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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 0-28082
KVH Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware05-0420589
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification Number)
50 Enterprise Center, Middletown, RI 02842
(Address of Principal Executive Offices) (Zip Code)
(401) 847-3327
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on which Registered
The Nasdaq Stock Market LLC
Common Stock, par value $0.01 per shareKVHI
(Nasdaq Global Select Market)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
DateClassOutstanding shares
October 30, 2023Common Stock, par value $0.01 per share19,610,790




KVH INDUSTRIES, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
  Page No.
ITEM 1.
Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022
Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (unaudited)
Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2023 and 2022 (unaudited)
Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)
ITEM 2.
ITEM 4.
ITEM 1A.
ITEM 6.
 
2



PART I. FINANCIAL INFORMATION
ITEM 1.    Financial Statements
KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2023December 31, 2022
ASSETS(unaudited)
Current assets:
Cash and cash equivalents$11,484 $21,056 
Marketable securities57,710 55,680 
Accounts receivable, net of allowance for credit losses of $1,010 and $1,268 as of September 30, 2023 and December 31, 2022, respectively
28,190 27,427 
Inventories26,423 22,730 
Prepaid expenses and other current assets 4,617 3,067 
Current contract assets1,130 1,243 
Total current assets129,554 131,203 
Property and equipment, net
49,407 53,118 
Intangible assets, net
 404 
Goodwill 5,308 
Right of use assets1,191 2,168 
Other non-current assets3,985 5,037 
Non-current contract assets2,557 3,033 
Deferred income tax asset258 259 
Total assets$186,952 $200,530 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$3,644 $20,449 
Accrued compensation and employee-related expenses4,936 7,621 
Accrued other11,609 4,234 
Accrued product warranty costs642 1,287 
Contract liabilities3,268 3,108 
Current operating lease liability921 1,532 
Liability for uncertain tax positions693 637 
Total current liabilities25,713 38,868 
Long-term operating lease liability272 636 
Long-term contract liabilities3,905 4,315 
Deferred income tax liability55 55 
Total liabilities$29,945 $43,874 
Commitments and contingencies (Notes 2, 10, and 15)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued
  
Common stock, $0.01 par value. Authorized 30,000,000 shares; 21,066,899 and 20,631,152 shares issued at September 30, 2023 and December 31, 2022, respectively; and 19,610,790 and 19,198,458 shares outstanding at September 30, 2023 and December 31, 2022, respectively
211 206 
Additional paid-in capital164,505 160,475 
Retained earnings8,603 11,936 
Accumulated other comprehensive loss(4,222)(4,110)
169,097 168,507 
Less: treasury stock at cost, common stock, 1,456,109 and 1,432,694 shares as of September 30, 2023 and December 31, 2022, respectively.
(12,090)(11,851)
Total stockholders’ equity157,007 156,656 
Total liabilities and stockholders’ equity$186,952 $200,530 
See accompanying Notes to Unaudited Consolidated Financial Statements.
3


KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share amounts, unaudited)
 
Three Months EndedNine Months Ended
September 30,September 30,
 2023202220232022
Sales:
Product$4,152 $6,625 $14,526 $19,808 
Service29,397 28,544 86,883 83,065 
Net sales33,549 35,169 101,409 102,873 
Costs and expenses:
Costs of product sales4,729 6,747 16,596 17,363 
Costs of service sales16,238 15,379 47,848 45,505 
Research and development2,398 2,745 7,379 8,380 
Sales, marketing and support4,854 5,710 15,708 18,355 
General and administrative4,367 5,559 13,139 19,532 
Goodwill impairment charge5,333  5,333  
Long-lived assets impairment charge657  657  
Total costs and expenses38,576 36,140 106,660 109,135 
Loss from operations(5,027)(971)(5,251)(6,262)
Interest income997 389 2,660 798 
Interest expense 1  3 
Other (expense) income, net(121)569 (583)1,561 
Loss from continuing operations before income tax expense(4,151)(14)(3,174)(3,906)
Income tax expense from continuing operations95 81 159 645 
Net loss from continuing operations$(4,246)$(95)$(3,333)$(4,551)
Net income from discontinued operations, net of tax 29,741  28,061 
Net (loss) income$(4,246)$29,646 $(3,333)$23,510 
Net loss from continuing operations per common share
Basic$(0.22)$(0.01)$(0.17)$(0.25)
Diluted$(0.22)$(0.01)$(0.17)$(0.25)
Net income from discontinued operations per common share
Basic$0.00 $1.59 $0.00 $1.51 
Diluted$0.00 $1.59 $0.00 $1.51 
Net (loss) income per common share
Basic$(0.22)$1.58 $(0.17)$1.27 
Diluted$(0.22)$1.58 $(0.17)$1.27 
Weighted average number of common shares outstanding:
Basic19,231 18,706 19,090 18,574 
Diluted19,231 18,706 19,090 18,574 


See accompanying Notes to Unaudited Consolidated Financial Statements.
4


KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, unaudited)
 
Three Months EndedNine Months Ended
 September 30,September 30,
 2023202220232022
Net (loss) income$(4,246)$29,646 $(3,333)$23,510 
Other comprehensive loss, net of tax:
Unrealized gain on available-for-sale securities  12  
Foreign currency translation adjustment(267)(646)(124)(1,258)
Other comprehensive loss, net of tax(1)
(267)(646)(112)(1,258)
Total comprehensive (loss) income$(4,513)$29,000 $(3,445)$22,252 
(1) Tax impact was nominal for all periods.

