What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-01 · 102 added, 92 removed, 99 unchanged (66% 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 I of our annual report on Form 10-K for the year ended December 31, 2023.

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

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

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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.

In March 2023, we began selling Starlink terminals and in September 2023 became a Starlink authorized hardware and airtime reseller.

We expect to earn usage fees from OneWeb service upon the launch of that service, which we currently anticipate will occur late in the third quarter of 2024.

In March 2023, we began selling Starlink terminals and in September 2023 became a Starlink authorized hardware and airtime reseller initially offering Mobile Priority data plans for maritime use.

In October 2024, we expanded our portfolio to include Starlink Business Priority data plans, which will primarily be used for stationary commercial use on land.

We expect to earn usage fees from OneWeb service upon the launch of that service, which we currently anticipate will occur in the fourth quarter of 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 and hotel markets through KVH Media Group, along with supplemental value-added services.

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

Historically, our Ku-band VSAT communications service has been the primary driver of growth.

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As of June 30, 2024, all employee terminations were completed.

During the three and six months ended June 30, 2024, we incurred $1.2 million and $3.4 million, respectively, of severance charges for this restructuring.

The $3.4 million of severance charges incurred during the six months ended June 30, 2024 consisted 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.

During the nine months ended September 30, 2024, we incurred $2.9 million of severance charges for this restructuring, which amount reflects a favorable $0.4 million correction in the three months ended September 30, 2024.

The $2.9 million of severance charges incurred during the nine months ended September 30, 2024 consisted of approximately $2.6 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.

During the second quarter of 2024, we expanded our relationship with Starlink through a bulk data distribution agreement.

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The new agreement offers us increased flexibility in the development and sale of custom airtime plans using Starlink’s Mobile Priority service.

During the third quarter of 2024, we commenced our plan to sell the warehouse building and surface parking lot located at 75 Enterprise Center in Middletown, RI (“75 Enterprise Center”).

As of September 30, 2024, 75 Enterprise Center had a carrying value of approximately $7.8 million.

We determined that all of the criteria to classify 75 Enterprise Center as held for sale had been met as of September 30, 2024.

The estimated fair value was determined based upon the anticipated sales price of these assets based on current market conditions and assumptions made by management, less selling costs.

We recorded an impairment charge of $1.1 million during the three and nine months ended September 30, 2024, as the carrying value of 75 Enterprise Center at the time the asset for sale criteria were met exceeded the fair value less costs to sell.

Additionally, in the third quarter of 2024, we commenced our plan to sell the property, building, improvements, and land located at 50 Enterprise Center in Middletown, RI (“50 Enterprise Center”).

As of September 30, 2024, 50 Enterprise Center had a carrying value of approximately $3.6 million.

We determined that all of the criteria to classify 50 Enterprise Center as held for sale had been met as of September 30, 2024.

The estimated fair value of 50 Enterprise Center exceeds its carrying value.

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

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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 estimates for intangible assets and other long-lived assets are the only estimates critical to an understanding and evaluation of our financial results for the six months ended June 30, 2024, as discussed below.

We believe that our accounting estimates for intangible assets and other long-lived assets are the only estimates critical to an understanding and evaluation of our financial results for the nine months ended September 30, 2024, as discussed below.

Results of Operations

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2024 2023 2024 2023

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General and administrative 13.1 13.2 15.2 13.0

Goodwill impairment charge — 16.1 — 5.3

Long-lived assets impairment charge 3.9 2.0 1.3 0.7

Total costs and expenses 106.9 115.6 110.0 105.1

(Loss) income from operations (10.0) 0.4 (11.6) (0.1)

Loss from operations (6.9) (15.6) (10.0) (5.1)

Interest income 2.2 3.0 2.8 2.6

Other expense, net (1.3) (0.7) (1.0) (0.7)

(Loss) income before income tax (benefit) expense (8.2) 2.3 (9.5) 1.7

Income tax (benefit) expense — 0.1 0.1 0.1

Net (loss) income (8.2) % 2.2 % (9.6) % 1.6 %

Three months ended June 30, 2024 and 2023

Our net sales for the three months ended June 30, 2024 and 2023 were as follows:

For the three months ended June 30, 2024 vs.

