KVH INDUSTRIES INC \DE\ - Quarter Report: 2023 September (Form 10-Q)

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


☐			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)


Delaware			05-0420589
(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 Class	Trading Symbol(s)	Name of Each Exchange on which Registered
		The Nasdaq Stock Market LLC
Common Stock, par value $0.01 per share	KVHI	(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 filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller 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.


Date	Class	Outstanding shares
October 30, 2023	Common Stock, par value $0.01 per share	19,610,790

KVH INDUSTRIES, INC. AND SUBSIDIARIES

Form 10-Q

INDEX


		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.	INTERIM FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (unaudited)	4
	Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2023 and 2022 (unaudited)	5
	Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 4.	CONTROLS AND PROCEDURES	33
PART II. OTHER INFORMATION

ITEM 1A.	RISK FACTORS	34

ITEM 6.	EXHIBITS	43
SIGNATURE		44

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, 2023		December 31, 2022
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	11,484	$	21,056
Marketable securities	57,710		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
Inventories	26,423		22,730
Prepaid expenses and other current assets	4,617		3,067
Current contract assets	1,130		1,243

Total current assets	129,554		131,203
Property and equipment, net	49,407		53,118
Intangible assets, net	—		404
Goodwill	—		5,308
Right of use assets	1,191		2,168
Other non-current assets	3,985		5,037
Non-current contract assets	2,557		3,033
Deferred income tax asset	258		259

Total assets	$	186,952	$	200,530
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,644	$	20,449
Accrued compensation and employee-related expenses	4,936		7,621
Accrued other	11,609		4,234
Accrued product warranty costs	642		1,287

Contract liabilities	3,268		3,108
Current operating lease liability	921		1,532
Liability for uncertain tax positions	693		637

Total current liabilities	25,713		38,868

Long-term operating lease liability	272		636
Long-term contract liabilities	3,905		4,315

Deferred income tax liability	55		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 capital	164,505		160,475
Retained earnings	8,603		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’ equity	157,007		156,656
Total liabilities and stockholders’ equity	$	186,952	$	200,530

See accompanying Notes to Unaudited Consolidated Financial Statements.

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except earnings per share amounts, unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Sales:
Product	$	4,152	$	6,625	$	14,526	$	19,808
Service	29,397		28,544		86,883		83,065
Net sales	33,549		35,169		101,409		102,873
Costs and expenses:
Costs of product sales	4,729		6,747		16,596		17,363
Costs of service sales	16,238		15,379		47,848		45,505
Research and development	2,398		2,745		7,379		8,380
Sales, marketing and support	4,854		5,710		15,708		18,355
General and administrative	4,367		5,559		13,139		19,532
Goodwill impairment charge	5,333		—		5,333		—
Long-lived assets impairment charge	657		—		657		—
Total costs and expenses	38,576		36,140		106,660		109,135
Loss from operations	(5,027)		(971)		(5,251)		(6,262)
Interest income	997		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 operations	95		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:
Basic	19,231		18,706		19,090		18,574
Diluted	19,231		18,706		19,090		18,574

See accompanying Notes to Unaudited Consolidated Financial Statements.

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
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.

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, unaudited)



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance at June 30, 2023	20,969	$	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 plan	17	—		123		—		—		—	—		123





Exercise of stock options and issuance of restricted stock awards, net of forfeitures	81	1		133		—		—		—	—		134

Balance at September 30, 2023	21,067	$	211	$	164,505	$	8,603	$	(4,222)	(1,456)	$	(12,090)	$	157,007



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance at December 31, 2022	20,631	$	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 plan	17	—		123		—		—		—	—		123
Acquisition of treasury stock	—	—		—		—		—		(23)	(239)		(239)
Exercise of stock options and issuance of restricted stock awards, net of forfeitures	419	5		2,474		—		—		—	—		2,479

Balance at September 30, 2023	21,067	$	211	$	164,505	$	8,603	$	(4,222)	(1,456)	$	(12,090)	$	157,007



	Common Stock			Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance at June 30, 2022	20,503	$	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 forfeitures	103	1		450		—		—		—	—		451

Balance at September 30, 2022	20,606	$	206	$	159,555	$	11,345	$	(4,667)	(1,433)	$	(11,851)	$	154,588



	Common Stock			Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance at December 31, 2021	20,343	$	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 plan	22	—		193		—		—		—	—		193

Exercise of stock options and issuance of restricted stock awards, net of forfeitures	241	3		599		—		—		—	—		602
Taxes accrued for net share settlement of options	—	—		(131)		—		—		—	—		(131)
Balance at September 30, 2022	20,606	$	206	$	159,555	$	11,345	$	(4,667)	(1,433)	$	(11,851)	$	154,588

See accompanying Notes to Unaudited Consolidated Financial Statements.

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)


	Nine Months Ended
	September 30,
	2023		2022
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 amortization	10,119		10,756
Impairment charge to goodwill and long-lived assets	5,990		—
Deferred income taxes	1		(31)
Loss on disposals of fixed assets	511		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 assets	1,530		1,574
Accounts payable	(16,758)		612
Contract liabilities and long-term contract liabilities	(255)		203
Accrued compensation, product warranty and other	4,119		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 securities	15,422		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 plan	2,604		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 period	21,056		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.

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.

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

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.

(4) Marketable Securities

Marketable securities as of September 30, 2023 and December 31, 2022 consisted of the following:


September 30, 2023	Amortized 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, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Money market mutual funds	$	30,977	$	—	$	—	$	30,977
United States treasuries	24,715		—		(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:



	Nine Months Ended September 30,
	2023		2022
Risk-free interest rate	4.49	%	2.97	%
Expected volatility	43.93	%	43.16	%
Expected life (in years)	4.30		4.24
Dividend yield	0	%	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.

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,
	2023		2022		2023		2022
Cost of product sales	$	9	$	333	$	25	$	468
Cost of service sales	6		3		15		8
Research and development	162		371		399		702
Sales, marketing and support	63		14		160		225
General and administrative	319		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 Translation		Total 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 Translation		Total 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 Translation		Unrealized (Loss) Gain on Available for Sale Marketable Securities		Total 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)



	Foreign Currency Translation		Total 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 Ended		Nine Months Ended
	September 30,		September 30,
	2023	2022	2023	2022
Weighted average common shares outstanding—basic	19,231	18,706	19,090	18,574
Dilutive common shares issuable in connection with stock plans	—	—	—	—
Weighted average common shares outstanding—diluted	19,231	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 process	4,083		4,164
Finished goods	7,015		4,363
	$	26,423	$	22,730

(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 improvements	18,839		18,869
Leasehold improvements	439		513
Machinery and equipment	5,927		5,948
Revenue-generating assets	75,440		72,527
Office and computer equipment	13,613		14,652
Motor vehicles	31		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,
	2023		2022
Beginning balance	$	1,287	$	1,084
Charges to expense	521		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.