See accompanying Notes to Unaudited Consolidated Financial Statements.
5


KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
 Common StockAdditional
Paid-in
Capital
Retained EarningsAccumulated
Other
Comprehensive
Loss
Treasury StockTotal
Stockholders’
Equity
 SharesAmountSharesAmount
Balance at June 30, 202320,969 $210 $163,690 $12,849 $(3,955)(1,456)$(12,090)$160,704 
Net loss— — — (4,246)— — — (4,246)
Other comprehensive loss— — — — (267)— — (267)
Stock-based compensation— — 559 — — — — 559 
Issuance of common stock under employee stock purchase plan17 — 123 — — — — 123 
Exercise of stock options and issuance of restricted stock awards, net of forfeitures81 1 133 — — — — 134 
Balance at September 30, 202321,067 $211 $164,505 $8,603 $(4,222)(1,456)$(12,090)$157,007 
 Common StockAdditional
Paid-in
Capital
Retained EarningsAccumulated
Other
Comprehensive
Loss
Treasury StockTotal
Stockholders’
Equity
 SharesAmountSharesAmount
Balance at December 31, 202220,631 $206 $160,475 $11,936 $(4,110)(1,433)$(11,851)$156,656 
Net loss— — — (3,333)— — — (3,333)
Other comprehensive loss— — — — (112)— — (112)
Stock-based compensation— — 1,433 — — — — 1,433 
Issuance of common stock under employee stock purchase plan17 — 123 — — — — 123 
Acquisition of treasury stock— — — — — (23)(239)(239)
Exercise of stock options and issuance of restricted stock awards, net of forfeitures419 5 2,474 — — — — 2,479 
Balance at September 30, 202321,067 $211 $164,505 $8,603 $(4,222)(1,456)$(12,090)$157,007 
 Common StockAdditional
Paid-in
Capital
(Accumulated Deficit) Retained EarningsAccumulated
Other
Comprehensive Loss
Treasury StockTotal
Stockholders’
Equity
 SharesAmountSharesAmount
Balance at June 30, 202220,503 $205 $157,996 $(18,301)$(4,021)(1,433)$(11,851)$124,028 
Net income— — — 29,646 — — — 29,646 
Other comprehensive loss— — — — (646)— — (646)
Stock-based compensation— — 1,109 — — — — 1,109 
Exercise of stock options and issuance of restricted stock awards, net of forfeitures103 1 450 — — — — 451 
Balance at September 30, 202220,606 $206 $159,555 $11,345 $(4,667)(1,433)$(11,851)$154,588 
 Common StockAdditional
Paid-in
Capital
(Accumulated Deficit) Retained EarningsAccumulated
Other
Comprehensive Loss
Treasury StockTotal
Stockholders’
Equity
 SharesAmountSharesAmount
Balance at December 31, 202120,343 $203 $156,199 $(12,165)$(3,409)(1,433)$(11,851)$128,977 
Net income— — — 23,510 — — — 23,510 
Other comprehensive loss— — — — (1,258)— — (1,258)
Stock-based compensation— — 2,695 — — — — 2,695 
Issuance of common stock under employee stock purchase plan22 — 193 — — — — 193 
Exercise of stock options and issuance of restricted stock awards, net of forfeitures241 3 599 — — — — 602 
Taxes accrued for net share settlement of options— — (131)— — — — (131)
Balance at September 30, 202220,606 $206 $159,555 $11,345 $(4,667)(1,433)$(11,851)$154,588 
See accompanying Notes to Unaudited Consolidated Financial Statements.
6


KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited) 
Nine Months Ended
 September 30,
 20232022
Cash flows from operating activities:
Net (loss) income$(3,333)$23,510 
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses(168)459 
Depreciation and amortization10,119 10,756 
Impairment charge to goodwill and long-lived assets5,990  
Deferred income taxes1 (31)
Loss on disposals of fixed assets511 362 
Compensation expense related to stock-based awards and employee stock purchase plan
1,433 2,695 
Unrealized currency translation gain(150)(808)
Gain on sale of KVH Media Group Entertainment Limited (631)
Gain on sale of inertial navigation business
 (30,858)
Changes in operating assets and liabilities:
Accounts receivable(593)(117)
Inventories(3,693)(9,643)
Prepaid expenses, other current assets, and current contract assets(1,430)(1,543)
Other non-current assets and non-current contract assets1,530 1,574 
Accounts payable(16,758)612 
Contract liabilities and long-term contract liabilities(255)203 
Accrued compensation, product warranty and other4,119 1,993 
Net cash used in operating activities$(2,677)$(1,467)
Cash flows from investing activities:
Capital expenditures(7,170)(11,000)
Cash paid for acquisition of intangible asset(35)(42)
Proceeds from the sale of KVH Media Group Entertainment Limited, net of cash sold 2,378 
Proceeds from the sale of inertial navigation business 55,000 
Purchases of marketable securities(17,441)(55,203)
Maturities and sales of marketable securities15,422 13,164 
Net cash (used in) provided by investing activities$(9,224)$4,297 
Cash flows from financing activities:
Proceeds from stock options exercised and employee stock purchase plan2,604 796 
Purchase of treasury stock(239) 
Payment of finance lease(22)(198)
Net cash provided by financing activities$2,343 $598 
Effect of exchange rate changes on cash and cash equivalents(14)(402)
Net (decrease) increase in cash and cash equivalents(9,572)3,026 
Cash and cash equivalents at beginning of period21,056 11,376 
Cash and cash equivalents at end of period$11,484 $14,402 
Supplemental disclosure of non-cash investing and financing activities:
Changes in accrued other and accounts payable related to property and equipment additions$3 $6 
Taxes accrued for net share settlement of options$ $131 
See accompanying Notes to Unaudited Consolidated Financial Statements.
7


KVH INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
(Unaudited, all amounts in thousands except per share amounts)

(1)    Description of Business

KVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile connectivity products and services for the marine and land markets.

KVH’s satellite-only and hybrid products enable marine customers to receive data, Voice over Internet Protocol (VoIP), and value-added services via satellite, cellular, and shore-based Wi-Fi networks onboard commercial, leisure, and military/government vessels. In addition, the Company’s in-motion television terminals permit customers to receive live digital television via regional satellite services in marine vessels, recreational vehicles, buses and automobiles. KVH sells its products through an extensive international network of dealers and distributors. KVH also sells and leases products to service providers and end users.