Other income (expense), net 0.7 (0.4) (0.4) (0.6)

Loss before income tax expense (4.0) (13.0) (7.6) (3.1)

Income tax expense 0.2 0.3 0.1 0.2

Net loss (4.2) % (13.3) % (7.7) % (3.3) %

Three months ended September 30, 2024 and 2023

Our net sales for the three months ended September 30, 2024 and 2023 were as follows:

For the three months ended September 30, 2024 vs.

2024 2023 $ %

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Net sales $ 28,971 $ 33,195 $ (4,224) (13) %

Net sales decreased by $4.9 million, or 15%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

Service sales decreased by $4.1 million, or 14%, to $24.7 million for the three months ended June 30, 2024 from $28.7 million for the three months ended June 30, 2023.

The decrease was primarily due to a $5.6 million decrease in our VSAT service sales driven primarily by a decrease in subscribers, partially offset by a $1.7 million increase in Starlink service sales.

Net sales decreased by $4.2 million, or 13%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Service sales decreased by $5.0 million, or 17%, to $24.4 million for the three months ended September 30, 2024 from $29.4 million for the three months ended September 30, 2023.

The decrease was primarily due to a $4.6 million decrease in our airtime service sales, driven primarily by a decrease in VSAT-only subscribers, partially offset by an increase in Starlink service sales.

Alternative solutions offered by recent low-earth-orbit (LEO) entrants have heightened competition in the global leisure segment as well as in commercial and government markets.

Subscribers to Starlink terminals have approximately doubled from March 31, 2024 to June 30, 2024.

We expect that VSAT service sales will continue to decline while Starlink services sales will continue to grow.

We expect that the trend of intensifying competition from LEO satellite service providers will continue and that our quarterly revenues from VSAT service sales will continue to decline on a year-over-year basis.

It is possible that the rate of reduction will accelerate.

We anticipate that a key driver of the expected reduction in revenue will be an acceleration of the previously disclosed transition by one of our largest customers, the U.S.

It is possible that the rate of reduction will continue to accelerate.

A key driver of the expected reduction in revenue is the previously disclosed transition by one of our largest customers, the U.S.

Coast Guard, of its primary satellite service relationship to Starlink.

As a result of the accelerated transition, the anticipated decline in revenue from this customer will occur earlier, reducing the aggregate amount of revenue we expect to receive from this customer in 2024.

We anticipate that this decline will begin in the third or fourth quarter of 2024.

Product sales decreased by $0.8 million, or 17%, to $4.0 million for the three months ended June 30, 2024 from $4.8 million for the three months ended June 30, 2023.

The decrease in product sales was primarily due to a $1.1 million decrease in VSAT Broadband product sales, a $0.6 million decrease in TracVision product sales and a $0.3 million decrease in accessory product sales, partially offset by a $1.2 million increase in Starlink product sales.

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

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.

As a result of the transition, the decline in revenue from this customer began late in the third quarter of 2024.

Product sales increased by $0.8 million, or 20%, to $4.6 million for the three months ended September 30, 2024 from $3.8 million for the three months ended September 30, 2023.

The increase in product sales was primarily due to a $1.2 million increase in Starlink product sales and a $0.2 million increase in VSAT Broadband product sales, partially offset by a $0.5 million decrease in accessory product sales and a $0.3 million decrease in TracVision product sales.

The increase in product sales was primarily due to an increase in unit sales volume of Starlink and VSAT Broadband products.

Competition from low-cost alternatives to VSAT, which include streaming capabilities, has had a significant impact on sales of our TracVision products.

Costs of Sales

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

Costs of sales decreased by $2.0 million, or 9%, in the three months ended June 30, 2024 to $19.8 million from $21.8 million in the three months ended June 30, 2023.

The decrease in costs of sales was driven by a $1.9 million decrease in costs of product sales and a $0.1 million decrease in costs of service sales.

As a percentage of net sales, costs of sales were 69% and 65% for the three months ended June 30, 2024 and 2023, respectively.

Costs of sales decreased by $1.1 million, or 5%, in the three months ended September 30, 2024 to $19.7 million from $20.7 million in the three months ended September 30, 2023.

