10-Q 1 kvhi930201910q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2019
OR
o
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
Common Stock, par value $0.01 per share
KVHI
The NASDAQ Stock Market LLC
(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  ý    No  o

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  ý    No  o

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
o
Accelerated filer
ý
Non-accelerated filer
o
Smaller reporting company
ý
 
 
Emerging growth company
o
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. o

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

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 28, 2019
Common Stock, par value $0.01 per share
18,096,586





KVH INDUSTRIES, INC. AND SUBSIDIARIES
Form 10-Q
INDEX

 
 
Page No.
 
ITEM 1.
 
 
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)
 
Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2019 and 2018 (unaudited)
 
Consolidated Statements of Stockholders' Equity for the three and nine months ended in September 30, 2019 and 2018 (unaudited)
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)
 
ITEM 2.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.
 

2




PART I. FINANCIAL INFORMATION
ITEM 1.    Financial Statements
KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
September 30, 2019
 
December 31, 2018
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,243

 
$
15,212

Marketable securities
46,325

 
25

Accounts receivable, net of allowance for doubtful accounts of $2,090 and $2,390 as of September 30, 2019 and December 31, 2018, respectively
29,979

 
28,592

Inventories
25,317

 
22,942

Prepaid expenses and other current assets
3,121

 
2,532

Current contract assets
1,407

 
3,566

Current assets held for sale

 
4,871

Total current assets
115,392

 
77,740

Property and equipment, net
52,661

 
50,633

Intangible assets, net
4,840

 
5,661

Goodwill
14,667

 
15,031

Right of use assets
6,951

 

Other non-current assets
6,091

 
5,484

Non-current contract assets
3,449

 
6,971

Non-current deferred income tax asset
131

 
226

Non-current assets held for sale

 
25,906

Total assets
$
204,182

 
$
187,652

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,502

 
$
16,735

Accrued compensation and employee-related expenses
5,391

 
4,947

Accrued other
9,501

 
9,602

Accrued product warranty costs
2,288

 
1,916

Current portion of long-term debt

 
9,928

Contract liabilities
5,701

 
7,647

Current operating lease liability
3,584

 

Liability for uncertain tax positions
686

 
631

Current liabilities held for sale

 
4,604

Total current liabilities
41,653

 
56,010

Other long-term liabilities
1,445

 
1,920

Long-term operating lease liability
3,388

 

Long-term contract liabilities
5,194

 
9,070

Long-term debt, excluding current portion

 
19,437

Non-current deferred income tax liability
835

 
887

Non-current liabilities held for sale

 
813

Total liabilities
$
52,515

 
$
88,137

Commitments and contingencies (Notes 2, 10, 12, and 19)
 
 
 
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; 19,381,008 and 19,026,393 shares issued at September 30, 2019 and December 31, 2018, respectively; and 18,098,586 and 17,743,971 shares outstanding at September 30, 2019 and December 31, 2018, respectively
194

 
190

Additional paid-in capital
143,214

 
139,617

Retained earnings (accumulated deficit)
23,021

 
(15,397
)
Accumulated other comprehensive loss
(4,598
)
 
(14,731
)
 
161,831

 
109,679

Less: treasury stock at cost, common stock, 1,282,422 shares as of September 30, 2019 and December 31, 2018
(10,164
)
 
(10,164
)
Total stockholders’ equity
151,667

 
99,515

Total liabilities and stockholders’ equity
$
204,182

 
$
187,652



See accompanying Notes to Unaudited Consolidated Financial Statements.
3



KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share amounts, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Sales:
 
 
 
 
 
 
 
Product
$
14,808

 
$
16,367

 
$
43,212

 
$
46,521

Service
24,503

 
22,945

 
72,205

 
66,828

Net sales
39,311

 
39,312

 
115,417

 
113,349

Costs and expenses:
 
 
 
 
 
 
 
Costs of product sales
10,823

 
9,767

 
31,756

 
28,784

Costs of service sales
15,029

 
14,133

 
45,781

 
40,734

Research and development
4,327

 
3,789

 
11,993

 
11,288

Sales, marketing and support
7,717

 
7,346

 
24,700

 
22,532

General and administrative
6,273

 
6,134

 
18,958

 
18,280

Total costs and expenses
44,169

 
41,169

 
133,188

 
121,618

Loss from operations
(4,858
)
 
(1,857
)
 
(17,771
)
 
(8,269
)
Interest income
451

 
158

 
1,626

 
451

Interest expense
73

 
446

 
1,016

 
1,282

Other income, net
680

 
222

 
922

 
459

Loss from continuing operations before income tax (benefit) expense
(3,800
)
 
(1,923
)
 
(16,239
)
 
(8,641
)
Income tax (benefit) expense from continuing operations
(492
)
 
8

 
(3,140
)
 
138

Net loss from continuing operations
$
(3,308
)
 
$
(1,931
)
 
$
(13,099
)
 
$
(8,779
)
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of tax
(1,036
)
 
757

 
49,837

 
2,369

Net (loss) income
$
(4,344
)
 
$
(1,174
)
 
$
36,738

 
$
(6,410
)
 
 
 
 
 
 
 
 
Net loss from continuing operations per common share

 

 
 
 
 
Basic and diluted
$
(0.19
)
 
$
(0.11
)
 
$
(0.75
)
 
$
(0.52
)
Net (loss) income from discontinued operations per common share
 
 
 
 
 
 
 
Basic and diluted
$
(0.06
)
 
$
0.04

 
$
2.86

 
$
0.14

Net (loss) income per common share
 
 
 
 
 
 
 
Basic and diluted
$
(0.25
)
 
$
(0.07
)
 
$
2.11

 
$
(0.38
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
17,521

 
17,188

 
17,429

 
17,025



See accompanying Notes to Unaudited Consolidated Financial Statements.
4



KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net (loss) income
$
(4,344
)
 
$
(1,174
)
 
$
36,738

 
$
(6,410
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities

 

 

 
1

Foreign currency translation adjustment
(1,109
)
 
(763
)
 
10,122

 
(2,185
)
Unrealized gain on derivative instruments, net

 
12

 
11

 
49

Other comprehensive (loss) income, net of tax(1)
(1,109
)
 
(751
)
 
10,133

 
(2,135
)
Total comprehensive (loss) income
$
(5,453
)
 
$
(1,925
)
 
$
46,871

 
$
(8,545
)

(1) Tax impact was nominal for all periods.


