What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-10 compared with 2024-03-15 · 127 added, 154 removed, 102 unchanged (73% of the section changed)

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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 movies, television programming, news, and music, to commercial customers in the maritime market, 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.

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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.

Sales of our airtime services accounted for 79% and 81% of our consolidated net sales for 2024 and 2023, respectively.

In mid-2022, we launched our KVH ONE hybrid network, which integrates global satellite service (including Ku-band VSAT using the Intelsat HTS network along with Starlink, Iridium, and other satellite services), KVH-provided cellular service in more than 150 countries, and shore-based Wi-Fi access.

Revenue from our cellular airtime service has 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.

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

In December 2024, we introduced our TracNet Coastal and TracNet Coastal Pro terminals, expanding our extensive multi-channel portfolio of maritime products and services with a 5G/cellular and Wi-Fi system.

We expect to earn usage fees from our offering of OneWeb service, which we launched in January 2025.

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.

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

Sales of content services accounted for 3% of our consolidated net revenues for both 2024 and 2023.

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

However, these services represent a declining percentage of our revenues in the face of competition from emerging LEO services.

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.

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Product sales accounted for 15% and 13% of our consolidated net sales for 2024 and 2023, respectively.

Manufacturing Wind-down;

Restructuring

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 concluded that we should discontinue our capital-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 through 2025 and potentially into 2026 and that we will cease substantially all manufacturing activity by the end of 2025.

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.

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

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

As of June 30, 2024, all employee terminations had been completed.

During 2024, we incurred an aggregate of $3.9 million of severance charges for this and other restructurings.

The $3.9 million of severance charges incurred during the year consisted of approximately $3.6 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.

Starlink Distribution Agreement

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

Under the agreement, we prepaid $17.0 million for access to a large block of Starlink Mobile Priority data at favorable rates.

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

Assets Held for Sale

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, Rhode Island (“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 in 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.

In December 2024, we entered into an agreement to sell 75 Enterprise Center for $8.5 million.

Consummation of the transaction is subject to customary closing conditions.

Under the purchase agreement, the buyer has six months to obtain specified zoning approvals, with up to three 30-day extensions, as well as a 60-day inspection period, subject to potential extension.

The buyer may terminate the agreement at any time before the expiration of the inspection period and may also terminate the agreement if the specified zoning approvals are denied before the expiration of the zoning approval period.

Upon consummation of the sale, we will remain in possession of the property as a tenant under a triple-net lease having an initial term of six months, which we can extend for up to an additional three months.

Rent during the initial term is approximately $25,000 per month, which would increase to approximately $44,000 per month during any extension.

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, Rhode Island (“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.

In December 2024, we entered into an agreement to sell 50 Enterprise Center, subject to the buyer’s right to terminate the agreement during an inspection period.

In January 2025, before the end of the inspection period, we received notice of termination from the buyer.

50 Enterprise Center remains held for sale as we continue to search for a suitable buyer.

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

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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.

In 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.

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 led to the staged wind-down of our manufacturing activities at our facility in Middletown, Rhode Island noted above.

Please see Note 14 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.

During 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.

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

See Note 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 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.

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

Approximately $2.2 million of severance payments, other employee benefits, and legal and advisory fees were incurred 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.

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

In May 2022, we entered into executive employment agreements with each of Brent C.

Bruun, Roger A.

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

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

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

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

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

Year Ended December 31,

Product 13.4 % 19.3 %

Service 84.7 % 86.6 %

Product 15.3 13.4

Net sales 100.0 100.0

Costs and expenses:

Costs of product sales 22.0 18.1

Costs of service sales 52.7 49.4

Costs of product sales 16.3 22.0

Research and development 7.4 7.1

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Interest expense — —

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) %

Other expense, net (1.6) (1.1)

Loss before income taxes expense (9.3) (11.4)

Income tax expense 0.4 0.2

Net loss (9.7) % (11.6) %

Years ended December 31, 2024 and 2023

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(in thousands)

Product sales $ 17,757 $ 26,842 $ (9,085) (34) %

Service sales $ 96,446 $ 114,622 $ (18,176) (16) %

Product sales 17,382 17,757 (375) (2) %

Net sales 113,828 132,379 (18,551) (14) %

Net sales decreased by $18.6 million, or 14%, in 2024 as compared to 2023.

Service sales decreased by $18.2 million, or 16%, to $96.4 million in 2024 from $114.6 million in 2023.

The decrease in service sales was primarily due to a $17.1 million decrease in our airtime service sales, driven primarily by a decrease in VSAT-only subscribers, partially offset by an increase in LEO service sales.

$2.7 million of this decrease was related to the U.S.

Coast Guard contract downgrade.

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

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

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

Product sales decreased by $0.4 million, or 2%, to $17.4 million in 2024 from $17.8 million in 2023.