The decrease in costs of sales was driven by a $1.3 million decrease in costs of service sales, partially offset by a $0.2 million increase in costs of product sales.

As a percentage of net sales, costs of sales were 68% and 63% for the three months ended September 30, 2024 and 2023, respectively.

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, product installation costs, media materials and distribution costs, and service repair materials.

For the three months ended June 30, 2024, costs of service sales remained flat period-over-period at $15.5 million for both the three months ended June 30, 2024 and 2023, primarily due to a $1.6 million decrease in VSAT Broadband airtime costs of service sales, partially offset by a $1.3 million increase in Starlink airtime costs of service sales.

As a percentage of service sales, costs of service sales were 63% and 54% for the three months ended June 30, 2024 and 2023, respectively.

During the second quarter of 2024, we expanded our relationship with Starlink through a bulk data distribution agreement whereby we purchased access to a large block of data at favorable rates.

Although we expect that future margins on sales of Starlink airtime services will be slightly lower than current margins on sales of our VSAT Broadband airtime services, we expect that the opportunities provided under the agreement will result in improved profitability compared to the previous arrangement with Starlink.

For the three months ended September 30, 2024, costs of service sales decreased by $1.3 million or 8%, to $15.0 million from $16.2 million in the three months ended September 30, 2023, primarily due to a $1.3 million decrease in airtime costs of service sales.

As a percentage of service sales, costs of service sales were 61% and 55% for the three months ended September 30, 2024 and 2023, respectively, driven primarily by fixed costs.

During the second quarter of 2024, we purchased from Starlink access to a large block of data at favorable rates.

As a result of this purchase, during the three months ended September 30, 2024 our gross margin percentage on Starlink airtime services improved.

The increase in gross margin on Starlink airtime services was higher than previously anticipated, but we may be unable to maintain this higher gross margin percentage during future periods.

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

For the three months ended June 30, 2024, costs of product sales decreased by $1.9 million, or 31%, to $4.3 million from $6.2 million in the three months ended June 30, 2023, primarily due to a $1.7 million decrease in various manufacturing and other unabsorbed expenses, which primarily consists of labor, purchase price variance, excess and obsolescence write down, absorption and severance costs, a $0.8 million decrease in VSAT Broadband cost of product sales and a $0.5 million decrease in TracVision cost of product sales, partially offset by a $1.1 million increase in Starlink product sales.

As a percentage of product sales, costs of product sales were 108% and 128% for the three months ended June 30, 2024 and 2023, respectively.

Cost of product sales decreased as a percentage of product sales primarily due to improved purchase price variance and improved absorption driven by the reduction in headcount of manufacturing employees, as well as ramped up production required to achieved targeted inventory levels before completion of the staged wind-down.

For the three months ended September 30, 2024, costs of product sales increased by $0.2 million, or 5%, to $4.7 million from $4.5 million in the three months ended September 30, 2023, primarily due to a $1.1 million increase in Starlink product sales and a $0.3 million increase in VSAT Broadband cost of product sales, partially offset by a $0.9 million decrease in various manufacturing and other unabsorbed expenses, which primarily consists of labor, purchase price variance, excess and obsolescence write down, absorption and severance costs, and a $0.2 million decrease in TracVision cost of product sales.

As a percentage of product sales, costs of product sales were 103% and 119% for the three months ended September 30, 2024 and 2023, respectively.

Cost of product sales decreased as a percentage of product sales primarily due to improved absorption driven by the reduction in headcount of manufacturing employees and the ramp up of production.

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 June 30, 2024 decreased by $0.1 million, or 4%, to $2.3 million from $2.4 million for the three months ended June 30, 2023.

During the three months ended June 30, 2024, we incurred $0.3 million in costs related to the reduction in our workforce beginning in February 2024, which was more than offset by various cost savings, including a $0.2 million decrease in other salaries, benefits and taxes.

As a percentage of net sales, research and development expense was 8% and 7% for the three months ended June 30, 2024 and 2023, respectively.

Research and development expense for the three months ended September 30, 2024 decreased by $1.0 million, or 41%, to $1.4 million from $2.4 million for the three months ended September 30, 2023.

The decrease in research and development expense resulted primarily from a $0.8 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce begun in February 2024 and concluded in June 2024.