See accompanying Notes to Unaudited Consolidated Financial Statements.
5



KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 

Retained Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
Balance at June 30, 2019
19,320

 
$
193

 
$
141,856

 
$
27,365

 
$
(3,489
)
 
(1,282
)
 
$
(10,164
)
 
$
155,761

Net loss

 

 

 
(4,344
)
 

 

 

 
(4,344
)
Other comprehensive loss

 

 

 

 
(1,109
)
 

 

 
(1,109
)
Stock-based compensation

 

 
1,112

 

 

 

 

 
1,112

Issuance of common stock under employee stock purchase plan
22

 

 
196

 

 

 

 

 
196

Exercise of stock options and issuance of restricted stock awards, net of forfeitures
39

 
1

 
50

 

 

 

 

 
51

Balance at September 30, 2019
19,381

 
$
194

 
$
143,214

 
$
23,021

 
$
(4,598
)
 
(1,282
)
 
$
(10,164
)
 
$
151,667

 
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, 2018
19,026

 
$
190

 
$
139,617

 
$
(15,397
)
 
$
(14,731
)
 
(1,282
)
 
$
(10,164
)
 
$
99,515

Net income

 

 

 
36,738

 

 

 

 
36,738

Other comprehensive income

 

 

 

 
10,133

 

 

 
10,133

ASC 606 correction (FN 16)

 

 

 
1,680

 

 

 

 
1,680

Stock-based compensation

 

 
3,019

 

 

 

 

 
3,019

Issuance of common stock under employee stock purchase plan
45

 

 
414

 

 

 

 

 
414

Exercise of stock options and issuance of restricted stock awards, net of forfeitures
310

 
4

 
164

 

 

 

 

 
168

Balance at September 30, 2019
19,381

 
$
194

 
$
143,214

 
$
23,021

 
$
(4,598
)
 
(1,282
)
 
$
(10,164
)
 
$
151,667

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
Balance at June 30, 2018
18,937

 
$
189

 
$
137,508

 
$
(12,401
)
 
$
(12,701
)
 
(1,282
)
 
$
(10,164
)
 
$
102,431

Net loss

 

 

 
(1,174
)
 

 

 

 
(1,174
)
Other comprehensive loss

 

 

 

 
(751
)
 

 

 
(751
)
Stock-based compensation

 

 
860

 

 

 

 

 
860

Issuance of common stock under employee stock purchase plan
17

 

 
167

 

 

 

 

 
167

Exercise of stock options and issuance of restricted stock awards, net of forfeitures
68

 
1

 
196

 

 

 

 

 
197

Balance at September 30, 2018
19,022

 
$
190

 
$
138,731

 
$
(13,575
)
 
$
(13,452
)
 
(1,282
)
 
$
(10,164
)
 
$
101,730

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive Loss
 
Treasury Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
Balance at December 31, 2017
18,788

 
$
188

 
$
134,361

 
$
(4,417
)
 
$
(11,317
)
 
(1,659
)
 
$
(13,150
)
 
$
105,665

Net loss

 

 

 
(6,410
)
 

 

 

 
(6,410
)
Other comprehensive loss

 

 

 

 
(2,135
)
 

 

 
(2,135
)
ASC 606 adoption

 

 

 
(2,748
)
 

 

 

 
(2,748
)
Stock-based compensation

 

 
2,452

 

 

 

 

 
2,452

Issuance of common stock under employee stock purchase plan
17

 

 
167

 

 

 

 

 
167

Sale of treasury stock

 

 
1,478

 

 

 
377

 
2,986

 
4,464

Exercise of stock options and issuance of restricted stock awards, net of forfeitures
217

 
2

 
273

 

 

 

 

 
275

Balance at September 30, 2018
19,022

 
$
190

 
$
138,731

 
$
(13,575
)
 
$
(13,452
)
 
(1,282
)
 
$
(10,164
)
 
$
101,730


See accompanying Notes to Unaudited Consolidated Financial Statements.
6



KVH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited) 
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
36,738

 
$
(6,410
)
Adjustments to reconcile net income (loss) to net cash (used in) provided operating activities:
 
 
 
Provision for doubtful accounts
(28
)
 
444

Depreciation and amortization
8,893

 
9,481

Deferred income taxes
8

 
22

Loss on disposals of fixed assets
164

 
2

Gain on sale of Videotel
(53,701
)
 

Compensation expense related to stock-based awards and employee stock purchase plan
3,019

 
2,452

Unrealized currency translation gain
(799
)
 
(290
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,637
)
 
(1,217
)
Inventories
(2,412
)
 
(1,907
)
Prepaid expenses, other current assets, and current contract assets
(235
)
 
(232
)
Other non-current assets and non-current contract assets
(729
)
 
(1,647
)
Accounts payable
(2,331
)
 
(992
)
Contract liabilities and long-term contract liabilities
2,229

 
701

Accrued compensation, product warranty and other current liabilities
(612
)
 
1,364

Other long-term liabilities
(17
)
 
(10
)
Net cash (used in) provided by operating activities
$
(11,450
)
 
$
1,761

Cash flows from investing activities:
 
 
 
Capital expenditures
(9,335
)
 
(11,463
)
Cash paid for acquisition of intangible asset
(71
)
 
(22
)
Proceeds from sale of fixed assets
103

 

Proceeds from sale of Videotel, net of cash sold
88,447

 

Purchases of marketable securities
(50,300
)
 