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 $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.

The decrease in product sales was primarily the result of a $2.2 million decrease in VSAT Broadband product sales, a $2.0 million decrease in TracVision product sales and a $1.3 million decrease in accessory and service product sales, partially offset by a $5.0 million increase in Starlink product sales and a $0.5 million increase in CommBox Edge product sales.

The decline in product sales was primarily driven by product sales mix.

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 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.

Coast Guard, which accounted for approximately $11 million of our service sales in 2023, advised us that it intended to transition its primary satellite service relationship on the vessels we served to SpaceX Starshield.

In the third quarter of 2024, we received and processed the anticipated service downgrade request from the U.S.

Coast Guard, which reduces anticipated revenue from this customer for 2025 through 2027 by approximately 95%.

As a result, we expect to generate substantially less revenue from the U.S.

Costs of Sales

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

Costs of sales decreased by $15.9 million, or 17%, in 2024 to $78.6 million from $94.5 million in 2023.

The decrease in costs of sales was driven by a $5.4 million decrease in costs of service sales and a $10.5 million decrease in costs of product sales.

As a percentage of net sales, costs of sales were 69% and 71% for 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 distribution costs, and service repair materials.

For 2024, costs of service sales decreased by $5.4 million, or 8%, to $60.0 million from $65.4 million in 2023.

Costs of service sales decreased primarily due to a $5.5 million decrease in airtime costs of service sales.

As a percentage of service sales, costs of service sales were 62% and 57% for 2024 and 2023, respectively.

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, 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 in future periods.

Despite this higher gross margin on Starlink airtime services, the overall gross margin on service sales was negatively impacted by fixed costs associated with the VSAT Broadband network.

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

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.

For 2024, costs of product sales decreased by $10.5 million, or 36%, to $18.6 million from $29.1 million in 2023, primarily due to an $8.7 million decrease in various manufacturing and other unabsorbed expenses, a $3.6 million decrease in excess purchase order obligations, a $1.5 million decrease in TracVision cost of product sales, a $0.9 million decrease in VSAT Broadband cost of product sales and a $0.3 million decrease in accessory cost of product sales, partially offset by a $4.5 million increase in LEO cost of product sales and a $0.4 million increase in CommBox Edge cost of product sales.

The decrease in manufacturing and other unabsorbed costs was primarily due to additional expenses taken in 2023 as a result of the wind-down of our manufacturing activities, which included a $6.6 million inventory write-down, as well as lower unit volume, resulting in reduced absorption of overhead.

The excess purchase order obligations related to unconditional purchase orders outstanding as of December 31, 2023 that we determined would exceed our anticipated needs.

Please see Note 14 to our accompanying audited financial statements for further information.

As a percentage of product sales, costs of product sales were 107% and 164% for 2024 and 2023, respectively.

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.

Cost of product sales decreased as a percentage of product sales primarily due to the decrease in various manufacturing and other unabsorbed expenses.

This decrease resulted primarily from the additional expenses incurred in 2023 related to the wind-down of the Company's manufacturing activities, as well as the 2024 reduction in headcount of manufacturing employees.

Operating Expenses

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Research and development expense for 2024 decreased by $1.0 million, or 10%, to $8.4 million from $9.4 million in 2023.

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.

The decrease in research and development expense resulted primarily from a $1.6 million decrease in salaries, benefits and taxes, excluding costs related to the previously mentioned reduction in workforce, and a $0.3 million decrease in expensed materials.

These decreases were partially offset by $1.4 million in costs incurred related to the reduction in our workforce.

As a percentage of net sales, research and development expense was 7% in both 2024 and 2023.

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 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 $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.

Sales, marketing, and support expense increased by $0.1 million, or less than 1%, to $21.0 million in 2024 from $20.9 million in 2023.

In 2024, we incurred $0.7 million in costs related to the reduction in our workforce, 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% in 2024 and 2023, respectively.

This increase resulted primarily from a reduction in net sales.

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 2024 decreased by $2.4 million, or 13%, to $16.5 million from $18.9 million for 2023.

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.

The decrease in general and administrative expense resulted primarily from the $2.1 million charge incurred in 2023 for the discontinuation of a project for implementing a new manufacturing-centric accounting system, a $1.0 million decrease in professional fees, driven by additional accounting and consulting costs incurred in 2023 to prepare our 2022 annual filings, a $0.6 million decrease in salaries, benefits and taxes, excluding costs related to the previously mentioned reduction in workforce, and a $0.4 million decrease in computer expenses.

Partially offsetting these items were $0.8 million in costs incurred related to the reduction in our workforce, 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, and a $0.4 million increase in facility expenses.

As a percentage of net sales, general and administrative expense was 15% and 14% for 2024 and 2023, respectively.