KVH’s service sales primarily represent revenue earned from satellite Internet airtime services. KVH provides, for monthly fixed and per-usage fees, satellite connectivity encompassing broadband Internet and VoIP services, to its TracNet H-series and TracPhone V-HTS series customers via KVH’s global high-throughput satellite (HTS) network. Revenue from our cellular airtime service increasingly supplements KVH’s satellite-only airtime revenue following the July 2022 launch of the KVH ONE hybrid network and TracNet H-series terminals. This product and service combination integrates global satellite service with KVH-provided cellular service in more than 150 countries, along with shore-based Wi-Fi access. The May 2023 introduction of the KVH ONE OpenNet Program expanded access to KVH's global HTS network and airtime services to non-KVH terminals for the first time.

AgilePlans, KVH’s connectivity as a service offering, is a monthly subscription model that provides global connectivity to commercial maritime customers. The subscription includes the choice of satellite-only and hybrid terminals, airtime data service, VoIP, daily news, subsidized shipping and installation, and global support for a monthly fee with no minimum contract commitment. KVH offers AgilePlans subscribers a variety of airtime data plans with varying data speeds and fixed data usage levels with per megabyte overage charges. These airtime plans are similar to those the Company offers to customers who elect to purchase or lease a TracNet H-series or TracPhone V-HTS series terminal.

The Company recognizes the monthly AgilePlans subscription fee as service revenue over the service delivery period. The Company retains ownership of the hardware it provides to AgilePlans customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. KVH records the cost of the hardware used by AgilePlans customers as revenue-generating assets and depreciates the cost over an estimated useful life of five years. Since the Company is retaining ownership of the hardware, it does not accrue any warranty costs for AgilePlans hardware; however, any maintenance costs on the hardware are expensed in the period these costs are incurred.

Service sales also include the distribution of commercially licensed entertainment, including news, sports, and movies to commercial customers in the maritime and hotel markets through the KVH Media Group, along with supplemental value-added cybersecurity, email, and crew internet services. In addition, KVH earns monthly usage fees from third-party satellite connectivity services, including VoIP, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate their subscriptions with KVH. Service sales also include sales from product repairs and extended warranty sales.

KVH's marine leisure business is highly seasonal, and seasonality can also impact the Company's commercial marine business, although typically to a lesser degree. Historically, the Company has generated the majority of its marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year, compared to the first two quarters. Temporary suspensions of the Company's airtime services typically increase in the fourth and first quarters of each year as boats are placed out of service during the winter months.

8


On August 9, 2022, the Company sold its inertial navigation business to EMCORE Corporation for net proceeds of $54,904, less specified deductions. On August 9, 2022, the Company also entered into a Transition Services Agreement with EMCORE, pursuant to which the Company agreed to provide certain transition services to support the continued operation of the inertial navigation business for six months following the sale with two extension options of three months each. The fee comprised both fixed monthly fees of approximately $100 as well as variable amounts for certain additional services with escalation increases on the fixed and variable rates for each extension option. The Company did not have any continuing involvement in these operations other than the transition services, which were recorded as an offset to general and administrative expenses in continuing operations. As of September 30, 2023, the Company is no longer providing transition services. For the three and nine months ended September 30, 2023, the Company recognized an offset to general and administrative expenses associated with the Transition Services Agreement of $(13) and $710, respectively. The Company determined that the sale met the requirements for reporting as discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. Please see Note 16 for the discontinued operations disclosures. As a result of the sale of its inertial navigation business, the Company operates as one reportable segment.

(2)     Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated interim financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company has evaluated all subsequent events through the date of this filing. All significant intercompany accounts and transactions have been eliminated in consolidation.

The 2022 consolidated interim financial statements reflect the sale of the inertial navigation business as discontinued operations. See Notes 1 and 16 for further information on the sale of the inertial navigation business.

The consolidated interim financial statements have not been audited by the Company’s independent registered public accounting firm and include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods presented. These consolidated interim financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2022 filed on March 16, 2023 with the Securities and Exchange Commission. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of operating results for the remainder of the year.

Significant Estimates and Assumptions and Other Significant Non-Recurring Transactions

The preparation of interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim financial statements and the reported amounts of sales and expenses during the reporting periods. As described in the Company’s annual report on Form 10-K, the estimates and assumptions used by management affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of long-lived assets, including goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, forfeitures and key valuation assumptions for its share-based awards, estimated fulfillment costs for warranty obligations, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance, and the valuation of right-of-use assets and lease liabilities.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.

Foreign Currency Translation
9



The financial statements of the Company’s foreign subsidiaries located in Denmark and Singapore are maintained using the United States dollar as the functional currency. Exchange rates in effect on the date of the transaction are used to record monetary assets and liabilities. Revenue and other expense elements are recorded at rates that approximate the rates in effect on the transaction dates. Foreign currency exchange gains and losses are recognized within “other (expense) income, net” in the accompanying consolidated statements of operations. The Company recorded a total of net foreign currency exchange gains (losses), which are comprised of both realized and unrealized foreign currency exchange gains and losses, in its accompanying consolidated statements of operations of $92 and $450 for the three months ended September 30, 2023 and 2022, respectively, and $(18) and $1,009 for the nine months ended September 30, 2023 and 2022, respectively.

The financial statements of the Company’s foreign subsidiaries located in the United Kingdom, Brazil, Norway, Cyprus, India and Japan use the foreign subsidiaries’ respective local currencies as the functional currency. The Company translates the assets and liabilities of these foreign subsidiaries at the exchange rates in effect at the end of each reporting period. Net sales, costs and expenses are translated using average exchange rates in effect during the period. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive loss included in stockholders' equity in the accompanying consolidated balance sheets.