(2,036
)
Maturities and sales of marketable securities
4,000

 
10,019

Net cash provided by (used in) investing activities
$
32,844

 
$
(3,502
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(2,597
)
 
(136
)
Repayments of term note borrowings
(21,938
)
 
(3,975
)
Repayments of line of credit borrowings
(15,000
)
 

Proceeds from line of credit borrowings
10,000

 

Proceeds from stock options exercised and employee stock purchase plan
558

 
477

Sale of treasury stock

 
4,500

Payment of finance lease
(457
)
 
(410
)
Net cash (used in) provided by financing activities
$
(29,434
)
 
$
456

Effect of exchange rate changes on cash and cash equivalents
(767
)
 
(411
)
Net decrease in cash and cash equivalents
(8,807
)
 
(1,696
)
Cash and cash equivalents at beginning of period
18,050

 
34,596

Cash and cash equivalents at end of period
$
9,243

 
$
32,900

Supplemental disclosure of non-cash investing activities:
 
 
 
Changes in accrued other and accounts payable related to property and equipment additions
$
86

 
$
965



See accompanying Notes to Unaudited Consolidated Financial Statements.
7



KVH INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated 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) is a leading manufacturer of solutions that provide global high-speed Internet, television, and voice services via satellite to mobile users at sea and on land. KVH is also a leading provider of commercially licensed entertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets. KVH is also a premier manufacturer of high-performance navigational sensors and integrated inertial systems for defense and commercial applications. KVH’s reporting segments are as follows:

the mobile connectivity segment and
the inertial navigation segment

KVH’s mobile connectivity products enable customers to receive voice services, Internet services, and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. KVH’s CommBox offers a range of tools designed to increase communication efficiency, reduce costs, and manage network operations. KVH sells and leases its mobile connectivity products through an extensive international network of dealers and distributors. KVH also sells and leases products directly to end users. In March 2019, KVH introduced a 1-meter Ku/C-band antenna designed to deliver download/upload speeds as fast as 20 Mbps/3Mbps through a dual Ku/C-band design that automatically switches between bandwidths to deliver expanded global coverage on KVH’s mini-VSAT Broadband high-throughput satellite (HTS) network. In March 2019, KVH further expanded the mini-VSAT Broadband HTS network for the entire Pacific Ocean region via the Horizons 3e satellite, which is jointly owned by Intelsat and SKY Perfect JSAT. The high-performance Horizons 3e satellite immediately adds to the global coverage and capacity of KVH’s mini-VSAT Broadband HTS network, which provides connectivity to vessels worldwide.

KVH’s mobile connectivity service sales primarily represent sales earned from satellite voice and Internet airtime services. KVH provides, for monthly fixed and usage fees, satellite connectivity services, including broadband Internet, data and VoIP services, to its TracPhone V-series customers. The Company offers AgilePlans, a monthly mini-VSAT Broadband subscription model providing global connectivity to commercial maritime customers, including hardware, installation, broadband Internet, Voice over Internet Protocol (VoIP), entertainment and training content and global support for a monthly fee with no minimum commitment. KVH offers AgilePlans customers a variety of airtime data plans with varying data speeds and fixed data usage levels with overage charges per megabyte, which is similar to the plans that the Company offers to its other customers. The Company recognizes the monthly subscription fee as service revenue over the service delivery period. The Company retains ownership of the hardware that 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 retains ownership of the hardware, it does not accrue any warranty costs for AgilePlans hardware; however, any maintenance costs for the hardware are expensed in the period these costs are incurred. Mobile connectivity service sales also include the distribution of commercially licensed entertainment, including news, sports, music, and movies to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group. KVH also earns monthly usage fees from third-party satellite connectivity services, including voice, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate their subscriptions with KVH. Mobile connectivity service sales also include engineering services provided under development contracts, sales from product repairs, and extended warranty sales.


8



On May 13, 2019, the Company and its wholly owned subsidiary, KVH Media Group Limited (KMG), entered into a Share Purchase Agreement (the Purchase Agreement) with Pelican Holdco Limited, an affiliate of Oakley Capital IV Master SCSp, a UK company (together, Oakley), pursuant to which KMG sold all of the issued share capital of Super Dragon Limited and Videotel Marine Asia Limited (together referred to as Videotel) to Oakley for $89,387 in cash, on a cash-free, debt-free basis, subject to working capital adjustments. Videotel comprised the Company’s maritime training business, which offered video, animation, eLearning computer-based training and interactive distance learning services to the maritime industry. The sale was completed immediately upon execution of definitive agreements. The Company received payment of the initial purchase price pursuant to a loan agreement (the Bridge Loan) on June 21, 2019. The Bridge Loan was secured by a charge (a type of foreign security interest) over the shares of Super Dragon Limited and Videotel Marine Asia Limited and was further backed by an equity commitment letter from Oakley Capital IV Master SCSp. The Bridge Loan’s interest rate was 5% per year during the period from closing until and including the 15th business day after the closing and increased to 12% per year during the period after the 15th business day until the maturity date. The working capital adjustment is in the process of being finalized. The Company had accrued an estimated adjustment liability of approximately $300 as of June 30, 2019. In the third quarter of 2019, the Company increased the estimated working capital adjustment by $800 for a total accrual value of $1,100. The Company anticipates the calculation will be finalized in the fourth quarter of 2019. The Company does not have any continuing involvement in these operations other than short term transition services which are being recorded in other income in continuing operations. The Company determined that the sale met the requirements for reporting as a discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. Please see Note 20 for the discontinued operations disclosures.

KVH's inertial navigation products offer precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing and guidance. KVH’s inertial navigation products also include tactical navigation systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. KVH’s inertial navigation products are sold directly to U.S. and foreign governments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, KVH's inertial navigation technology is used in numerous commercial products, such as navigation and positioning systems for various applications including precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial robotics and optical stabilization.

KVH’s inertial navigation service sales include product repairs, engineering services provided under development contracts and extended warranty sales.