(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, 2023	Total		Level 1		Level 2		Level 3		Valuation Technique
Assets
Money market mutual funds	$	57,710	$	57,710	$	—	$	—	(a)


December 31, 2022	Total		Level 1		Level 2		Level 3		Valuation 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.

(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 adjustment	25
Balance at September 30, 2023	$	—

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 acquisition	35
Impairment	(274)
Foreign currency translation adjustment	2
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 Amount		Accumulated Amortization		Net Carrying Value
September 30, 2023
Subscriber relationships	$	—	$	—	$	—
Distribution rights	—		—		—
Internally developed software	—		—		—
Proprietary content	—		—		—
Intellectual property	2,284		2,284		—

	$	2,284	$	2,284	$	—
December 31, 2022
Subscriber relationships	$	7,649	$	7,245	$	404
Distribution rights	315		315		—
Internally developed software	446		446		—
Proprietary content	153		153		—
Intellectual property	2,284		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.

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 Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Product, transferred at point in time	$	3,531	$	5,974	$	12,578	$	18,057
Product, transferred over time	621		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.

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 Type	Balance Sheet Location	September 30, 2023		December 31, 2022
Current portion of deferred costs	Current contract assets	$	1,130	$	1,243
Non-current portion of deferred costs	Non-current contract assets	2,557		3,033
Current portion of deferred revenues	Contract liabilities*	1,668		1,743
Non-current portion of deferred revenues	Long-term contract liabilities	3,905		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

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
2024	629
2025	93
2026	47
2027 and thereafter	79
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 leases	5.50		%

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.

The future undiscounted cash flows from these leases as of September 30, 2023 are:


Remainder of 2023	$	1,547
2024	3,346
2025	2,016
2026	1,033
2027	514
2028	98
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
2024	343
2025	25



Total	$	506

(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 Ended		Nine Months Ended
	September 30,		September 30,
	2022		2022
Sales:
Product	$	1,276	$	16,042
Service	218		679
Net sales	1,494		16,721
Costs and expenses:
Costs of product sales	1,504		12,732
Costs of service sales	169		457
Research and development	374		3,147
Sales, marketing and support	348		3,035

Other income, net	12		81
Loss from discontinued operations before income tax expense	(889)		(2,569)
Gain on sale of discontinued operations before tax expense	30,858		30,858
Total income from discontinued operations before tax expense	$	29,969	$	28,289
Income tax expense on discontinued operations	228		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:
Basic	18,706		18,574
Diluted	18,706		18,574

The following table presents supplemental cash flow information of the discontinued operations:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2022		2022

Cash used in operating activities - discontinued operations	$	(252)	$	(3,853)
Cash used in investing activities - discontinued operations	$	(220)	$	(307)

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


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2022		2022
Depreciation	$	91	$	622
Compensation expense related to stock-based awards and employee stock purchase plan	$	237	$	475

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.

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.

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 Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Sales:
Product	12.4	%	18.8	%	14.3	%	19.3	%
Service	87.6		81.2		85.7		80.7
Net sales	100.0		100.0		100.0		100.0
Cost and expenses:
Costs of product sales	14.1		19.2		16.4		16.9
Costs of service sales	48.4		43.7		47.2		44.2
Research and development	7.1		7.8		7.3		8.1
Sales, marketing and support	14.5		16.2		15.5		17.8
General and administrative	13.0		15.8		13.0		19.0
Goodwill impairment charge	15.9		—		5.3		—
Intangible asset impairment charge	2.0		—		0.6		—
Total costs and expenses	115.0		102.7		105.3		106.0
Loss from operations	(15.0)		(2.7)		(5.3)		(6.0)
Interest income	3.0		1.1		2.6		0.8
Interest expense	—		—		—		—
Other (expense) income, net	(0.4)		1.6		(0.6)		1.5
Loss from continuing operations before income tax expense	(12.4)		—		(3.3)		(3.7)
Income tax expense from continuing operations	0.3		0.2		0.2		0.6
Net loss from continuing operations	(12.7)	%	(0.2)	%	(3.5)	%	(4.3)	%

Three months ended September 30, 2023 and 2022

Net Sales

Our net sales for the three months ended September 30, 2023 and 2022 were as follows:


					Change
	For the three months ended September 30,				2023 vs. 2022
	2023		2022		$		%
	(dollars in thousands)

Product	$	4,152	$	6,625	$	(2,473)	(37)	%
Service	29,397		28,544		853		3	%
Net sales	$	33,549	$	35,169	$	(1,620)	(5)	%

Net sales decreased by $1.6 million, or 5%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Product sales decreased by $2.5 million, or 37%, to $4.2 million for the three months ended September 30, 2023 from $6.6 million for the three months ended September 30, 2022. The decrease in product sales was primarily due to a $1.9 million decrease in TracVision product sales and a $1.1 million decrease in VSAT Broadband product sales, partially offset by a $0.6 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. In addition, alternative solutions offered by recent low-earth-orbit (LEO) entrants have heightened competition in both the global leisure segment and commercial markets.

Service sales increased by $0.9 million, or 3%, to $29.4 million for the three months ended September 30, 2023 from $28.5 million for the three months ended September 30, 2022. The increase was primarily due to a $0.7 million increase in our VSAT airtime sales.

Costs of Sales

Costs of sales consists of costs of product sales and costs of service sales. Costs of sales decreased by $1.2 million, or 5%, in the three months ended September 30, 2023 to $21.0 million from $22.1 million in the three months ended September 30, 2022. The decrease in costs of sales was driven by a $2.0 million decrease in costs of product sales, partially offset by a $0.9 million increase in costs of service sales. As a percentage of net sales, costs of sales were 62% and 63% for the three months ended September 30, 2023 and 2022, respectively.

Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For the three months ended September 30, 2023, costs of product sales decreased by $2.0 million, or 30%, to $4.7 million from $6.7 million in the three months ended September 30, 2022, primarily due to a $1.5 million decrease in TracVision cost of product sales and a $0.9 million decrease in VSAT Broadband cost of product sales, partially offset by a $0.5 million increase in Starlink product sales. As a percentage of product sales, costs of product sales were 114% and 102% for the three months ended September 30, 2023 and 2022, respectively. Cost of product sales increased as a percentage of product sales primarily due to a $0.3 million increase in the excess and obsolescence reserve and $0.2 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 VSAT Broadband network infrastructure, direct network service labor, product installation costs, media materials and distribution costs, and service repair materials. For the three months ended September 30, 2023, costs of service sales increased by $0.9 million, or 6%, to $16.2 million from $15.4 million for the three months ended September 30, 2022, primarily due to a $0.9 million increase in VSAT airtime costs of service sales. The increase in airtime cost of sales is primarily related to capacity increases necessary to support growth in our airtime subscriber base. As a percentage of service sales, costs of service sales were 55% and 54% for the three months ended September 30, 2023 and 2022, respectively.