CEO Executive Employment Agreement

In May 2022, the Company entered into an executive employment agreement with Brent C. Bruun in order to retain his services and provide him with certain benefits in the event that the Company terminates his employment without cause (as defined in the agreement) or Mr. Bruun terminates his employment for good reason (as defined in the agreement) (either such termination, a “Qualifying Termination”), including following a change in control. The agreement provided that, if Mr. Bruun continued to serve as an employee through December 31, 2022 (the “Retention Date”), the Company would pay him a retention bonus equal to 75% of his base salary on the agreement date, and the Company would accelerate the vesting of his equity awards that would otherwise have vested in the twelve months after the Retention Date.

On October 11, 2022, the Company entered into an amendment to the employment agreement with Mr. Bruun that, among other things, increased his annual base salary to $448 per year, retroactive to July 1, 2022, increased his target annual incentive compensation for the second half of 2022 to 80% of his base salary (without changing his target annual incentive compensation for the first half of 2022), extended his Retention Date from December 31, 2022 to December 31, 2023, which effectively extended the period during which Mr. Bruun must remain employed by the Company in order to earn his retention bonus, and modified the amount of the retention bonus from 75% of his base salary in effect on May 2, 2022 to 75% of the highest base salary in effect for Mr. Bruun on or before the date he becomes entitled to receive the retention bonus or the “Partial Retention Bonus” (as defined in the employment agreement). If a Qualifying Termination occurs before December 31, 2023, Mr. Bruun will receive a pro rata portion of the retention bonus. If in connection with such a termination he becomes entitled to receive the change in control severance payments and benefits, he will also become entitled to receive the full retention bonus, and the Retention Date will be the later of the date of such change in control or such termination of employment. The amendment did not modify the terms of the employment agreement relating to acceleration of vesting of certain equity awards if Mr. Bruun remains employed by the Company through December 31, 2022.

As of September 30, 2023, the Company has accrued approximately $286 for the retention bonus payable to Mr. Bruun.

Contemporaneously with the amendment to Mr. Bruun’s employment agreement, the Compensation Committee also granted Mr. Bruun a restricted stock award and a non-statutory stock option, which together had an aggregate grant date fair value of approximately $100. The restricted stock award and the non-statutory stock option have terms that are materially consistent with the previously disclosed terms of similar grants to the Company’s executive officers.

(3)     Recently Issued Accounting Standards and Accounting Standards Not yet Adopted

There are no recent accounting pronouncements issued by the FASB, but not yet effective, that the Company expects would have a material impact on the Company's financial statements.

10


(4)    Marketable Securities

Marketable securities as of September 30, 2023 and December 31, 2022 consisted of the following:
September 30, 2023Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Money market mutual funds$57,710 $ $ $57,710 
United States treasuries    
Total marketable securities designated as available-for-sale$57,710 $ $ $57,710 
 
December 31, 2022Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Money market mutual funds$30,977 $ $ $30,977 
United States treasuries24,715  (12)24,703 
Total marketable securities designated as available-for-sale$55,692 $ $(12)$55,680 

Interest income from marketable securities was $744 and $193 during the three months ended September 30, 2023 and 2022, respectively, and $2,019 and $203 during the nine months ended September 30, 2023 and 2022, respectively.

(5)     Stockholder's Equity

(a) Stock Equity and Incentive Plan
The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation. On June 8, 2022, at the Company's 2022 Annual Meeting of Stockholders, the stockholders of the Company approved an amendment and restatement of the Company’s current equity compensation plan to increase the number of shares of common stock reserved for issuance under the plan by 1,280 shares, from 4,800 shares to 6,080 shares (excluding rollover shares). Stock-based compensation expense was $558 and $1,103, excluding $1 and $6 of compensation charges related to our Amended and Restated 1996 Employee Stock Purchase Plan, or the ESPP, for the three months ended September 30, 2023 and 2022, respectively, and $1,408 and $2,663, excluding $25 and $32 of compensation shares related to the ESPP, for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was $2,272 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.66 years. As of September 30, 2023, there was $2,953 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.52 years.

Stock Options

During the three months ended September 30, 2023, the Company issued 14 shares of common stock upon the exercise of stock options and received $113 as payment for the exercise price. No shares were surrendered to the Company to satisfy minimum tax withholding obligations. Additionally, during the three months ended September 30, 2023, no stock options were granted and 133 stock options expired, were canceled or were forfeited.

During the nine months ended September 30, 2023, the Company issued 274 shares of common stock upon the exercise of stock options and received $2,480 as payment for the exercise price. No shares were surrendered to the Company to satisfy minimum tax withholding obligations. Additionally, during the nine months ended September 30, 2023, 317 stock options were granted and 564 stock options expired, were canceled or were forfeited. During the nine months ended September 30, 2022, 398 stock options were granted. The Company has historically estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions utilized to determine the fair value of options granted during the nine months ended September 30, 2023 and 2022 are as follows:
11


Nine Months Ended September 30,
 20232022
Risk-free interest rate4.49 %2.97 %
Expected volatility43.93 %43.16 %
Expected life (in years)4.304.24
Dividend yield0 %0 %

As of September 30, 2023, there were 1,230 options outstanding with a weighted average exercise price of $9.57 per share and 510 options exercisable with a weighted average exercise price of $9.56 per share.

Restricted Stock

During the three months ended September 30, 2023, 66 shares of restricted stock were granted with a weighted average grant date fair value of 8.75 per share and no shares of restricted stock were forfeited. Additionally, during the three months ended September 30, 2023, 7 shares of restricted stock vested, of which no shares of common stock were surrendered to the Company as payment by employees in lieu of cash to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock.

During the nine months ended September 30, 2023, 217 shares of restricted stock were granted with a weighted average grant date fair value of $9.49 per share and 72 shares of restricted stock were forfeited. Additionally, during the nine months ended September 30, 2023, 101 shares of restricted stock vested, of which no shares of common stock were surrendered to the Company as payment by employees in lieu of cash to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock.

As of September 30, 2023, the Company had no unvested outstanding options and no outstanding shares of restricted stock that were subject to performance-based or market-based vesting conditions.

