing activities for 2023 was $14.7 million as compared to net cash provided by investing activities of $0.4 million for 2022.

The $15.1 million increase in net cash used in investing activities was primarily the result of a $55.0 million decrease in proceeds from the sale of the inertial navigation business, a decrease of $2.4 million in proceeds from the sale of KVH Media Group Entertainment Limited and a $1.2 million increase in cash paid for acquisition of intangible assets, partially offset by a $39.8 million decrease in net investment in marketable securities and a $3.8 million decrease in capital expenditures.

Financing Activities

Net cash provided by financing activities for 2023 was $2.3 million as compared to net cash provided by financing activities in 2022 of $0.7 million.

The $1.9 million decrease in net cash provided by financing activities is primarily attributable to the $2.0 million decrease in cash inflows relating to proceeds from stock options exercises 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 and related interest.

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 year ended December 31, 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.

The $1.6 million increase in net cash provided by financing activities is primarily attributable to a $1.6 million increase in cash inflows relating to proceeds from the exercise of stock options and purchases under our employee stock purchase plan and a $0.2 million decrease in cash outflows related to the payment of finance leases, 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 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.

From time to time we have entered into multi-year agreements to lease satellite capacity, and we have also purchased numerous satellite hubs to support the added capacity.

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Off-Balance Sheet Arrangements

As of December 31, 2022, except for certain satellite service capacity obligations that are not considered operating or financing leases under ASC 842, we did not have any off-balance sheet arrangements that have or are reasonably likely to have

a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

As of December 31, 2023, we had certain satellite service capacity obligations that are not considered operating or financing leases under ASC 842.

As of that date, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, cash requirements or capital resources.

Please see Note 5 to our accompanying audited consolidated financial statements for additional information on our satellite service capacity obligations.

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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-K

Item 7. Management’s Discussion and Analysis