As a percentage of net sales, research and development expense was 5% and 7% for the three months ended September 30, 2024 and 2023, 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 June 30, 2024 increased by $0.2 million, or 4%, to $5.3 million from $5.1 million for the three months ended June 30, 2023.

The increase primarily resulted from a $0.4 million increase in bad debt expense and a $0.3 million increase in salaries, benefits and taxes, partially offset by a $0.2 million decrease in facilities expenses.

As a percentage of net sales, sales, marketing and support expense was 19% and 15% for the three months ended June 30, 2024 and 2023, respectively.

Sales, marketing and support expense for the three months ended September 30, 2024 increased by $0.1 million, or 2%, to $4.9 million from $4.8 million for the three months ended September 30, 2023.

As a percentage of net sales, sales, marketing and support expense was 17% and 15% for the three months ended September 30, 2024 and 2023, 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 June 30, 2024 remained flat period-over-period at $4.1 million for both the three months ended June 30, 2024 and 2023.

During the three months ended June 30, 2024, we incurred $0.3 million in costs related to the reduction in our workforce beginning in February 2024, which was offset by a $0.4 million decrease in other salaries, benefits and taxes.

As a percentage of net sales, general and administrative expense was 14% and 12% for the three months ended June 30, 2024 and 2023, respectively.

Interest and Other Expense, Net

General and administrative expense for the three months ended September 30, 2024 decreased by $0.6 million, or 13%, to $3.8 million from $4.4 million the three months ended September 30, 2024.

The decrease in general and administrative expense resulted primarily from a $0.7 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce begun in February 2024 and concluded in June 2024.

As a percentage of net sales, general and administrative expense was 13% for both the three months ended September 30, 2024 and 2023.

Interest and Other Income (Expense), 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 remained flat period-over-period at $0.9 million for both the three months ended June 30, 2024 and 2023.

Interest income decreased by $0.4 million to $0.6 million for the three months ended September 30, 2024 from $1.0 million for the three months ended September 30, 2023.

Of the current period interest income of $0.6 million, $0.5 million is attributable to interest earned on cash and cash equivalents, while the remaining $0.1 million was attributable to interest from lease receivables.

Other expense, net increased by $0.1 million to $0.4 million for the three months ended June 30, 2024 from other expense, net of $0.2 million for the three months ended June 30, 2023.

Income Tax (Benefit) Expense

Income tax (benefit) expense for each of the three months ended June 30, 2024 and 2023 was less than $0.1 million and related to taxes on income earned in foreign jurisdictions.

Six months ended June 30, 2024 and 2023

Our net sales for the six months ended June 30, 2024 and 2023 were as follows:

For the six months ended June 30, 2024 vs.

Other income (expense), net changed by $0.3 million to other income, net of $0.2 million for the three months ended September 30, 2024 from other expense, net of $0.1 million for the three months ended September 30, 2023, which was driven by the disposal of fixed assets.

Income Tax Expense

Income tax expense for each of the three months ended September 30, 2024 and 2023 was $0.1 million and related to taxes on income earned in foreign jurisdictions.

Nine months ended September 30, 2024 and 2023

Our net sales for the nine months ended September 30, 2024 and 2023 were as follows:

For the nine months ended September 30, 2024 vs.

2024 2023 $ %

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Net sales $ 86,911 $ 100,924 $ (14,013) (14) %

Net sales decreased by $9.8 million, or 14%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Service sales decreased by $7.8 million, or 14%, to $49.7 million for the six months ended June 30, 2024 from $57.5 million for the six months ended June 30, 2023.

The decrease was primarily due to a $9.7 million decrease in our VSAT service sales driven primarily by a decrease in subscribers, partially offset by a $2.3 million increase in Starlink service sales.

Net sales decreased by $14.0 million, or 14%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Service sales decreased by $12.8 million, or 15%, to $74.1 million for the nine months ended September 30, 2024 from $86.9 million for the nine months ended September 30, 2023.

The decrease was primarily due to a $12.0 million decrease in our airtime service sales, driven primarily by a decrease in VSAT-only subscribers, partially offset by an increase in Starlink service sales.

Alternative solutions offered by recent LEO entrants have heightened competition in the global leisure segment and in commercial and government markets.