Common Stock Repurchase

In the first quarter of 2023, the Company’s Board of Directors authorized the repurchase of a portion of executive common stock. The Company repurchased 23 shares of common stock held by executives at the Company to satisfy minimum tax withholding obligations in lieu of cash payment. No shares of common stock were repurchased during the twelve months ended December 31, 2022.

(b) Employee Stock Purchase Plan

The Company's ESPP affords eligible employees the right to purchase common stock, via payroll deductions, through various offering periods at a purchase price equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the three months ended September 30, 2023 and 2022, 17 and 0 shares were issued under the ESPP plan, respectively. During the nine months ended September 30, 2023 and 2022, 17 and 22 shares were issued under the ESPP plan, respectively. The Company recorded compensation charges related to the ESPP of $1 and $6 for the three months ended September 30, 2023 and 2022, respectively, and $25 and $32 for the nine months ended September 30, 2023 and 2022, respectively.

12


(c) Stock-Based Compensation Expense
The following table presents stock-based compensation expense, including expense for the ESPP, in the Company's consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Cost of product sales$9 $333 $25 $468 
Cost of service sales6 3 15 8 
Research and development162 371 399 702 
Sales, marketing and support63 14 160 225 
General and administrative319 388 834 1,292 
$559 $1,109 $1,433 $2,695 

(d) Accumulated Other Comprehensive Loss (AOCL)

Comprehensive income (loss) includes net income (loss), unrealized gains and losses from foreign currency translation, and unrealized gains and losses on available for sale marketable securities. The components of the Company’s comprehensive income (loss) and the effect on earnings for the periods presented are detailed in the accompanying consolidated statements of comprehensive (loss) income.

The balances for the three months ended September 30, 2023 and 2022 are as follows:
Foreign Currency TranslationTotal Accumulated Other Comprehensive Loss
Balance, June 30, 2023$(3,955)$(3,955)
Other comprehensive loss(267)(267)
Net other comprehensive loss(267)(267)
Balance, September 30, 2023$(4,222)$(4,222)

Foreign Currency TranslationTotal Accumulated Other Comprehensive Loss
Balance, June 30, 2022$(4,021)$(4,021)
Other comprehensive loss(646)(646)
Net other comprehensive loss(646)(646)
Balance, September 30, 2022$(4,667)$(4,667)

The balances for the nine months ended September 30, 2023 and 2022 are as follows:
Foreign Currency TranslationUnrealized (Loss) Gain on Available for Sale Marketable SecuritiesTotal Accumulated Other Comprehensive Loss
Balance, December 31, 2022$(4,098)$(12)$(4,110)
Other comprehensive (loss) income(124)12 (112)
Net other comprehensive (loss) income(124)12 (112)
Balance, September 30, 2023$(4,222)$ $(4,222)

13


Foreign Currency TranslationTotal Accumulated Other Comprehensive Loss
Balance, December 31, 2021$(3,409)$(3,409)
Other comprehensive loss(1,258)(1,258)
Net other comprehensive loss(1,258)(1,258)
Balance, September 30, 2022$(4,667)$(4,667)

(6)     Net (Loss) Income from Continuing Operations per Common Share

    Basic net (loss) income per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined with the treasury stock accounting method. For the three and nine months ended September 30, 2023, since there was a net loss from continuing operations, the Company excluded 1,572 and 1,053 shares, respectively, underlying outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these convertible securities would have reduced the net loss per share. For the three and nine months ended September 30, 2022, since there was a net loss from continuing operations, the Company excluded 1,572 and 1,763 shares, respectively, underlying outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these convertible securities would have reduced the net loss per share.

A reconciliation of the basic and diluted weighted average common shares outstanding is as follows:
 
Three Months EndedNine Months Ended
 September 30,September 30,
 2023202220232022
Weighted average common shares outstanding—basic19,231 18,706 19,090 18,574 
Dilutive common shares issuable in connection with stock plans    
Weighted average common shares outstanding—diluted19,231 18,706 19,090 18,574 

(7)     Inventories

Inventories are stated at the lower of cost or net realizable value using the first-in first-out costing method. Inventories as of September 30, 2023 and December 31, 2022 include the costs of material, labor, and factory overhead. Components of inventories consist of the following:
September 30,
2023
December 31,
2022
Raw materials$15,325 $14,203 
Work in process4,083 4,164 
Finished goods7,015 4,363 
$26,423 $22,730 

14


(8)     Property and Equipment

Property and equipment, net, as of September 30, 2023 and December 31, 2022 consist of the following:
September 30,
2023
December 31,
2022
Land$2,833 $2,833 
Building and improvements18,839 18,869 
Leasehold improvements439 513 
Machinery and equipment5,927 5,948 
Revenue-generating assets75,440 72,527 
Office and computer equipment13,613 14,652 
Motor vehicles31 31 
117,122 115,373 
Less accumulated depreciation(67,715)(62,255)
$49,407 $53,118 

Depreciation expense was $3,180 and $3,283 for the three months ended September 30, 2023 and 2022, respectively and $9,952 and $9,591 for the nine months ended September 30, 2023 and 2022, respectively.

Certain revenue-generating hardware assets are utilized by the Company in the delivery of the Company's airtime services, media and other content.

As part of the Company's impairment testing, an internally developed software asset was deemed the primary asset of the asset group known as KVH Media Group. The $383 net asset value was determined to be fully impaired as a result of the review. The movement associated with the impairment is reflected as a component of the office and computer equipment. Please see Note 12 for additional details surrounding the impairment.

(9)     Product Warranty

The Company’s products carry standard limited warranties that range from one to two years and vary by product. The warranty period begins on the date of retail purchase or lease by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include the number of units sold or leased, historical and anticipated rates of warranty repairs and the cost per repair. Warranty and related costs are reflected within sales, marketing and support in the accompanying consolidated statements of operations. As of September 30, 2023 and December 31, 2022, the Company had accrued product warranty costs of $642 and $1,287, respectively.