(2)     Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated 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 2019 consolidated interim financial statements reflect the sale of Videotel as a discontinued operations. See Notes 1 and 20 for further information on the sale of Videotel.

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, 2018 filed on March 1, 2019 with the Securities and Exchange Commission, which financial statements and related notes do not reflect the sale of Videotel as a discontinued operations. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of operating results for the remainder of the year.

The only material change to the significant accounting policies disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2018 was the Company’s adoption of ASC 842, Leases, effective January 1, 2019. Please see Note 19 for further discussion.

9




Significant Estimates and Assumptions and Other Significant Non-Recurring Transactions

The preparation of 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 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 most significant estimates and assumptions by management affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, valuations and deferred purchase price consideration related to asset acquisition, 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, 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. The Company has reviewed these estimates and determined that these remain the most significant estimates in addition to the valuation of right-of-use assets and lease liabilities as of September 30, 2019.

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.

On February 27, 2018, the Company entered into a stock purchase agreement with SKY Perfect JSAT Corporation, or SJC, pursuant to which the Company agreed to sell 377 shares of treasury stock to SJC for a purchase price of $11.95 per share, or an aggregate of $4,500, in a private placement. The transaction closed on February 28, 2018.

During the first quarter of 2018, the Company entered into a five-year finance lease for three satellite hubs for the HTS network. Please see Note 19 for further discussion.

During the second quarter of 2019, the Company sold Videotel. Please see Notes 1 and 20 for further discussion.

During the third quarter of 2019, the Company identified an out-of-period immaterial error related to the implementation and application of ASC 606 with respect to the recognition of revenue associated with sales-type leases. Please see Note 16 for further discussion.

(3)     Accounting Standards Issued and Not Yet Adopted

ASC Update No. 2016-13, ASC Update No. 2018-19, ASC Update No. 2019-04, and ASC Update No. 2019-05

In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. The purpose of Update No. 2016-13 is to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates.

In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvements to Topic 326, Financial
Instruments—Credit Losses. This update introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost. The amendment also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases.

In May 2019, the FASB issued ASC Update No. 2019-04, Codification Improvements to Topic 326, Financial
Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This update introduced clarifications of the Board’s intent to accrued interest, the transfer between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projects of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures, and extension and renewal options.


10



In May 2019, the FASB issued ASC Update No. 2019-05, Financial Instruments—Credit Losses (Topic 326). The amendments in the update ease the transition for entities adopting ASC Update 2016-13 and increase the comparability of financial statement information. With the exception of held-to-maturity debt securities, the amendments allow entities to irrevocably elect to apply the fair value option to financial instruments that were previously recorded at amortized cost basis within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The adoption of Update Nos. 2016-13, 2018-19, 2019-04, and 2019-05 are not expected to have a material impact on the Company's financial position or results of operations.

ASC Update No. 2018-13

In August 2018, the FASB issued ASC Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The update is effective for annual periods beginning on or after December 15, 2019. Early adoption is permitted upon issuance of this update. The purpose of Update No. 2018-13 is to modify and eliminate some of the disclosure requirements on fair value measurements found in Topic 820, Fair Value Measurement, for both public and nonpublic entities. Through the inclusion of this update, FASB aims to facilitate a clear communication of the information required by GAAP that is most important to users of each entity's financial statements, thus helping to improve the effectiveness of disclosures in the notes to financial statements. Update No. 2018-13 is not expected to have a material impact on the Company's financial position or results of operations.

ASC Update No. 2018-15
    
In August 2018, the FASB issued ASC Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software
(Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The update is effective for annual periods beginning on or after December 15, 2019. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The purpose of Update No. 2018-15 is to provide a new guideline to the accounting of a customer of a cloud computing arrangement hosted by a vendor when the customer incurs costs associated with the implementation, set-up, and other upfront costs. Specifically, customers will follow the same criteria found in an arrangement with a software license when they capitalize the implementation costs. The new guidance also affects the classification of the capitalized implementation costs and related amortization expense found in a company's balance sheet, income statement, and cash flow statement, and the update also requires additional quantitative and qualitative disclosures. Update No. 2018-15 is not expected to have a material impact on the Company's financial position or results of operations.

ASC Update No. 2018-18

In November 2018, the FASB issued ASC Update No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This update is effective for public business entities for fiscal years beginning after December 15, 2019, and the interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for public business entities for periods for which financial statements have not yet been issued. The purpose of Update No. 2018-18 is to help make clarifications on the interactions between Topic 808, Collaborative Arrangement, and Topic 606, Revenue from Contracts with Customers. Update No. 2018-18 is not expected to have a material impact on the Company's financial position or results of operation.

There are no other recent accounting pronouncements issued by the FASB that are expected to have a material impact on the Company's financial statements.


11



(4)
Marketable Securities

Marketable securities as of September 30, 2019 and December 31, 2018 consisted of the following:
September 30, 2019
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Money market mutual funds
$
46,325

 
$

 
$

 
$
46,325

Total marketable securities designated as available-for-sale
$
46,325

 
$

 
$

 
$
46,325

 
December 31, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Money market mutual funds
$
25

 
$

 
$

 
$
25

Total marketable securities designated as available-for-sale
$
25

 
$

 
$

 
$
25


The amortized costs and fair value of marketable securities as of September 30, 2019 and December 31, 2018 are shown below by effective maturity. Effective maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
September 30, 2019
Amortized
Cost
 
Fair
Value
Due in less than one year
$

 
$

December 31, 2018
Amortized
Cost
 
Fair
Value
Due in less than one year
$

 
$


Interest income from marketable securities was $267 and $2 during the three months ended September 30, 2019 and 2018, respectively, and $299 and $17 during the nine months ended September 30, 2019 and 2018, 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. Stock-based compensation expense, excluding compensation charges related to our employee stock purchase plan, or the ESPP, was $1,093 and $849 for the three months ended September 30, 2019 and 2018, respectively, and $2,970 and $2,417 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $3,351 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.88 years. As of September 30, 2019, there was $4,163 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.28 years.