Product sales decreased by $2.0 million, or 20%, to $8.2 million for the six months ended June 30, 2024 from $10.2 million for the six months ended June 30, 2023.

The decrease in product sales was primarily due to a $2.4 million decrease in VSAT Broadband product sales, a $1.4 million decrease in TracVision product sales and a $0.5 million decrease in accessory product sales, partially offset by a $2.6 million increase in Starlink product sales.

Product sales decreased by $1.3 million, or 9%, to $12.8 million for the nine months ended September 30, 2024 from $14.0 million for the nine months ended September 30, 2023.

The decrease in product sales was primarily due to a $2.2 million decrease in VSAT Broadband product sales, a $1.7 million decrease in TracVision product sales and a $1.2 million decrease in accessory and service product sales, partially offset by a $3.8 million increase in Starlink product sales and a $0.4 million increase in CommBox Edge product sales.

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

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Costs of Sales

Costs of sales decreased by $4.0 million, or 9%, in the six months ended June 30, 2024 to $39.1 million from $43.1 million in the six months ended June 30, 2023.

Costs of sales decreased by $5.1 million, or 8%, in the nine months ended September 30, 2024 to $58.8 million from $63.9 million in the nine months ended September 30, 2023.

The decrease in costs of sales was driven by a $3.4 million decrease in costs of service sales and a $1.7 million decrease in costs of product sales.

As a percentage of net sales, costs of sales were 68% and 64% for the six months ended June 30, 2024 and 2023, respectively.

For the six months ended June 30, 2024, costs of service sales decreased by $2.1 million, or 7%, to $29.5 million from $31.6 million for the six months ended June 30, 2023, primarily due to a $4.1 million decrease in VSAT Broadband airtime costs of service sales, partially offset by a $1.8 million increase in Starlink airtime costs of service sales.

As a percentage of service sales, costs of service sales were 59% and 55% for the six months ended June 30, 2024 and 2023, respectively.

For the six months ended June 30, 2024, costs of product sales decreased by $1.9 million, or 17%, to $9.6 million from $11.5 million in the six months ended June 30, 2023, primarily due to a $1.4 million decrease in various manufacturing and other unabsorbed expenses, which primarily consists of labor, purchase price variance, excess and obsolescence write down, absorption and severance costs, a $1.4 million decrease in VSAT Broadband cost of product sales, a $1.1 million decrease in TracVision cost of product sales and a $0.3 million decrease in accessory cost of product sales, partially offset by a $2.4 million increase in Starlink cost of product sales.

As a percentage of product sales, costs of product sales were 117% and 113% for the six months ended June 30, 2024 and 2023, respectively.

Cost of product sales increased as a percentage of product sales primarily due to lower product sales volume, as well as the under-utilization of the factory and severance costs for manufacturing employees, partially offset by the improved purchase price variance.

As a percentage of net sales, costs of sales were 68% and 63% for the nine months ended September 30, 2024 and 2023, respectively.

For the nine months ended September 30, 2024, costs of service sales decreased by $3.4 million, or 7%, to $44.5 million from $47.8 million for the nine months ended September 30, 2023, primarily due to a $3.6 million decrease in airtime costs of service sales.

As a percentage of service sales, costs of service sales were 60% and 55% for the nine months ended September 30, 2024 and 2023, respectively, driven primarily by fixed costs.

For the nine months ended September 30, 2024, costs of product sales decreased by $1.7 million, or 11%, to $14.3 million from $16.0 million in the nine months ended September 30, 2023, primarily due to a $2.3 million decrease in various manufacturing and other unabsorbed expenses, which primarily consists of labor, purchase price variance, excess and obsolescence write down, absorption and severance costs, a $1.3 million decrease in TracVision cost of product sales, a $1.1 million decrease in VSAT Broadband cost of product sales and a $0.5 million decrease in accessory cost of product sales, partially offset by a $3.5 million increase in Starlink cost of product sales.

As a percentage of product sales, costs of product sales were 112% and 114% for the nine months ended September 30, 2024 and 2023, respectively.

Cost of product sales increased as a percentage of product sales primarily due to lower product sales volume, as well as product sales mix.