The following table summarizes product warranty activity during 2023 and 2022:
 
Nine Months Ended
 September 30,
 20232022
Beginning balance$1,287 $1,084 
Charges to expense521 964 
Costs incurred(1,166)(764)
Ending balance$642 $1,284 

(10)     Legal Matters
    
    In the ordinary course of business, the Company is a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. The Company is not a party to any lawsuit or proceeding that, in management's opinion, is likely to materially harm the Company's business, results of operations, financial condition, or cash flows.

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(11)     Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1:    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments in money market mutual funds and United States treasuries.

Level 2:    Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based on directly or indirectly market-corroborated inputs. The Company has no Level 2 assets or liabilities.

Level 3:    Unobservable inputs that are supported by little or no market activity, and are developed based on the best information available given the circumstances. The Company has no Level 3 assets.

Assets and liabilities measured at fair value are based on the valuation techniques identified in the table below.

The following tables present financial assets and liabilities at September 30, 2023 and December 31, 2022 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:

September 30, 2023TotalLevel 1Level 2Level 3Valuation
Technique
Assets
Money market mutual funds$57,710 $57,710 $ $ (a)
December 31, 2022TotalLevel 1Level 2Level 3Valuation
Technique
Assets
Money market mutual funds$30,977 $30,977 $ $ (a)
United States treasuries$24,703 $24,703 $ $ (a)
(a)Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets.
The carrying amount of certain financial instruments approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of the Company's operating and financing lease liabilities approximates fair value based on currently available quoted rates of similarly structured borrowings.

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company's non-financial assets, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if indications of impairment exist. During the nine months ended September 30, 2023, the Company recorded an impairment charge of $5,990 to goodwill and long-lived assets. There were no other impairments of the Company's non-financial assets noted during the nine months ended September 30, 2023. Please see Note 12 for further discussion. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis.

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(12)     Goodwill and Other Long-Lived Assets

The Company performs 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. 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. The Company’s two reporting units are: Mobile Broadband (MBB) and KVH Media Group (Media).

Other long-lived assets, which include intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of other long-lived assets is measured by a comparison of the carrying amount of an asset group to its future undiscounted cash flows. If these comparisons indicate that an asset group is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset group exceeds its related estimated fair value. The Company has determined that the assets within each of the Company's reporting units (MBB and Media) are highly interrelated and interdependent on each other to generate revenues, and thus independent cash flows are not identifiable at a level lower than that of these reporting units. Accordingly, the Company's asset groups were determined to be its reporting units (MBB and Media).

In the third quarter of 2023, the Company experienced a sustained decrease in its stock price, which was identified by the Company as an indicator of impairment. Consequently, the Company performed a quantitative assessment of impairment of goodwill and other long-lived assets for the MBB and Media reporting units and asset groups. These assessments require considerable judgment and are largely based on assumptions and estimates developed by management including estimation of future cash flows, estimation of long-term growth rates, determination of the period over which future cash flows will occur, determination of a weighted average cost of capital, and consideration of market, industry, and other factors.

In performing the quantitative impairment assessment for goodwill, the Company determined the fair value of its reporting units by discounting its estimated future cash flows using an appropriate weighted average cost of capital. As of September 30, 2023, the estimated 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), the Company recognized a goodwill impairment charge of $5,333, which represented the total goodwill for both reporting units, in the consolidated statements of operations for the three and nine months ended September 30, 2023.

In performing the quantitative impairment assessment for other long-lived assets, the Company used undiscounted cash flows expected to be generated over the estimated remaining useful life of the primary asset of each asset group, to determine whether the carrying amounts of each asset group are recoverable. As of September 30, 2023, the Company’s analysis indicated that the carrying amount of the MBB asset group is recoverable, and therefore no impairment charge was recognized. As of September 30, 2023, the Company’s analysis indicated that the carrying amount of the Media asset group is not recoverable and that such carrying amount exceeded its fair value. Accordingly, the Company recognized a long-lived assets impairment charge of $657 in the consolidated statements of operations for the three and nine months ended September 30, 2023.

Goodwill

The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2023:

Amounts
Balance at December 31, 2022
$5,308 
Impairment(5,333)
Foreign currency translation adjustment25 
Balance at September 30, 2023
$ 
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Intangible Assets

The changes in the carrying amount of intangible assets during the nine months ended September 30, 2023 are as follows:
Amounts
Balance at December 31, 2022
$404 
Amortization expense(167)
Intangible assets acquired in asset acquisition35 
Impairment(274)
Foreign currency translation adjustment2 
Balance at September 30, 2023
$ 

Intangible assets arose from the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013. These intangible assets were being amortized on a straight-line basis over the estimated useful life of 10 years for acquired subscriber relationships. The intangible assets were recorded in pounds sterling and fluctuations in exchange rates cause these amounts to increase or decrease from time to time.

Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at September 30, 2023 and December 31, 2022, respectively:
Gross Carrying AmountAccumulated AmortizationNet Carrying Value
September 30, 2023
Subscriber relationships$ $ $ 
Distribution rights   
Internally developed software   
Proprietary content   
Intellectual property2,284 2,284  
$2,284 $2,284 $ 
December 31, 2022
Subscriber relationships$7,649 $7,245 $404 
Distribution rights315 315  
Internally developed software446 446  
Proprietary content153 153  
Intellectual property2,284 2,284  
$10,847 $10,443 $404 

Amortization expense related to intangible assets was $19 and $90 for the three months ended September 30, 2023 and 2022, respectively, and $167 and $409 for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense was categorized as general and administrative expense.

(13)     Revenue from Contracts with Customers

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these products and services.

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Disaggregation of Revenue for Continuing Operations

The following table summarizes net sales from contracts with customers for the three and nine months ended September 30, 2023 and 2022:

Three Months EndedNine Months Ended
September 30,September 30,
2023202220232022
Product, transferred at point in time$3,531 $5,974 $12,578 $18,057 
Product, transferred over time621 651 1,948 1,751 
Service 29,397 28,544 86,883 83,065 
 Total net sales$33,549 $35,169 $101,409 $102,873 
Revenue recognized during the three months ended September 30, 2023 and 2022 from amounts included in contract liabilities at the beginning of the period was $533 and $572, respectively. Revenue recognized during the nine months ended September 30, 2023 and 2022 from amounts included in contract liabilities at the beginning of the period was $1,826 and $1,645, respectively.