Stock Options

During the three months ended September 30, 2019, 4 stock options were exercised for common stock. Additionally, during the three months ended September 30, 201920 stock options were granted and 28 stock options expired, were canceled or were forfeited.


12



During the nine months ended September 30, 2019, 18 stock options were exercised for common stock, $144 of which was delivered to the Company as payment for the exercise price and none of which were surrendered for minimum tax withholding obligations. Additionally, during the nine months ended September 30, 2019630 stock options were granted with a weighted average grant date fair value of $3.09 per share and 127 stock options expired, were canceled or were forfeited. The Company has 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, 2019 and 2018 were as follows:
 
 
 
 
 
Nine Months Ended
September 30,
 
2019
 
2018
Risk-free interest rate
1.91
%
 
2.81
%
Expected volatility
36.94
%
 
36.60
%
Expected life (in years)
4.27

 
4.29

Dividend yield
0
%
 
0
%

As of September 30, 2019, there were 1,761 options outstanding with a weighted average exercise price of $9.92 per share and 542 options exercisable with a weighted average exercise price of $10.28 per share.

Restricted Stock

During the three months ended September 30, 201945 shares of restricted stock were granted with a weighted average grant date fair value of $8.90 per share, and 11 shares of restricted stock were forfeited. Additionally, during the three months ended September 30, 2019, 30 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, 2019322 shares of restricted stock were granted with a weighted average grant date fair value of $9.66 per share and 31 shares of restricted stock were forfeited. Additionally, during the nine months ended September 30, 2019287 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, 2019, there were 531 shares of restricted stock outstanding that were still subject to service-based vesting conditions.

As of September 30, 2019, the Company had no unvested outstanding options and no shares of restricted stock that were subject to performance-based or market-based vesting conditions.

(b) Employee Stock Purchase Plan

The Company's Amended and Restated 1996 Employee Stock Purchase Plan (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 and nine months ended September 30, 2019, 22 and 45 shares were issued under the ESPP plan, respectively. During the three and nine months ended September 30, 2018, 17 shares were issued under the ESPP plan. The Company recorded compensation charges related to the ESPP of $19 and $11 for the three months ended September 30, 2019 and 2018, respectively, and $49 and $35 for the nine months ended September 30, 2019 and 2018, respectively.


13



(c) Stock-Based Compensation Expense
    
The following table presents stock-based compensation expense, including expense for the ESPP, in the Company's consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Cost of product sales
$
69

 
$
40

 
$
171

 
$
122

Research and development
221

 
177

 
589

 
496

Sales, marketing and support
226

 
138

 
620

 
485

General and administrative
596

 
505

 
1,639

 
1,349

 
$
1,112

 
$
860

 
$
3,019

 
$
2,452


(d) Accumulated Other Comprehensive Loss (AOCI)

Comprehensive income (loss) includes net income (loss), unrealized gains and losses from foreign currency translation, unrealized gains and losses from available for sale marketable securities and changes in fair value related to interest rate swap derivative instruments, net of tax attributes, which were not material. 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 income (loss).

The balances for the three months ended September 30, 2019 and 2018 are as follows:
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Available for Sale Marketable Securities
 
Interest Rate Swaps
 
Total Accumulated Other Comprehensive Loss
Balance, June 30, 2019
$
(3,489
)
 
$

 
$

 
$
(3,489
)
Other comprehensive loss before reclassifications
(1,109
)
 

 

 
(1,109
)
Reclassified from AOCI

 

 

 

Net other comprehensive loss, September 30, 2019
(1,109
)
 

 

 
(1,109
)
Balance, September 30, 2019
$
(4,598
)
 
$

 
$

 
$
(4,598
)

 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Available for Sale Marketable Securities
 
Interest Rate Swaps
 
Total Accumulated Other Comprehensive Loss
Balance, June 30, 2018
$
(12,669
)
 
$

 
$
(32
)
 
$
(12,701
)
Other comprehensive loss before reclassifications
(763
)
 

 

 
(763
)
Reclassified from AOCI

 

 
12

 
12

Net other comprehensive (loss) income, September 30, 2018
(763
)
 

 
12

 
(751
)
Balance, September 30, 2018
$
(13,432
)
 
$

 
$
(20
)
 
$
(13,452
)


14



The balances for the nine months ended September 30, 2019 and 2018 are as follows:

 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Available for Sale Marketable Securities
 
Interest Rate Swaps
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2018
$
(14,720
)
 
$

 
$
(11
)
 
$
(14,731
)
Other comprehensive (loss) income before reclassifications
(1,361
)
 

 
3

 
(1,358
)
Reclassified from AOCI
11,483

 

 
8

 
11,491

Net other comprehensive income, September 30, 2019
10,122

 

 
11

 
10,133

Balance, September 30, 2019
$
(4,598
)
 
$

 
$

 
$
(4,598
)
 
 
Foreign Currency Translation
 
Unrealized (Loss) Gain on Available for Sale Marketable Securities
 
Interest Rate Swaps
 
Total Accumulated Other Comprehensive Loss
Balance, December 31, 2017
$
(11,247
)
 
$
(1
)
 
$
(69
)
 
$
(11,317
)
Other comprehensive (loss) income before reclassifications
(2,185
)
 
1

 
11

 
(2,173
)
Reclassified from AOCI

 

 
38

 
38

Net other comprehensive (loss) income, September 30, 2018
(2,185
)
 
1

 
49

 
(2,135
)
Balance, September 30, 2018
$
(13,432
)
 
$

 
$
(20
)
 
$
(13,452
)

For additional information, see Note 4, "Marketable Securities," and Note 17, "Derivative Instruments and Hedging Activities."