Operating Expenses

Research and development expense for the six months ended June 30, 2024 increased by $0.4 million, or 8%, to $5.4 million from $5.0 million for the six months ended June 30, 2023.

The increase in research and development expense resulted primarily from a $0.7 million increase in salaries, benefits and taxes, which was driven by $1.1 million in costs related to the reduction in our workforce beginning in February 2024.

As a percentage of net sales, research and development expense was 9% and 7% for the six months ended June 30, 2024 and 2023, respectively.

Sales, marketing and support expense for the six months ended June 30, 2024 decreased by $0.1 million, or 1%, to $10.7 million from $10.8 million for the six months ended June 30, 2023.

The decrease in sales, marketing and support expense resulted primarily from a $0.2 million decrease in facilities expenses, a $0.2 million decrease in external commissions and a $0.2 million decrease in marketing expenses.

These decreases were partially offset by $0.4 million in costs related to the reduction in our workforce beginning in February 2024.

As a percentage of net sales, sales, marketing and support expense was 19% and 16% for the six months ended June 30, 2024 and 2023, respectively.

General and administrative expense for the six months ended June 30, 2024 increased by $0.7 million, or 7%, to $9.4 million from $8.8 million for the six months ended June 30, 2023.

The increase in general and administrative expense resulted primarily from a $1.1 million increase in salaries, benefits and taxes, which was driven by $0.9 million in costs related to the reduction in our workforce beginning in February 2024, and a $0.7 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 August 2022.

Partially offsetting these items was a $1.0 million decrease in professional fees, related to a decrease in legal fees, as well as additional accounting and consulting costs incurred during the six months ended June 30, 2023 to prepare our 2022 annual filings.

Lastly, there was a $0.3 million decrease in software license and maintenance fees.

As a percentage of net sales, general and administrative expense was 16% and 13% for the six months ended June 30, 2024 and 2023, respectively.

Research and development expense for the nine months ended September 30, 2024 decreased by $0.6 million, or 8%, to $6.8 million from $7.4 million for the nine months ended September 30, 2023.

The decrease in research and development expense resulted primarily from a $1.0 million decrease in salaries, benefits and taxes, excluding costs related to the previously mentioned reduction in workforce, and a $0.2 million decrease in expensed materials.

These decreases were partially offset by $0.9 million in costs incurred related to the reduction in our workforce begun in February 2024 and concluded in June 2024.

As a percentage of net sales, research and development expense was 8% and 7% for the nine months ended September 30, 2024 and 2023, respectively.

Sales, marketing and support expense for the nine months ended September 30, 2024 remained flat period-over-period at $15.7 million for both the nine months ended September 30, 2024 and 2023.

During the nine months ended September 30, 2024, we incurred $0.4 million in costs related to the reduction in our workforce begun in February 2024 and concluded in June 2024, which was partially offset by a $0.4 million decrease in external commissions.

As a percentage of net sales, sales, marketing and support expense was 18% and 16% for the nine months ended September 30, 2024 and 2023, respectively.

General and administrative expense for the nine months ended September 30, 2024 increased by $0.1 million, or 1%, to $13.2 million from $13.1 million for the nine months ended September 30, 2023.

The increase in general and administrative expense resulted primarily from $0.7 million in costs incurred related to the reduction in our workforce begun in February 2024 and concluded in June 2024 and a $0.7 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 August 2022.

Partially offsetting these items were a $0.9 million decrease in professional fees, driven by additional accounting and consulting costs incurred during the nine months ended September 30, 2023 to prepare our 2022 annual filings and a $0.3 million decrease in salaries, benefits and taxes, excluding costs related to the previously mentioned reduction in workforce.

As a percentage of net sales, general and administrative expense was 15% and 13% for the nine months ended September 30, 2024 and 2023, respectively.

Interest and Other Expense, Net

Interest income increased by $0.1 million to $1.8 million for the six months ended June 30, 2024 from $1.7 million for the six months ended June 30, 2023.

Interest income decreased by $0.2 million to $2.4 million for the nine months ended September 30, 2024 from $2.7 million for the nine months ended September 30, 2023.

Of the current period interest income of $2.4 million, $2.1 million is attributable to interest earned on cash and cash equivalents, and $0.4 million was attributable to interest from lease receivables.