For product sales, the delivery of the Company’s performance obligations is generally transferred to the customer, and associated revenue is recognized, at a point in time, with the exception of certain VSAT contracts which are transferred to customers over time. For service sales, the delivery of the Company’s performance obligations is transferred to the customer, and associated revenue is recognized, over time. The Company's performance is impacted by the levels of activity in the marine and land mobile markets, among other factors. Performance in any particular period could be impacted by the timing of sales to certain large customers.

The Company primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to the Internet, television, and VoIP services while on the move. Product sales accounted for 12% and 19% of the Company's consolidated net sales for the three months ended September 30, 2023 and 2022, respectively, and 14% and 19% of the Company's consolidated net sales for the nine months ended September 30, 2023 and 2022, respectively. Service sales of VSAT Broadband airtime service accounted for 82% and 76% of the Company's consolidated net sales for the three months ended September 30, 2023 and 2022, respectively, and 80% and 74% of the Company's consolidated net sales for the nine months ended September 30, 2023 and 2022, respectively. The balance of service sales is comprised of distribution of commercially licensed entertainment and news, product repairs, and extended warranty sales.

No other single product class accounts for 10% or more of the Company's consolidated net sales.

The Company operates in a number of major geographic areas, including internationally. Revenues from international locations primarily include Singapore, Canada, South America countries, European Union countries and other European countries, and countries in Africa, the Middle East and Asia/Pacific, including India. Revenues are based upon customer location and revenues from international locations represented 69% and 62% of consolidated net sales for the three months ended September 30, 2023 and 2022, respectively, and 67% and 61% of consolidated net sales for the nine months ended September 30, 2023 and 2022, respectively. Sales to Singapore customers represented 18% and 17% of the Company's consolidated net sales for the three months ended September 30, 2023 and 2022, respectively. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended September 30, 2023 or 2022. Sales to Singapore customers represented 18% and 16% of the Company's consolidated net sales for the nine months ended September 30, 2023 and 2022, respectively. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the nine months ended September 30, 2023 or 2022.

As of September 30, 2023 and December 31, 2022, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets.

19


Business and Credit Concentrations

Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers and their dispersion across several geographic areas. Although the Company does not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishes allowances for credit losses and evaluates, on a monthly basis, the adequacy of those reserves based upon expected losses, historical experience and its expectation for future collectability concerns.

No single customer accounted for 10% or more of consolidated net sales for the nine months ended September 30, 2023 or 2022. Two customers accounted for approximately 18% and 11% of accounts receivable at September 30, 2023, respectively. Two customers accounted for approximately 16% and 12%, respectively, of accounts receivable at December 31, 2022. One customer accounted for 64% and 66% of long-term accounts receivable included in other non-current assets on the consolidated balance sheets related to sales-type leases at September 30, 2023 and December 31, 2022, respectively.

Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results.

Customer Contract Balances

The following table provides the balance sheet location and amounts of contract assets, or unbilled accounts receivable, and contract liabilities, or deferred revenue, from contracts with customers as of September 30, 2023 and December 31, 2022:

Contract Balance TypeBalance Sheet LocationSeptember 30, 2023December 31, 2022
Current portion of deferred costsCurrent contract assets$1,130 $1,243 
Non-current portion of deferred costsNon-current contract assets2,557 3,033 
Current portion of deferred revenuesContract liabilities*1,668 1,743 
Non-current portion of deferred revenuesLong-term contract liabilities3,905 4,315 

*Management notes that the remaining “Contract liabilities” balance not included in the above table (which as of September 30, 2023 and December 31, 2022 is $1,600 and $1,365, respectively) relates to deferred income unaffiliated with the Company’s primary revenue streams, the majority of which relates to our content subscription business. These values are therefore excluded from the contract assets and contract liabilities from contracts with customers.

There were no material changes to contract asset balances for the nine months ended September 30, 2023 as a result of changes in estimates or impairments. The change in the contract liability balance from December 31, 2022 to September 30, 2023 was primarily due to the increase in upfront support billings received in the first nine months of 2023 in comparison to revenues recognized in the prior period from historical support billings.

(14)     Income Taxes

The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2023 was (2.3)% and (5.0)%, respectively, compared with (578.6)% and (16.5)% for the corresponding periods in the prior year. The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable periods, including retroactive changes in tax legislation, settlements of tax audits or assessments, and the resolution or identification of tax position uncertainties.

For the three and nine months ended September 30, 2023 and 2022, the effective tax rates from continuing operations differed from the statutory tax rate primarily due to the Company maintaining a valuation allowance reserve on its U.S. deferred tax assets, discrete tax adjustments and the composition of income from foreign jurisdictions taxed at lower rates.

As of September 30, 2023 and December 31, 2022, the Company had reserves for uncertain tax positions of $693 and $637, respectively. There were no material changes during the nine months ended September 30, 2023 to the Company’s reserve for uncertain tax positions. The Company estimates that it is reasonably possible that the balance of unrecognized tax
20


benefits as of September 30, 2023 may decrease $38 in the next twelve months as a result of a lapse of statutes of limitations and settlements with taxing authorities.

The Company’s tax jurisdictions include the United States, the United Kingdom, Denmark, Cyprus, Norway, Brazil, Singapore, Japan and India. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to 2019, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state and foreign taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding year.