Operating Expenses

Research and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internally funded product development and product sustaining engineering activities. Research and development expense for the three months ended September 30, 2023 decreased by $0.3 million, or 13%, to $2.4 million from $2.7 million for the three months ended September 30, 2022. The decrease primarily resulted from a $0.3 million decrease in salaries, benefits and taxes. As a percentage of net sales, research and development expense was 7% and 8% for the three months ended September 30, 2023 and 2022, respectively.

Sales, marketing, and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in-house and third-party representatives, costs related to the co-development of certain content, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and support costs, warranty-related costs and bad debt expense. Sales, marketing and support expense also includes the operating expenses of our sales office subsidiaries in Denmark, Singapore, Brazil, and Japan. Sales, marketing and support expense for the three months ended September 30, 2023 decreased by $0.9 million, or 15%, to $4.9 million from $5.7 million for the three months ended September 30, 2022. The decrease primarily resulted from a $0.5 million decrease in salaries, benefits and taxes, and a $0.3 million decrease in bad debt expense. As a percentage of net sales, sales, marketing and support expense was 14% and 16% for the three months ended September 30, 2023 and 2022, respectively.

General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources, certain outside professional services, and other administrative costs. General and administrative expense for the three months ended September 30, 2023 decreased by $1.2 million, or 21%, to $4.4 million from $5.6 million, for the three months ended September 30, 2022. The decrease primarily resulted from a $1.1 million decrease in salaries, benefits, and taxes, which was driven by the reduction in our workforce in March 2022 of approximately 10%, partially offset by a $0.3 million increase in legal and professional fees. As a percentage of net sales, general and administrative expense was 13% and 16% for the three months ended September 30, 2023 and 2022, respectively.

Interest and Other (Expense) Income, Net

Interest income represents interest earned on our cash and cash equivalents, as well as from investments and our sale-type lease receivables. Interest income increased $0.6 million for the three months ended September 30, 2023 to $1.0 million from $0.4 million for the three months ended September 30, 2022. Of the current period interest income of $1.0 million, $0.8 million is attributable to interest earned on cash and cash equivalents, while the remaining $0.2 million was attributable to interest from lease receivables. Interest expense remained flat period-over-period at less than $0.1 million for both of the three months ended September 30, 2023 and 2022. Other (expense) income, net changed to other expense, net of $0.1 million for the three months ended September 30, 2023 from other income, net of $0.6 million for the three months ended September 30, 2022 primarily due to the decrease in foreign exchange gains from our UK operations.

Income Tax Expense

Income tax expense for each of the three months ended September 30, 2023 and 2022 was $0.1 million and related to taxes on income earned in foreign jurisdictions.

Nine months ended September 30, 2023 and 2022

Net Sales

Our net sales for the nine months ended September 30, 2023 and 2022 were as follows:


					Change
	For the nine months ended September 30,				2023 vs. 2022
	2023		2022		$		%
	(dollars in thousands)

Product	$	14,526	$	19,808	$	(5,282)	(27)	%
Service	86,883		83,065		3,818		5	%
Net sales	$	101,409	$	102,873	$	(1,464)	(1)	%

Net sales decreased by $1.5 million, or 1%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Product sales decreased by $5.3 million, or 27%, to $14.5 million for the nine months ended September 30, 2023 from $19.8 million for the nine months ended September 30, 2022. The decrease in product sales was primarily due to a $3.9 million decrease in TracVision product sales and a $2.4 million decrease in VSAT Broadband product sales, partially offset by a $0.9 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. In addition, alternative solutions offered by recent LEO entrants have heightened competition in both the global leisure segment and commercial markets.

Service sales increased by $3.8 million, or 5%, to $86.9 million for the nine months ended September 30, 2023 from $83.1 million for the nine months ended September 30, 2022. The increase was primarily due to a $4.9 million increase in our VSAT service sales driven by an increase in subscribers, partially offset by a $0.9 million decrease in our content services sales, primarily driven by the sale of a subsidiary in April 2022.

Costs of Sales

Costs of sales increased by $1.6 million, or 3%, in the nine months ended September 30, 2023 to $64.4 million from $62.9 million in the nine months ended September 30, 2022. The increase in costs of sales was driven by a $2.3 million increase in costs of service sales, partially offset by a $0.8 million decrease in costs of product sales. As a percentage of net sales, costs of sales were 64% and 61% for the nine months ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023, costs of product sales decreased by $0.8 million, or 4%, to $16.6 million from $17.4 million in the nine months ended September 30, 2022, primarily due to a $2.9 million decrease in TracVision cost of product sales and a $1.6 million decrease in VSAT Broadband cost of product sales, partially offset by a $2.4 million increase in various manufacturing and other unabsorbed expenses, a $0.9 million increase in Starlink cost of product sales and a $0.5 million increase in accessories cost of product sales. The manufacturing and other unabsorbed costs included a $0.7 million write-down of inventory, a $0.6 million increase in the excess and obsolescence reserve, as well as lower unit volume resulting in less absorption of overhead. As a percentage of product sales, costs of product sales were 114% and 88% for the nine months ended September 30, 2023 and 2022, respectively. Cost of product sales increased as a percentage of product sales primarily due to the write-down of inventory, the increase in the excess and obsolescence reserve and $0.7 million of higher unit component costs.

For the nine months ended September 30, 2023, costs of service sales increased by $2.3 million, or 5%, to $47.8 million from $45.5 million for the nine months ended September 30, 2022, primarily due to a $2.7 million increase in VSAT 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 55% for both the nine months ended September 30, 2023 and 2022.

Operating Expenses

Research and development expense for the nine months ended September 30, 2023 decreased by $1.0 million, or 12%, to $7.4 million from $8.4 million for the nine months ended September 30, 2022. The decrease in research and development expense resulted primarily from a $0.6 million decrease in salaries, benefits and taxes driven by the reduction in our workforce in March 2022 and a $0.3 million decrease in expensed materials. As a percentage of net sales, research and development expense was 7% and 8% for the nine months ended September 30, 2023 and 2022, respectively.

Sales, marketing and support expense for the nine months ended September 30, 2023 decreased by $2.6 million, or 14%, to $15.7 million from $18.4 million for the nine months ended September 30, 2022. The decrease in sales, marketing and support expense resulted primarily from a $2.3 million decrease in salaries, benefits and taxes driven by the reduction in our workforce in March 2022, a $0.6 million decrease in bad debt expense, a $0.4 million decrease in warranty expense and a $0.3 million decrease in external commission expense, partially offset by a $0.7 million increase in facilities expenses. As a percentage of net sales, sales, marketing and support expense was 15% and 18% for the nine months ended September 30, 2023 and 2022, respectively.

General and administrative expense for the nine months ended September 30, 2023 decreased by $6.4 million, or 33%, to $13.1 million from $19.5 million for the nine months ended September 30, 2022. The decrease in general and administrative expense resulted primarily from a $4.3 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. In addition, we were reimbursed by EMCORE for $0.7 million of expenses incurred under the Transition Service Agreement relating to the sale of the inertial navigation business in 2022. There was also a $0.6 million decrease in recruiting expenses, which was driven by professional fees incurred during the nine months ended September 30, 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 $0.4 million decrease in facilities expenses and a $0.3 million decrease in bank fees, partially offset by a $0.3 million increase in professional fees. As a percentage of net sales, general and administrative expense was 13% and 19% for the nine months ended September 30, 2023 and 2022, respectively.