15



(6)     Net Loss per Common Share

Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net loss 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, 2019, since there was a net loss from continuing operations, the Company excluded all 1,565 and 1,221, respectively, in outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these securities would have reduced the net loss per share. For the three and nine months ended September 30, 2018, since there was a net loss from continuing operations, the Company excluded all 932 and 739, respectively, in outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these securities would have reduced the net loss per share.

A reconciliation of the basic and diluted weighted average common shares outstanding for net loss from continuing operations is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Weighted average common shares outstanding—basic
17,521

 
17,188

 
17,429

 
17,025

Dilutive common shares issuable in connection with stock plans

 

 

 

Weighted average common shares outstanding—diluted
17,521

 
17,188

 
17,429

 
17,025


(7)     Inventories

Inventories are stated at the lower of cost and net realizable value using the first-in first-out costing method. Inventories as of September 30, 2019 and December 31, 2018 include the costs of material, labor, and factory overhead. Components of inventories consist of the following:

 
September 30,
2019
 
December 31,
2018
Raw materials
$
10,225

 
$
13,698

Work in process
3,740

 
2,489

Finished goods
11,352

 
6,755

 
$
25,317

 
$
22,942


During the second quarter of 2019, the Company recorded an inventory reserve of $2.1 million relating to its TracPhone V-IP products as the Company decided to no longer promote sales of these products and instead to focus its efforts on migrating customers to its HTS network and products.


16



(8)     Property and Equipment

Property and equipment, net, as of September 30, 2019 and December 31, 2018 consist of the following:

 
September 30,
2019
 
December 31,
2018
Land
$
3,828

 
$
3,828

Building and improvements
24,159

 
24,060

Leasehold improvements
493

 
478

Machinery and equipment
17,797

 
17,239

Revenue-generating assets
44,699

 
38,066

Office and computer equipment
13,444

 
12,681

Motor vehicles
31

 
31

 
104,451

 
96,383

Less accumulated depreciation
(51,790
)
 
(45,750
)
 
$
52,661

 
$
50,633


Depreciation expense was $2,246 and $1,760 for the three months ended September 30, 2019 and 2018, respectively, and $6,453 and $5,016 for the nine months ended September 30, 2019 and 2018, respectively.

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

(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, 2019 and December 31, 2018, the Company had accrued product warranty costs of $2,288 and $1,916, respectively.

The following table summarizes product warranty activity during 2019 and 2018:
 
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Beginning balance
$
1,916

 
$
2,074

Charges to expense
1,478

 
1,592

Costs incurred
(1,106
)
 
(1,634
)
Ending balance
$
2,288

 
$
2,032



17



(10)     Debt

Long-term debt consisted of the following:

 
September 30,
2019
 
December 31,
2018
2018 term note
$

 
$
21,938

2018 revolver

 
5,000

Mortgage loan

 
2,597

Total long-term debt

 
29,535

Less debt issuance costs for 2018 term note (a)

 
170

Total long-term debt less debt issuance costs

 
29,365

Less amounts classified as current

 
9,928

Long-term debt, excluding current portion
$

 
$
19,437

(a)- As of December 31, 2018, debt issuance costs classified as current and long-term are $60 and $110, respectively.

Term Note and Line of Credit

On October 30, 2018, the Company amended and restated its 2014 Credit Agreement by entering into (i) a three-year senior credit facility agreement (the 2018 Credit Agreement) with Bank of America, N.A., as Administrative Agent, and the lenders named from time to time as parties thereto (the 2018 Lenders), for an aggregate amount of up to $42,500, including a term loan (2018 Term Loan) of $22,500 and a reducing revolving credit facility (the 2018 Revolver) of up to $20,000 initially and reducing to $15,000 on December 31, 2019, each to be used for general corporate purposes, including the refinancing of the Company’s then outstanding indebtedness under the 2014 Credit Agreement, (ii) a Security Agreement with respect to the grant by the Company of a security interest in substantially all of the assets of the Company in order to secure the obligations of the Company under the 2018 Credit Agreement, and (iii) Pledge Agreements with respect to the grant by the Company of a security interest in 65% of the capital stock of each of KVH Industries A/S and KVH Industries U.K. Limited held by the Company in order to secure the obligations of the Company under the 2018 Credit Agreement. On the closing date, the Company repaid $17,225 on the 2014 Term Loan and refinanced its remaining balance. On the closing date, the Company also borrowed $5,000 under the 2018 Revolver.

The 2018 Credit Agreement contains provisions requiring the mandatory prepayment of amounts outstanding under the 2018 Term Loan and the 2018 Revolver under specified circumstances, including (i) 100% of the net cash proceeds from certain dispositions to the extent not reinvested in the Company’s business within a stated period, (ii) 50% of the net cash proceeds from stated equity issuances and (iii) 100% of the net cash proceeds from certain receipts above certain threshold amounts outside the ordinary course of business. The prepayments are first applied to the 2018 Term Loan, in inverse order of maturity, and then to the 2018 Revolver. As of September 30, 2019, no amounts were outstanding under the 2018 Revolver and the full balance of $20,000 was available for borrowing.

Borrowings under the 2018 Revolver are subject to the satisfaction of various conditions precedent at the time of each borrowing, including the continued accuracy of the Company’s representations and warranties and the absence of any default under the 2018 Credit Agreement.

On May 13, 2019, the Company entered into a consent with Bank of America, N.A., as Administrative Agent, authorizing the Purchase Agreement and Bridge Loan, as discussed in Note 1. On June 27, 2019, the Company used the proceeds of the sale of Videotel to repay in full the then-outstanding balance of $21,375 under the 2018 Term Loan and to repay $13,000 of the the-outstanding balance under the 2018 Revolver such that the Consolidated Leverage Ratio was not more than 2.75:1.00. The 2018 Revolver will remain at $20,000 through the term of the Credit Agreement. On October 30, 2021, the entire principal balance of any outstanding loans under the 2018 Revolver is due and payable, together with all accrued and unpaid interest, fees and any other amounts due and payable under the 2018 Credit Agreement.