Interest and Other (Expense) Income, Net

This increase resulted primarily from a reduction in net sales.

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

Interest income decreased by $0.6 million to $3.0 million from $3.6 million for 2023.

Of the current period interest income of $3.0 million, $2.6 million is attributable to interest earned on cash and cash equivalents, while the remaining $0.5 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.

Interest declined primarily due to lower cash balances.

Other expense, net increased by $0.4 million to other expense, net of $1.8 million for 2024 from other expense, net of $1.4 million for 2023.

The increase was primarily due to a $0.5 million increase in foreign exchange losses and a $0.4 million expense incurred in 2024 for a prior period Brazil tax settlement, partially offset by a $0.3 million loss in 2023 on an unfavorable future contract and a $0.1 million decrease in the loss on the disposal of fixed assets.

The Company incurred a non-cash $0.9 million loss and a non-cash $0.7 million loss in 2024 and 2023, respectively, related to the disposal of AgilePlans revenue-generating fixed assets due to the decline in customer demand of VSAT Broadband AgilePlans units.

Income Tax Expense

Income tax expense for 2024 and 2023 was $0.4 million and $0.3 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 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 prior periods presented.

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

Results for discontinued operations are as follows:

Year Ended December 31,

(dollar in thousands)

Sales from discontinued operations $ 16,721

Gain on sale of discontinued operations before tax expense $ 30,763

Income from discontinued operations, net of tax $ 28,025

The effective tax rate for 2024 and 2023 was (4.0)% and (2.1)%, respectively.

For 2024 and 2023, the effective tax rates 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 varying rates.

Critical Accounting Estimates

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 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

In accordance with ASC Update No.

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

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.

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 2024, as discussed below.

Intangible Assets and other Long-Lived Assets

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.

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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.

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.

Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset.

During 2024, 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 8 to our accompanying audited consolidated 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 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.

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.

As of December 31, 2024, we had $50.6 million in cash and cash equivalents, of which $3.8 million in cash equivalents was held in local currencies by our foreign subsidiaries.

Our foreign subsidiaries held no marketable securities as of December 31, 2024.

As of December 31, 2024, we had $106.7 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.

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.

At December 31, 2023, we had outstanding non-cancellable satellite service capacity and other lease obligations with future minimum payments of $82.5 million.

As of December 31, 2023, we had $69.8 million in cash, cash equivalents, and marketable securities, of which $3.7 million in cash equivalents was held in local currencies by our foreign subsidiaries.

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

As of December 31, 2023, we had $93.8 million in working capital.

We believe that our primary long-term capital requirements relate to AgilePlans revenue-generating assets and the development and implementation of our new enterprise resource planning system, as well as servicing and paying our satellite service capacity and equipment lease obligations.

At December 31, 2024, we had outstanding non-cancellable satellite service capacity and other purchase obligations with future minimum payments of $46.3 million.

Operating Activities

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.

Operating activities used $13.2 million of net cash in 2024 and provided $2.5 million of net cash in 2023, an increase in net cash used by operating activities of $15.7 million.

The $15.7 million increase in net cash used by operations was primarily the result of a $11.5 million increase in cash outflows relating to accrued compensation, product warranty and other expenses, a $10.4 million increase in cash outflows relating to prepaid expenses and other current assets, a $7.6 million increase in cash outflows relating to inventories, a change of $5.6 million related to non-cash items, a $1.1 million decrease in cash inflows relating to deferred revenue, and a $1.1 million increase in cash outflows relating to other non-current assets.

Partially offsetting these items were a $15.2 million decrease in cash outflows related to accounts payable, a $4.4 million decrease in net loss (which included impairment charges of $1.1 million and $6.0 million in 2024 and 2023, respectively), and a $2.1 million increase in cash inflows relating to accounts receivable.

Investing Activities

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.

Net cash provided by investing activities for 2024 was $52.4 million as compared to net cash used by investing activities of $14.7 million for 2023.

The $67.1 million increase in net cash provided by investing activities was primarily the result of a $61.3 million decrease in net investment in marketable securities, which was driven by the liquidation of our marketable securities held by Wells Fargo, a $3.2 decrease in capital expenditures, a $1.4 million increase in proceeds from the sale of fixed assets and a $1.2 million decrease in cash paid for the acquisition of intangible assets.

Financing Activities

Net cash provided by financing activities for 2024 was $0.1 million as compared to net cash provided by financing activities in 2023 of $2.3 million.

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.

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.

Other Matters

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

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.

These transactions can involve millions of dollars.

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

From time to time, we have entered into multi-year agreements to lease satellite capacity, as well as prepaid for access to a large block of mobile data at favorable rates.

These agreements can involve millions of dollars.

Off-Balance Sheet Arrangements

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What changed 10-K

Item 7. Management’s Discussion and Analysis