Interest and Other (Expense) Income, Net

Interest income increased by $1.9 million to $2.7 million for the nine months ended September 30, 2023 from $0.8 million for the nine months ended September 30, 2022. Of the current period interest income of $2.7 million, $2.2 million is attributable to interest earned on cash and cash equivalents, and the remaining $0.5 million was attributable to interest from lease receivables. Interest expense remained flat period-over-period at less than $0.1 million for both the nine months ended September 30, 2023 and 2022. Other (expense) income, net changed to other expense, net of $0.6 million for the nine months ended September 30, 2023 from other income, net of $1.6 million for the nine months ended September 30, 2022 primarily due to the sale of KVH Media Group Entertainment Limited during the nine months ended September 30, 2022 and an increase in foreign exchange losses from our UK operations.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2023 and 2022 was $0.2 million and $0.6 million, respectively, and related to taxes on income earned in foreign jurisdictions.

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 16 of our accompanying financial statements for further discussion. Results for discontinued operations are as follows:


	Three months ended September 30,		Nine months ended September 30,
	2022		2022
	(dollars in thousands)

Sales from discontinued operations	$	1,494	$	16,721
Net income from discontinued operations, net of tax	$	29,741	$	28,061

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.

As of September 30, 2023, we had $69.2 million in cash, cash equivalents, and marketable securities, of which $3.6 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries. Our foreign subsidiaries held no marketable securities as of September 30, 2023. As of September 30, 2023, we had $103.8 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. Our funding plans for our working capital needs and other commitments may be adversely impacted if our underlying assumptions regarding our anticipated revenues and expenses are not realized. If our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In that event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise funds by issuing equity securities, our stockholders may experience dilution.

Net cash used in operations was $2.7 million for the nine months ended September 30, 2023 compared to net cash used in operations of $1.5 million for the nine months ended September 30, 2022. The $1.2 million increase in net cash used in operations was primarily the result of a $26.8 million decrease in net income, a $17.4 million increase in cash outflows related to accounts payable, a $0.5 million increase in cash outflows related to contract liabilities and long-term contract liabilities and a $0.5 million decrease in cash inflows relating to accounts receivable. Partially offsetting these items were a change of $35.8 million related to non-cash items, driven by the $30.9 million gain on sale of the inertial navigation business in 2022 and the $6.0 million impairment of goodwill and long-lived assets, a $6.0 million decrease in cash outflows relating to inventories and a $2.1 million decrease in cash outflows relating to accrued compensation, product warranty and other expenses.

Net cash used in investing activities was $9.2 million for the nine months ended September 30, 2023 compared to net cash provided by investing activities of $4.3 million for the nine months ended September 30, 2022. The $13.5 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 and a decrease of $2.4 million in proceeds from the sale of KVH Media Group Entertainment Limited, partially offset by a $40.0 million increase in net investment in marketable securities and a $3.8 million decrease in capital expenditures.

Net cash provided by financing activities was $2.3 million for the nine months ended September 30, 2023 compared to net cash provided by financing activities of $0.6 million for the nine months ended September 30, 2022. The $1.7 million increase in net cash provided by financing activities is primarily attributable to a $1.8 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023, the end of the period covered by this interim report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Evaluation of Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated changes in our internal control over financial reporting that occurred during the third quarter of 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the third quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Important Considerations

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in evaluating our business. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.

Risks related to our financial performance

We have a history of losses, and achieving sustained profitability may take longer than we anticipate or may not be achievable.

We recorded substantial losses from continuing operations in each of the last three fiscal years (notwithstanding the income we recognized in 2022 from the sale of the inertial navigation business and in 2021 from the forgiveness of the PPP Loan). Although our continuing operations were profitable in the fourth quarter of 2022 and second quarter of 2023, we may incur losses in the future as we face increasing competition, as we increase satellite capacity to handle our growing subscriber base, as we confront supply chain constraints and as we continue to invest in research and development to improve our existing products and develop new products. In order to maintain and improve our competitive position, generate revenue and achieve sustained profitability, we must grow our airtime subscriber base, reduce our bandwidth costs, and continue to introduce new and improved products. Our inability to accomplish any of these goals could have a material adverse effect on our revenues, profitability and cash flow, and we cannot assure you when, or whether, we will regain sustained profitability.

Fluctuations in our quarterly net sales and results of operations could depress the market price of our common stock.

Our quarterly net sales and results of operations could continue to vary significantly for various reasons, many of which are outside our control. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Our net sales or results of operations in a quarter may fall below the expectations of securities analysts or investors. If this occurs, the market price of our common stock could fall significantly. Our results of operations can fluctuate for many reasons, including changes in demand for our products and services; delays in order fulfillment, including as a result of shortages of components and raw materials; the mix of products and services we sell, including the mix of fixed rate and metered contracts for airtime services; our ability to manufacture, test and deliver products in a timely and cost-effective manner; the timing of new product introductions by us or our competitors; the scope and success of our investments in research and development; expenses incurred in pursuing acquisitions and investments; expenses incurred in expanding, maintaining, or improving our global HTS network; market and competitive pricing pressures; unanticipated charges or expenses; expenses incurred in responding to stockholder activism; general economic climate; seasonality of pleasure boat and recreational vehicle usage; and the impact of supply chain disruptions.

A large portion of our expenses, including expenses for network infrastructure, facilities, equipment, and personnel, are relatively fixed. If our net sales decline or do not grow as we anticipate, we may be unable to maintain or improve our operating margins. Any failure to achieve anticipated net sales could therefore significantly harm our operating results.

Risks related to our operations

Our future success will depend in part on the services of our executive officers.

The Company's future success depends to a significant degree on the skills and efforts of our executive officers. Our executive officers are at-will employees, competition is intense for executive management, and they could terminate their employment with us at any time. We do not maintain key-person life insurance on any of our personnel. Accordingly, the loss of one or more of our executive officers or key employees could have a material adverse effect on our business.

If we cannot effectively manage changes in our business and continue to attract and retain skilled personnel, our business may suffer.

If we cannot adjust expenses in response to changes in our operations, our results of operations may be harmed. To manage changes in our business effectively, we must, among other things, match our manufacturing facilities and capacity to demand for our products and services; secure appropriate satellite capacity to match demand for airtime services; effectively manage our inventory and working capital; ensure robust cybersecurity protection of Company and customer data and systems; and ensure

that our procedures and internal controls are revised and updated to remain appropriate for our workforce and the size and scale of our business operations.