The 2018 Credit Agreement contains two financial covenants, a Maximum Consolidated Leverage Ratio and a Minimum Consolidated Fixed Charge Coverage Ratio, each as defined in the 2018 Credit Agreement. The Consolidated Leverage Ratio may not be greater than 2.75:1.00 on September 30, 2019 and declines to 2.50:1.00 on December 31, 2019 and to 2.00:1.00 on December 31, 2020. The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00.


18



The 2018 Credit Agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment of taxes and other obligations, compliance with laws, performance of material contracts, creation of liens, incurrence of indebtedness, investments, dispositions, fundamental changes, restricted payments, changes in the nature of the Company’s business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements.

The Company’s obligation to repay any loans that may be outstanding under the 2018 Credit Agreement could be accelerated upon an event of default under its terms, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to comply with the Company’s affirmative and negative covenants under the 2018 Credit Agreement, a change of control of the Company, certain defaults in payment relating to other indebtedness, the acceleration of payment of certain other indebtedness, certain events relating to the liquidation, dissolution, bankruptcy, insolvency or receivership of the Company, the entry of certain judgments against the Company, certain property loss events, and certain events relating to the impairment of collateral or the 2018 Lenders' security interest therein.
Mortgage Loan

In April 2019, on the Mortgage Loan’s original termination date, the Company repaid in full the outstanding balance of $2,551. As discussed in Note 17 to the consolidated financial statements, in April 2010 the Company entered into two interest rate swap agreements that were intended to hedge its mortgage interest obligations over the term of the Mortgage Loan by fixing the interest rates specified in the Mortgage Loan to 5.91% for half of the principal amount outstanding as of April 1, 2010 and 6.07% for the remaining half. Both interest rate swap agreements were also settled upon repayment of the Mortgage Loan.

(11)     Segment Reporting

The financial results of each segment are based on revenues from external customers, cost of revenue and operating expenses that are directly attributable to the segment and an allocation of costs from shared functions. These shared functions include, but are not limited to, facilities, human resources, information technology, and engineering. Allocations are made based on management’s judgment of the most relevant factors, such as head count, number of customer sites, or other operational data that contribute to the shared costs. Certain corporate-level costs have not been allocated as they are not directly attributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance, and costs associated with corporate actions. Segment-level asset information has not been provided as such information is not reviewed by the chief operating decision-maker for purposes of assessing segment performance and allocating resources. There are no inter-segment sales or transactions. As discussed in Note 1, the Company’s Videotel business, which had previously been included in the mobile connectivity segment, has been classified as discontinued operations and therefore excluded from the segment information below.

The Company's performance is impacted by the levels of activity in the marine and land mobile markets and defense sectors, among others. Performance in any particular period could be impacted by the timing of sales to certain large customers.

The mobile connectivity segment primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to television, the Internet and voice services while on the move. Product sales within the mobile connectivity segment accounted for 21% and 19% of the Company's consolidated net sales for the three months ended September 30, 2019 and 2018, respectively, and 21% of the Company's consolidated net sales for both the nine months ended September 30, 2019 and 2018. Sales of mini-VSAT Broadband airtime service accounted for 51% and 46% of the Company's consolidated net sales for the three months ended September 30, 2019 and 2018, respectively, and 50% and 46% of the Company's consolidated net sales for the nine months ended September 30, 2019 and 2018, respectively.
The inertial navigation segment manufactures and distributes a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address the rigorous requirements of military and commercial customers and provide reliable, easy-to-use and continuously available navigation and pointing data. The principal product categories in this segment include the FOG-based inertial measurement units (IMUs) for precision guidance, FOGs for tactical navigation as well as pointing and stabilization systems, and digital compasses that provide accurate heading information for demanding applications, security, automation and access control equipment and systems. Sales of FOG-based guidance and navigation systems within the inertial navigation segment accounted for 16% and 21% of the Company's consolidated net sales for the three months ended September 30, 2019 and 2018, respectively, and 15% and 18% of the Company's consolidated net sales for the nine months ended September 30, 2019 and 2018, respectively.

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 across the globe. The Company generates international net sales, based upon customer location, primarily from customers located in Canada, Europe, Africa, Asia/Pacific, the Middle East, and India. International revenues represented 59% and 55% of the Company's consolidated net sales for the three months ended September 30, 2019 and 2018, respectively, and 53% and 54% of the Company's consolidated net sales for the nine months ended September 30, 2019 and 2018, respectively. Sales to Singapore represented 10% of the Company's consolidated net sales for the three months ended September 30, 2019. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended September 30, 2019. No individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended September 30, 2018 or the nine months ended September 30, 2019 or 2018.

As of September 30, 2019 and December 31, 2018, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets and were deemed not material.


19



Net sales and operating (loss) income for the Company's reporting segments and the Company's loss from continuing operations before income tax (benefit) expense for the three and nine months ended September 30, 2019 and 2018 were as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
Mobile connectivity
$
31,642

 
$
29,220

 
$
92,025

 
$
86,277

Inertial navigation
7,669

 
10,092

 
23,392

 
27,072

Consolidated net sales
$
39,311

 
$
39,312

 
$
115,417

 
$
113,349

 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
Mobile connectivity
$
(267
)
 
$
506

 
$
(4,075
)
 
$
682

Inertial navigation
(171
)
 
1,920

 
24

 
3,818

Subtotal
(438
)
 
2,426

 
(4,051
)
 
4,500

Unallocated, net
(4,420
)
 
(4,283
)
 
(13,720
)
 
(12,769
)
Loss from operations
(4,858
)
 
(1,857
)
 
(17,771
)
 
(8,269
)
Net interest and other income (expense)
1,058

 
(66
)
 
1,532

 
(372
)
Loss from continuing operations before income tax (benefit) expense
$
(3,800
)
 
$
(1,923
)
 
$
(16,239
)
 
$
(8,641
)

Depreciation expense and amortization expense for the Company's segments are presented in the following table for the periods presented:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Depreciation expense:
 
 
 
 
 
 
 
Mobile connectivity
$
1,824

 
$
1,367

 
$
5,163

 
$
3,848

Inertial navigation
280

 
260

 
874

 
766

Unallocated
142

 
133

 
416

 
402

Total consolidated depreciation expense
$
2,246

 
$
1,760

 
$
6,453

 
$
5,016

 
 
 
 
 
 
 
 
Amortization expense:
 
 
 
 
 
 
 
Mobile connectivity
$
237

 
$
246

 
$
732

 
$
764

Inertial navigation

 

 

 

Unallocated

 

 

 

Total consolidated amortization expense
$
237

 
$
246

 
$
732

 
$
764


(12)     Legal Matters
    
From time to time, the Company is involved in litigation incidental to the conduct of its business. 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.