Other expense, net increased by $0.1 million to $0.6 million for the six months ended June 30, 2024 from other expense, net $0.5 million for the six months ended June 30, 2023.

Other expense, net decreased by $0.2 million to other expense, net of $0.3 million for the nine months ended September 30, 2024 from other expense, net of $0.6 million for the nine months ended September 30, 2023.

This decrease was driven by a $0.4 million decrease in the loss on disposal of fixed assets, offset by a $0.3 million increase in foreign exchange losses.

Income Tax Expense

Income tax expense for each of the six months ended June 30, 2024 and 2023 was $0.1 million and related to taxes on income earned in foreign jurisdictions.

Income tax expense for the nine months ended September 30, 2024 and 2023 was $0.1 million and $0.2 million, respectively, and related to taxes on income earned in foreign jurisdictions.

Liquidity and Capital Resources

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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 June 30, 2024, we had $49.3 million in cash, cash equivalents, and marketable securities, of which $3.3 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries.

Our foreign subsidiaries held no marketable securities as of June 30, 2024.

As of June 30, 2024, we had $93.4 million in working capital.

As of September 30, 2024, we had $49.8 million in cash, cash equivalents, and marketable securities, of which $3.5 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries.

Our foreign subsidiaries held no marketable securities as of September 30, 2024.

As of September 30, 2024, we had $108.1 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 $15.5 million for the six months ended June 30, 2024 compared to net cash used in operations of $3.2 million for the six months ended June 30, 2023.

The $12.3 million increase in net cash used in operations was primarily the result of a $15.6 million increase in cash outflows relating to prepaid expenses and other current assets, a $6.7 million increase in net loss, a $2.3 million decrease in cash inflows relating to accounts receivable, a $2.2 million increase in cash outflows relating to inventories, and a $0.4 million decrease in cash inflows relating to deferred revenue, partially offset by a $13.1 million decrease in cash outflows related to accounts payable and a $1.7 million increase in non-cash items.

Net cash provided by investing activities was $14.4 million for the six months ended June 30, 2024 compared to net cash used in investing activities of $6.0 million for the six months ended June 30, 2023.

The $20.5 million change in net cash provided by investing activities was primarily the result of a $20.8 million decrease in net investment in marketable securities, partially offset by a $0.4 million increase in capital expenditures.

Net cash provided by financing activities was $0.1 million for the six months ended June 30, 2024 compared to net cash provided by financing activities of $2.1 million for the six months ended June 30, 2023.

Net cash used in operations was $13.6 million for the nine months ended September 30, 2024 compared to net cash used in operations of $2.7 million for the nine months ended September 30, 2023.

The $10.9 million increase in net cash used in operations was primarily the result of a $14.6 million increase in cash outflows relating to prepaid expenses and other current assets, a $10.6 million increase in cash outflows relating to accrued compensation, product warranty and other expenses, a $3.5 million increase in net loss (which included a $1.1 million impairment charge during the nine months ended September 30, 2024), a change of $2.5 million related to non-cash items, a $2.5 million increase in cash outflows relating to inventories, a $0.5 million decrease in cash inflows relating to deferred revenue, and a $0.4 million increase in cash outflows related to other non-current assets, partially offset by a $22.2 million decrease in cash outflows related to accounts payable and a $1.5 million increase in cash inflows relating to accounts receivable.

Net cash provided by investing activities was $16.5 million for the nine months ended September 30, 2024 compared to net cash used in investing activities of $9.2 million for the nine months ended September 30, 2023.

The $25.7 million change in net cash provided by investing activities was primarily the result of a $25.1 million decrease in net investment in marketable securities and a $0.6 million decrease in capital expenditures.

Net cash provided by financing activities was $0.1 million for the nine months ended September 30, 2024 compared to net cash provided by financing activities of $2.3 million for the nine months ended September 30, 2023.

The $2.2 million decrease in net cash provided by financing activities is primarily attributable to a $2.5 million decrease in cash inflows relating to proceeds from the exercise of stock options and purchases under our employee stock purchase plan, partially offset by a $0.2 million decrease in cash outflows related to the repurchase of common stock to satisfy specific tax withholding obligations arising from accelerated vesting of executive stock grants in 2023.

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