We are highly dependent on qualified personnel at all levels, including our senior management team and other key technical, operational, managerial and sales and marketing personnel, each of whom would be difficult to replace. If we fail to retain and attract the necessary personnel, we may be unable to achieve our business objectives and may lose our competitive position, which could lead to a significant decline in net sales. The current job market for personnel is very competitive, resulting in increased compensation. We face challenges retaining our personnel and attracting new personnel to fulfill our unmet needs. Replacing key personnel may be difficult and may take an extended period of time because of the limited number of individuals with the skills and experience to execute our business strategy. We may be unable to identify or employ qualified personnel for any such position on acceptable terms, if at all. We may also need to pay higher compensation than we expect, which would make it more difficult to achieve our goal of sustained profitability.

Future cost-containment activities could disrupt our business and affect our results of operations.

In response to increasing competitive pressure, we may take additional measures intended to increase profitability and align our business more closely with our current strategic and financial objectives, including engagement with new suppliers, modifications to our manufacturing arrangements and other cost-reduction efforts. We may also choose to dispose of assets or make strategic divestitures, such as the sale of our inertial navigation business in August 2022. These efforts may not succeed in improving profitability. Any of these changes could be disruptive to our business, including our research and development and product launch efforts, and could result in significant expense, including losses on any asset disposition or divestiture, accounting charges for any inventory or technology-related write-offs or any workforce reduction costs. We could incur significant transaction costs, including for potential transactions that do not proceed. Substantial expense or charges resulting from restructuring activities, dispositions of assets or divestitures could adversely affect our results of operations and use of cash in the periods in which we take these actions. Any disposition of assets or divestiture could also result in the retention of liabilities and expenses that are not assumed by the buyer or the loss of operating income from the divested assets or operations, either of which could negatively impact profitability after any divestiture.

We must generate a certain level of service sales in order to maintain or improve our service gross margins.

As a result of our global HTS network infrastructure, we incur certain costs that generally do not vary directly in proportion to the volume of service sales, and we have limited ability to reduce these fixed costs in the short term. The cost of our HTS network has increased significantly each year as we have expanded our network to accommodate additional subscriber demand and/or coverage areas. We expect that this trend will continue through the end of 2023. If service sales, including through our AgilePlans subscription model, do not generate the level of revenue that we expect or if those revenues decline, our service gross margins may decline. The failure to improve our global HTS service gross margins and unit or subscriber sales would have a material adverse effect on our overall profitability.

Our ability to compete in the maritime airtime services market will be impaired if we are unable to provide sufficient service capacity to meet customer demand.

We currently offer our global HTS VSAT service in the Americas, Europe, the Middle East, Africa, Asia-Pacific, Indian, and Australian and New Zealand waters. We may need to expand capacity in existing coverage areas to support our subscriber base. If we are unable to reach economical agreements with third-party satellite providers to support our global HTS service and its technology or if transponder capacity is unavailable to meet growing demand in a given region, our ability to provide airtime services will be at risk and could reduce the attractiveness of our products and services.

Our results of operations are adversely affected by unseasonably cold weather, prolonged winter conditions, disasters or similar events.

Our leisure marine business is highly seasonal, and seasonality can also impact our commercial marine business. Historically, we have generated the majority of our leisure marine 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 our airtime services typically increase in the fourth and first quarters of each year as boats are placed out of service during winter months. Our leisure marine business is also significantly affected by the weather. Unseasonably cool weather, prolonged winter conditions, hurricanes, unusual amounts of rain, and natural and other disasters may decrease boating, which could reduce our revenues. Specifically, we may encounter a decrease in new airtime activations as well as an increase in the number of cancellations or temporary suspensions of our airtime service.

We have a single manufacturing facility, and any significant disruption to this facility will impair our ability to deliver our products.

We manufacture all of our products at our manufacturing facility in Middletown, Rhode Island. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use of our production facility. For example, we use some specialized equipment that may take time to replace if it is damaged or becomes unusable for any reason. In that event, shipments would be delayed, which could result in customer or dealer dissatisfaction, loss of sales and damage to our reputation.

Acquisitions and strategic relationships may disrupt our operations or adversely affect our results.

We evaluate opportunities to acquire other businesses and pursue other strategic relationships as they arise. The expenses we incur evaluating and pursuing acquisitions and strategic relationships could have a material adverse effect on our results of operations. If we acquire a business, we may be unable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize the strategic, financial, operational and other benefits we anticipate, and any acquisition or strategic relationship may increase our operating expenses. Further, our approach to acquisitions and strategic relationships may involve a number of special financial and business risks, such as entry into new and unfamiliar lines of business or markets, which may present challenges or risks that we did not anticipate; entry into new or unfamiliar geographic regions, including exposure to additional tax and regulatory regimes; increased expenses associated with the amortization of acquired intangible assets; increased exposure to fluctuations in foreign currency exchange rates; charges related to any abandoned acquisition; diversion of our management’s time, attention, and resources; loss of key personnel; increased costs to improve or coordinate managerial, operational, financial, and administrative systems, including internal control over financial reporting; dilutive issuances of equity securities; the assumption of legal liabilities; and losses arising from impairment charges associated with goodwill or intangible assets.

Risks related to our dependence on third parties and third-party technology

Our mobile satellite products currently depend on satellite services, gateway teleports and terrestrial networks provided by third parties, and a disruption in those services could adversely affect sales.

Our satellite antenna products include the equipment necessary to utilize satellite services. We do not own the satellites that provide two-way satellite communications or the terrestrial networks that interconnect our facilities with the satellite teleports that communicate with the satellites. Intelsat and Sky Perfect-JSAT currently provide the satellite capacity to support our global high-throughput satellite (HTS) broadband service and our TracNet H-series and TracPhone V-HTS series products. Vodafone provides the 5G/LTE services used by our TracNet H-series terminals to provide cellular service in 150+ countries. We rely on Inmarsat for satellite communications services for our FleetBroadband-compatible and FleetOne-compatible TracPhone products. We also have an arrangement with Iridium for additional satellite communications services that we make available to our customers as a backup option to provide communications redundancy with our primary service offerings.

In addition, we have agreements with various teleports and Internet service providers around the globe to support our global HTS broadband service. The terrestrial fiber links that we use to connect with the Internet and to move our VoIP and data services between our facilities and the various satellite earth stations that support our services are provided to us through numerous service providers, some of which have contractual relationships with our satellite service providers and not directly with us.

We currently offer satellite television products compatible with the DIRECTV and DISH Network services in the United States, the Bell TV service in Canada, the Sky Mexico service in Mexico, the Sky UK service in the United Kingdom, Canal+ service in France and Movistar service in Spain, and other regional satellite TV services in other parts of the world.