(15)     Leases

Lessee

The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense from continuing operations was $417 and $507 for the three months ended September 30, 2023 and 2022, respectively, and was $1,291 and $1,588 for the nine months ended September 30, 2023 and 2022, respectively. Short-term operating lease costs were $15 and $41 for the three months ended September 30, 2023 and 2022, respectively, and were $55 and $139 for the nine months ended September 30, 2023 and 2022, respectively. Maturities of lease liabilities as of September 30, 2023 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows:

Remainder of 2023$400 
2024629 
202593 
202647 
2027 and thereafter79 
Total minimum lease payments$1,248 
Less amount representing interest$(55)
Present value of net minimum operating lease payments$1,193 
Less current installments of obligation under current-operating lease liabilities$921 
Obligations under long-term operating lease liabilities, excluding current installments$272 
Weighted-average remaining lease term - operating leases (years)1.53
Weighted-average discount rate - operating leases5.50 %

Lessor

The Company enters into leases with certain customers primarily for the TracPhone VSAT systems. These leases are classified as sales-type leases because title to the equipment transfers to the customer at the end of the lease term. The Company records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the net present value of all payments under these leases as product revenue, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the lease term (typically three to five years) using an implicit interest rate. The sales-type leases do not have unguaranteed residual assets.

The current portion of the net investment in these leases was $3,739 as of September 30, 2023 and the non-current portion of the net investment in these leases was $3,984 as of September 30, 2023. The current portion of the net investment in the leases is included in accounts receivable, net of allowance for doubtful accounts on the accompanying consolidated balance sheets and the non-current portion of the net investment in these leases is included in other non-current assets on the accompanying consolidated balance sheets. Interest income from sales-type leases was $159 and $191 during the three months ended September 30, 2023 and 2022, respectively, and was $501 and $591 during the nine months ended September 30, 2023 and 2022, respectively.

21


The future undiscounted cash flows from these leases as of September 30, 2023 are:
Remainder of 2023$1,547 
20243,346 
20252,016 
20261,033 
2027514 
202898
Total undiscounted cash flows$8,554 
Present value of lease payments$7,723 
Difference between undiscounted cash flows and discounted cash flows $831 

In 2021, the Company began entering into three-year leases for its TracPhone VSAT systems, in which ownership of the hardware does not transfer to the lessee by the end of the lease term. As a result, and in light of other factors indicated in ASC 842, these leases are classified as operating leases.

As of September 30, 2023, the gross costs and accumulated depreciation associated with these operating leases are included in revenue generating assets and amounted to $1,880 and $798, respectively. They are depreciated on a straight-line basis over a five-year estimated useful life. Depreciation expense for these assets was $94 and $282 for the three and nine months ended September 30, 2023, respectively.

Lease revenue recognized was $138 and $415 for the three and nine months ended September 30, 2023, respectively, in service sales in the consolidated statements of operations.

As of September 30, 2023, minimum future lease payments to be recognized on the operating leases are as follows:
Remainder of 2023$138 
2024343 
202525 
Total $506 

22


(16)     Discontinued Operations

During the third quarter of 2022, the Company sold its inertial navigation business. The Company determined that the sale met the requirements for reporting as discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. There were no assets or liabilities of the inertial navigation business as of December 31, 2022 or September 30, 2023. Please see Note 1 for further discussion.

The following table presents a reconciliation of the major financial line items constituting the results for discontinued operations to the net income from discontinued operations, net of tax, presented separately in the Company's consolidated statement of operations for the three and nine months ended 2022:

Three Months EndedNine Months Ended
September 30,September 30,
20222022
Sales:
Product$1,276 $16,042 
Service218 679 
Net sales1,494 16,721 
Costs and expenses:
Costs of product sales1,504 12,732 
Costs of service sales169 457 
Research and development374 3,147 
Sales, marketing and support348 3,035 
Other income, net12 81 
Loss from discontinued operations before income tax expense(889)(2,569)
Gain on sale of discontinued operations before tax expense30,858 30,858 
Total income from discontinued operations before tax expense$29,969 $28,289 
Income tax expense on discontinued operations228 228 
Net income from discontinued operations, net of tax$29,741 $28,061 
Net income from discontinued operations per common share
Basic$1.59 $1.51 
Diluted$1.59 $1.51 
Weighted average number of common shares outstanding:
Basic18,706 18,574 
Diluted18,706 18,574 

The following table presents supplemental cash flow information of the discontinued operations:
Three Months EndedNine Months Ended
September 30,September 30,
20222022
Cash used in operating activities - discontinued operations$(252)$(3,853)
Cash used in investing activities - discontinued operations$(220)$(307)

23


The following table presents non-cash expenses from discontinued operations:

Three Months EndedNine Months Ended
September 30,September 30,
20222022
Depreciation$91 $622 
Compensation expense related to stock-based awards and employee stock purchase plan$237 $475 

24


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction

The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products and services, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. 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, 2022 as updated in Item 1A of Part II of this quarterly report on Form 10-Q. These and many other factors could affect our future financial and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. The following discussion and analysis should be read in conjunction with our consolidated interim financial statements and related notes appearing elsewhere in this report.

Overview

We design, develop, manufacture and market mobile connectivity products and services for the marine and land mobile markets. We generate a majority of our revenue from the sale of satellite internet airtime services. We offer both satellite-only and hybrid products that enable marine customers to receive data, Voice over Internet Protocol (VoIP), and value-added services via satellite, cellular, and shore-based Wi-Fi networks onboard commercial, leisure and military/government vessels. 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, along with supplemental value-added cybersecurity, email, and crew internet services. We generate a majority of our revenues from various international locations.

Impairment Charge

During the nine months ended September 30, 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 12 of our accompanying financial statements for further information.

Supply Chain

During the nine months ended September 30, 2023, we continued to experience delays in the availability and delivery of certain raw material components. We also experienced increased raw material costs, which we expect to continue throughout 2023. 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.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these interim 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 interim financial statements. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2022.

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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 goodwill, 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, 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.

Intangible assets with finite lives and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets with finite lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows expected to be generated by the asset or asset group. Asset groups are determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If these comparisons indicate that an asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value.

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 12 of our accompanying financial statements for further discussion.

26



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:
Three Months EndedNine Months Ended
 September 30,September 30,
 2023202220232022
Sales:
Product12.4 %18.8 %14.3 %19.3 %
Service87.6 81.2 85.7