We exercise little or no control over these third-party providers of satellite, teleport, and terrestrial network services, which increases our vulnerability to problems with the services they provide. Due to our reliance on these service providers, when problems occur, it may be difficult to identify the source of the problem. Service disruption or outages, regardless of whether they are caused by our service, the equipment or services of our third-party service providers, or our customers’ or their equipment and systems, may result in loss of market acceptance of our service, and any necessary repairs or other remedial actions may cause us to incur significant costs and expenses. Any failure on the part of third-party service providers to achieve or maintain expected performance levels, stability, and security could harm our relationships with our customers, result in claims for credits or damages, damage our reputation, significantly reduce customer demand for our solution and seriously harm our financial condition and operating results.

If customers become dissatisfied with the pricing, service, availability, programming or other aspects of any of these satellite services, or if any one or more of these services becomes unavailable for any reason, we could suffer a substantial decline in sales of our satellite products or services. There may be no alternative satellite service provider available to us in a particular geographic area, and our modem or other technology may not be compatible with the technology of any alternative service provider that may be available. Even if available, delays caused by switching our technology to another service provider, if available, and qualifying this new service provider could materially harm our customer relationships, business, financial condition, and operating results. In addition, the unexpected failure of a satellite could disrupt the availability of programming and services, which could reduce the demand for, or customer satisfaction with, our products and services.

We depend on cloud-based data services operated by third parties, and any disruption in the operation of these services could harm our business.

Some of our content services and business records are hosted by various cloud-based data services operated by third parties. Any failure or downtime in one of these services could affect a significant percentage of our customers. Although we control and have access to our servers and the components of our network that are located in our internal facilities and certain of our external data facilities, we do not control the operation of external facilities. The providers of our data management services have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one or more of our data management service providers is acquired, closes, suffers financial difficulty or is unable to meet our growing capacity needs, we may be required to transfer our data to other services, and we may incur significant costs and service interruptions in connection with doing so, which could harm our reputation with our customers and adversely affect our revenues and results of operations.

Our media and entertainment business relies on licensing arrangements with content providers, and the loss of, or changes in, those arrangements could adversely affect our business.

We distribute premium news, television shows, sports, and movies to commercial customers in the maritime and hotel markets. We license this content from third parties on a non-exclusive basis without long-term license agreements. Any content provider could terminate our arrangements without notice or could adversely modify the terms of the arrangement, including price increases. Further, the licenses we obtain are limited in scope, and any violation of the terms of a license could expose us to liability for copyright infringement. We pay license fees based in part on the revenue we generate from sublicenses, and our licensors generally have the right to audit our records. Failure to pay required license fees could result in termination of our license rights, penalties and damages. The loss of content could adversely affect the attractiveness of our media and entertainment offerings, which could in turn adversely affect our revenues. Any increase in the cost of content could reduce the profitability of these offerings.

Cybersecurity breaches could disrupt our operations, expose us to liability, damage our reputation, and require us to incur significant costs or otherwise adversely affect our financial results.

We are highly dependent on information technology networks and systems, including the Internet and third-party systems, to securely process, transmit and store electronic information, including personal information of our customers. We also retain sensitive data, including intellectual property, proprietary business information, personally identifiable information, credit card information, and usage data of our employees and customers on our computer networks and those of third parties. Although we take certain protective measures and endeavor to modify them as we believe circumstances warrant, invasive technologies and techniques continue to evolve rapidly, and increasingly sophisticated hacking organizations are targeting business systems. As a result, the computer systems, software and networks that we use are vulnerable to disruption, shutdown, unauthorized access, misuse, erasure, alteration, employee error, phishing, computer viruses, ransomware or other malicious code, and other events that could have a material security impact. The protective measures on which we rely may be inadequate to prevent or detect all material cybersecurity breaches or determine the extent of any material breach, and there can be no assurance that material undetected breaches have not already occurred. If any material cybersecurity event were to occur, it could disrupt our operations, distract our management, cause us to lose existing customers and fail to attract new customers, as well as subject us to regulatory actions, litigation, fines, damage to our reputation or competitive position, or orders or decrees requiring us to modify our business practices, any of which could have a material adverse effect on our financial position, results of operations or cash flows.

Risks related to economic conditions and trade relations

Our revenues, results of operations and financial condition may be adversely impacted by economic turmoil, political instability, declines in consumer and enterprise spending.

Economic and political conditions in the geographic markets we serve have experienced significant turmoil over the last several years, including a potential global recession, slow economic activity, tight credit markets, inflation and deflation concerns, low consumer confidence, limited capital spending, adverse business conditions, war and refugee crises in the Middle East and Europe, terrorist attacks, changes in government priorities, trade wars, restrictions on commercial fishing, a government shutdown, gridlock from a divided Congress, and liquidity concerns. These factors vary in intensity by region. We cannot predict the timing, duration, or ultimate impact of turmoil on our markets or our suppliers. We expect our business would be adversely impacted by any significant turmoil, to varying degrees and for varying amounts of time, in all our geographic markets.

Changes in U.S. trade policy, including changes to existing trade agreements and any resulting changes in international trade relations, may have a material adverse effect on us.

The U.S. may continue to alter its approach to international trade, which may impact existing bilateral or multi-lateral trade agreements and treaties with foreign countries. The U.S. has imposed tariffs on certain foreign goods and may increase tariffs or impose new ones, and certain foreign governments have retaliated and may continue to do so. We derive a majority of our revenues from international sales, which makes us especially vulnerable to increased tariffs. Changes in U.S. trade policy have created ongoing turmoil in international trade relations, and it is unclear what future actions governments will or will not take with respect to tariffs or other international trade agreements and policies. Ongoing or new trade wars or other governmental action related to tariffs or international trade agreements or policies could reduce demand for our products and services, increase our costs, reduce our profitability, adversely impact our supply chain or otherwise have a material adverse effect on our business and results of operations.

Changes in foreign currency exchange rates may negatively affect our financial condition and results of operations.

We face significant exposure to movements in exchange rates for foreign currencies, particularly the pound sterling and the euro. For example, during 2022, the U.S. dollar strengthened against certain foreign currencies, which adversely affected revenues reported in U.S. dollars and decreased the reported value of our assets in foreign countries. We also have intragroup receivables and liabilities, such as loans, that can generate significant foreign currency effects. Changes in exchange rates, particularly the U.S. dollar against the pound sterling, could lead to the recognition of unrealized foreign exchange losses.

Certain of our products and services are sold internationally in U.S. dollars; if the U.S. dollar continues to strengthen, the relative cost of these products and services to customers located in foreign countries would increase, which could adversely affect export sales. In addition, most of our financial obligations must be satisfied in U.S. dollars. Our exposures to changes in foreign currency exchange rates may change over time as our business practices evolve and could result in increased costs or reduced revenue and could adversely affect our cash flow. Changes in the relative values of currencies occur regularly and may have a significant impact on our operating results. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can cost-effectively mitigate this exposure.

Risks related to the sale of our inertial navigation business

We face potential liabilities and disruptions arising from the sale of our inertial navigation business.

On August 9, 2022, we sold our inertial navigation business to EMCORE Corporation. The sale of the inertial navigation business required us to separate and allocate specific assets to the business, including some shared assets. We could face disputes with EMCORE regarding whether or not certain assets were included in the sale. Any such disputes could divert the attention of our management or otherwise have a material adverse effect on our business, financial condition and results of operations. We incurred significant legal, accounting and financial advisory fees negotiating and consummating the sale of the inertial navigation business, and we may incur additional fees to resolve any dispute that may arise over the terms of the transaction or the parties’ compliance with their obligations under the transaction agreements.

Risks related to our industry

Increasing competition may limit our ability to sell our products and services.

The mobile connectivity market is very competitive, and competition is increasing. We may not be able to compete successfully against current and future competitors, which would impair our ability to sell our products and services. Competition has intensified significantly in recent years, both from companies that seek to compete primarily on price as well as new, emerging non-geostationary satellite orbit (NGSO) services, such as Starlink, OneWeb, Kuiper, Telesat, and others. These companies may continue to implement price reductions and discounts for both products and services, which have required us to reduce our prices or offer discounts in an effort to maintain or increase our market share. Current and future competitors have greater financial resources than we do, enabling them to operate at lower margins to gain market share. We believe increased competition contributed to the decrease in our product sales in the nine months ended September 30, 2023, including unit sales of our VSAT products, and this trend may continue in future periods.

Some of our VSAT competitors have already leveraged partnerships amongst themselves in order to capture larger combined market share. Further, some of the companies that we depend on to supply us with capacity on satellite communications networks may vertically integrate by introducing their own products and services to compete with ours, which might motivate them to stop providing satellite network capacity to us, or to make it available on less favorable terms.

The Starlink LEO service continues to adversely impact our business, particularly within the global leisure segment. A significant number of leisure customers have adopted Starlink systems for both two-way communications as well as streaming, which has impacted both our VSAT Broadband and TracVision businesses. Although our leisure business accounts for less than 20% of our total revenue, competition from Starlink has begun to adversely impact our commercial business as well, particularly our growth in that segment. While we have historically grown the total number of our subscribers in sequential quarters, in the third quarter of 2023 the total number of our subscribers declined one percent as a result of the churn in our leisure business and the slower growth in our commercial business. If this trend continues and we are unable to develop a competitive alternative, it could have a material adverse effect on our revenue, profitability, and cash flow.

In the marine market for satellite TV equipment, we compete primarily with Intellian, Cobham SATCOM and Raymarine (Intellian-made). In the marine market for two-way communications equipment, we compete primarily with Intellian and Cobham SATCOM. In the marine market for high-speed Internet, voice, fax, and data services, we compete primarily with Inmarsat, Marlink, Speedcast, Viasat, and Network Innovations, along with smaller, single-hub regional services. Additionally, we are starting to face competition from new NGSO networks such as SpaceX's Starlink and OneWeb. We also face competition from providers of low-speed data services, which include Inmarsat and Iridium Satellite LLC. In the market for land mobile satellite TV equipment, we compete primarily with King Controls and Winegard Company. In the markets for media content, the KVH Media Group competes primarily with Swank Motion Pictures, Baze Technology, and NewspaperDirect, Inc. Many of our competitors are well-established companies that have substantially greater financial, managerial, technical, marketing, personnel, and other resources than we do, which may help them to compete more effectively against us.

We depend on sole or limited source suppliers, and any disruption in supply could impair our ability to deliver our products on time or at expected cost.

We obtain many key components for our products from third-party suppliers, and in some cases we use a single or a limited number of suppliers. Any interruption in supply could impair our ability to deliver our products until we identify and qualify a new source of supply, which could take several weeks, months or longer and could increase our costs significantly. For example, the global chip shortage and supply chain constraints resulting from the COVID-19 pandemic adversely impacted our ability to deliver products in a timely manner and increased our cost of sales due to rising prices for materials. In the third quarter of 2023, we estimate that raw material costs exceeded our expectations by approximately $0.3 million. We may not be able to pass along any of these cost increases to our customers, and customers may not wait for our products to become available. These disruptions in our supply chain could worsen, which could delay delivery of our products and services and adversely affect our revenue and results of operations. Suppliers might change or discontinue key components, which could require us to modify our product designs. In general, we do not have written long-term supply agreements with our suppliers but instead buy components through purchase orders, which expose us to potential price increases and termination of supply without notice or recourse. We generally do not carry significant inventories of product components, which could magnify the impact of the loss of a supplier. If we must use a new source of supply, we could face unexpected manufacturing difficulties and loss of product performance or reliability. In addition, lead times for certain components can increase significantly due to imbalances in overall market supply and demand. This, in turn, could limit our ability to satisfy demand for our products and could result in the cancellation of customer orders.

We may source more materials and components from international suppliers, which could disrupt our business.

We may increase sourcing of raw materials, manufactured components and subassemblies from international suppliers. Increased reliance on foreign manufacturing and/or raw material supply could lengthen our supply chain and increased the risk that a disruption in that supply chain could have a material adverse effect on our operations and financial performance.

Changes in the competitive environment, customer demand, supply chain issues, and the transition to new products may require inventory write-downs.

From time to time, we have recorded significant inventory charges and/or inventory write-offs as a result of substantial declines in customer demand. For example, in 2019, we recorded a $2.3 million inventory reserve relating to our TracPhone V-IP products as we decided to no longer promote sales of these products but instead to focus our efforts on migrating customers to our HTS network and products. Market or competitive changes, such as a continuation of the decline in demand for our TracVision products that we experienced in the first nine months of 2023, could lead to future charges for excess or obsolete inventory, especially if we are unable to appropriately adjust the supply of material from our vendors.

Risks related to intellectual property and technological innovation

Our research and development efforts may be unsuccessful. If we are unable to improve our existing products and services and develop new, innovative products and services, our sales and market share may decline.

The market for mobile connectivity products and services is characterized by rapid technological change, frequent new product innovations, changes in customer requirements and expectations, and evolving industry standards. For example, we are starting to face competition from new LEO networks such as SpaceX's Starlink and OneWeb. If we fail to make innovations in our existing products and services and reduce the costs of our products and services, our market share may decline. For example, the introductions of our TracVision TV-series antennas in 2014 occurred later than we had anticipated, which we believe led certain customers to purchase competing products. Products or services using new technologies, or emerging industry standards, could render our products and services obsolete. If our competitors successfully introduce new or enhanced products or services that outperform our products or services, or are perceived as doing so, we may be unable to compete successfully in the markets affected by these changes.

Research and development is inherently complex and uncertain, and our current and anticipated research and development projects may not achieve the results we seek. The financial resources that we can devote to our research and development efforts may be insufficient to achieve our goals. Our efforts may not result in any viable products or may result in products whose performance, features, price or availability may not be attractive to customers or that we cannot manufacture and sell profitably.

Our business may suffer if we cannot protect our proprietary technology.

Our ability to compete depends significantly upon our patents, copyrights, source code, and other proprietary technology. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents will eventually expire and could be challenged, invalidated or circumvented. Customers or others with access to our proprietary or licensed media content could copy that content without permission or otherwise violate the terms of our customer agreements, which would adversely affect our revenues and could impair our relationships with content providers. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the United States, which could increase the likelihood of misappropriation. Any misappropriation of our technology could seriously harm our competitive position, which could lead to a substantial reduction in net sales. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive. The proceedings could distract the attention of management, and we may not prevail.

Claims by others that we infringe their intellectual property rights could harm our business and financial condition.

Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others.

Risks related to government regulation

Our international operations complicate our business and require us to comply with multiple regulatory environments.

Historically, sales to customers outside the United States have accounted for a significant portion of our net sales. We derived 67%, 62% and 58% of our revenues from continuing operations in the nine months ended September 30, 2023 and the years ended December 31, 2022 and 2021, respectively, from sales to these foreign customers. We have foreign offices in Denmark, the United Kingdom, Singapore, Japan, Norway and the Philippines, as well as a subsidiary in Brazil that manages local sales. Nonetheless, substantially all of our operations and approximately one-half of our personnel are located in the United States. Our limited international operations may impair our ability to compete successfully in international markets and to meet the service and support needs of our customers in countries where we have little to no infrastructure. Risks associated with our international business activities may increase our costs and require significant management attention. These risks include restrictions on international travel, which may restrict our ability to grow and service our business; tariffs; sanctions or other trade restrictions that preclude or restrict doing business with particular foreign governments, companies or individuals; technical challenges we may face in adapting our products to function with different satellite services and technology in use in various regions around the world; satisfaction of international regulatory requirements and delays and costs associated with procurement of any necessary licenses or permits; the potential unavailability of content licenses covering international waters and foreign locations; increased costs of providing customer support in multiple languages; increased costs of managing operations that are international in scope; potentially adverse tax consequences, including restrictions on the repatriation of earnings; protectionist laws and business practices that favor local competitors, which could slow our growth in international markets; potentially longer sales cycles; potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable; and economic and political instability in some international markets.

We could incur additional legal compliance costs associated with our international operations and could become subject to legal penalties if we do not comply with certain regulations.

Our international operations subject us to a number of legal requirements, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the customs, export, trade sanctions and anti-boycott laws of the United States, including those administered by the U.S. Customs and Border Protection, the Bureau of Industry and Security, the Department of Commerce, the Department of State, and the Office of Foreign Assets Control of the Treasury Department, as well as those of other nations. In addition, many of the countries where our customers use our products and services have licensing and regulatory requirements for the importation and use of satellite communications and reception equipment, including the use of such equipment in territorial waters, the transmission of satellite signals on certain radio frequencies, the transmission of VoIP services using such equipment and the reception of certain video programming services. These laws and regulations are continually changing, making compliance complex. We incur significant costs identifying and maintaining compliance with applicable licensing and regulatory requirements. Our training and compliance programs and our other internal control policies may be insufficient to protect us from acts committed by our employees, agents or third-party contractors. Any violation of these requirements by us or our employees, agents or third-party contractors may subject us to significant criminal and civil liability.

We are subject to FCC rules and regulations, and any non-compliance could subject us to FCC enforcement actions, fines, loss of licenses and possibly restrictions on our ability to operate or offer certain of our services

The satellite communications industry in the United States is regulated by the Federal Communications Commission (FCC), and we are subject to FCC regulations relating to privacy, contributions to the Universal Service Fund, or USF, and other requirements. If we do not comply with FCC regulations, we could face enforcement actions, substantial fines, penalties, loss of licenses and possibly restrictions on our ability to operate or offer services. Any enforcement action by the FCC, which may be a public process, could hurt our reputation, impair our ability to sell our services to customers and harm our business and results of operations.

Privacy concerns and domestic or foreign laws and regulations may reduce demand for our services, increase our costs and harm our business.

Our company and our customers can use our services to collect, use and store personal, confidential and sensitive information regarding the content and manner of usage of our services by them, their employees and maritime crews. Federal, state and foreign governments have adopted and are proposing new and more stringent laws and regulations regarding the collection, use, storage and transfer of information, such as the European Union’s General Data Protection Regulation (“GDPR”). The costs of compliance with, and other burdens imposed by, such laws and regulations may limit the use and adoption of our services and reduce overall demand. Non-compliance with these laws and regulations could lead to significant remediation expenses, fines,

penalties or other liabilities, such as orders or consent decrees that require modifications to our privacy practices, as well as reputational damage or third-party lawsuits seeking damages or other relief. For example, the GDPR imposes a strict data protection compliance regime with penalties of up to the greater of 2%-4% of worldwide revenue or €11-22 million.

Domestic and international legislative and regulatory initiatives may harm our ability, and the ability of our customers, to process, handle, store, use and transmit information, which could reduce demand for our services, increase our costs and force us to change our business practices. These laws and regulations are still evolving, are likely to be in flux and may be subject to uncertain interpretation for the foreseeable future. Our business also could be harmed if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent from country to country or inconsistent with our current policies and practices or those of our customers.

Risks related to owning our common stock

The market price of our common stock may be volatile.

Our stock price has historically been volatile. During the period from January 1, 2018 to September 30, 2023, the trading price of our common stock ranged from $5.08 to $15.29. Many factors may cause our stock price to fluctuate, including variations in quarterly results; the introduction of new products and services by us or our competitors; changes in estimates of our performance or recommendations by securities analysts; the hiring or departure of key personnel; acquisitions or strategic alliances involving us or our competitors; market conditions in our industry; and the global macroeconomic and geopolitical environment. Broad market fluctuations may adversely affect our stock price. When the market price of a company’s stock drops significantly, stockholders often institute securities litigation against that company. Any such litigation could cause us to incur significant expenses defending against the claim, divert the time and attention of our management and result in significant damages.

ITEM 6. EXHIBITS

Exhibits:

Exhibit
No.

Description

Filed with
this Form 10-Q

Incorporated by Reference

Form

Filing Date

Exhibit No.

3.1

Amended and Restated Certificate of Incorporation, as amended

10-Q

August 6, 2010

3.1

3.2

Certificate of Designations of Series A Junior Participating Cumulative Preferred Stock of KVH Industries, Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock

8-A

August 19, 2022

3.1

3.3

Amended and Restated Bylaws

10-Q

November 1, 2017

3.2

4.1

Specimen certificate for the common stock

10-K

March 2, 2018

4.1

31.1

Rule 13a-14(a)/15d-14(a) certification of principal executive officer

31.2

Rule 13a-14(a)/15d-14(a) certification of principal financial officer

32.1

Section 1350 certification of principal executive officer and principal financial officer

101

The following financial information from KVH Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive (Loss) Income (unaudited), (iv) the Consolidated Statements of Stockholders' Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) the Notes to Consolidated Interim Financial Statements (unaudited).

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: November 9, 2023

KVH Industries, Inc.

By:			/s/ ROGER A. KUEBEL
			Roger A. Kuebel
			(Duly Authorized Officer and Chief Financial Officer)