(13)     Share Buyback Program

On November 26, 2008, the Company’s Board of Directors authorized a program to repurchase up to 1,000 shares of the Company’s common stock. As of September 30, 2019, 341 shares of the Company’s common stock remained available for repurchase under the authorized program. The repurchase program was funded using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchase program, the Company, at management’s discretion, could repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depended on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program was superseded on October 4, 2019, as described below. There were no other repurchase programs outstanding during the nine months ended September 30, 2019, and no repurchase programs expired during the period.

During the nine months ended September 30, 2019 and 2018, the Company did not repurchase any shares of its common stock.

On October 4, 2019, the Company's Board of Directors authorized a share repurchase program pursuant to which the Company may purchase up to an additional 1,000 shares of the Company’s common stock. The repurchase program is expected to be funded using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchase program, the Company, at management’s discretion, may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. The repurchase program has a duration of one year. Under the Company's 2018 Credit Agreement, the Company may only repurchase up to $5,000 over the term of the agreement which ends on October 31, 2021.


20



(14)     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.

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’s Level 2 liabilities are interest rate swaps.

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 valuation techniques are:

(a)
Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets.

(b)
The valuations of the interest rate swaps intended to mitigate the Company’s interest rate risk are determined with the assistance of a third-party financial institution using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves and interest rate volatility, and reflects the contractual terms of these instruments, including the period to maturity, as of April 1, 2019.

The following tables present financial assets and liabilities at September 30, 2019 and December 31, 2018 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:
September 30, 2019
Total
 
Level 1
 
Level 2
 
Level 3
 
Valuation
Technique
Assets
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
46,325

 
$
46,325

 
$

 
$

 
(a)
December 31, 2018
Total
 
Level 1
 
Level 2
 
Level 3
 
Valuation
Technique
Assets
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
25

 
$
25

 
$

 
$

 
(a)
Liabilities
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
11

 
$

 
$
11

 
$

 
(b)
Certain financial instruments are carried at cost on the consolidated balance sheets, which 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 debt approximates fair value based on currently available quoted rates of similarly structured debt.

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 an impairment exists. There were no impairments of the Company’s non-financial assets noted as of September 30, 2019. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis.


21



(15)     Goodwill and Intangible Assets

Goodwill

The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2019:

 
 
Amounts
Balance at December 31, 2018
 
$
15,031

Foreign currency translation adjustment
 
(364
)
Balance at September 30, 2019
 
$
14,667


Intangible Assets

The changes in the carrying amount of intangible assets during the nine months ended September 30, 2019 are as follows:

 
 
Amounts
Balance at December 31, 2018
 
$
5,661

Amortization expense
 
(732
)
Intangible assets acquired in asset acquisition
 
71

Foreign currency translation adjustment
 
(160
)
Balance at September 30, 2019
 
$
4,840

Intangible assets arose from an acquisition made prior to 2013 and the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013. Intangibles arising from the acquisition made prior to 2013 are being amortized on a straight-line basis over an estimated useful life of 7 years. Remaining intangibles arising from the acquisition of KVH Media Group are being amortized on a straight-line basis over the estimated useful life of: (i) 10 years for acquired subscriber relationships and (ii) 15 years for distribution rights. The intangibles arising from the KVH Media Group were recorded in pounds sterling and fluctuations in exchange rates could cause these amounts to increase or decrease from time to time.

In January 2017, the Company completed the acquisition of certain subscriber relationships from a third party. This acquisition did not meet the definition of a business under ASC 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business, which the Company adopted on October 1, 2016. The Company ascribed $100 of the initial purchase price to the acquired subscriber relationships definite-lived intangible assets with an initial estimated useful life of 10 years. Under the asset purchase agreement, the purchase price included a component of contingent consideration under which the Company was required to pay a percentage of recurring revenues received from the acquired subscriber relationships through 2026 up to a maximum annual payment of $114. As of September 30, 2019, the carrying value of the intangible assets acquired in the asset acquisition was $249. As the acquisition did not represent a business combination, the contingent consideration arrangement is recognized only when the contingency is resolved and the consideration is paid or becomes payable. The amounts payable under the contingent consideration arrangement, if any, will be included in the measurement of the cost of the acquired subscriber relationships. During the nine months ended September 30, 2019, $71 of additional consideration was paid under the contingent consideration arrangement.


22



Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at September 30, 2019 and December 31, 2018, respectively:


Gross Carrying Amount

Accumulated Amortization

Net Carrying Value
September 30, 2019
 
 
 
 
 
 
Subscriber relationships
 
$
7,667

 
$
5,050

 
$
2,617

Distribution rights
 
4,155

 
1,932

 
2,223

Internally developed software
 
446

 
446

 

Proprietary content
 
153

 
153

 

Intellectual property
 
2,284

 
2,284

 

 
 
$
14,705

 
$
9,865

 
$
4,840

December 31, 2018
 
 
 
 
 
 
Subscriber relationships
 
$
7,678

 
$
4,519

 
$
3,159

Distribution rights
 
4,233

 
1,731

 
2,502

Internally developed software
 
446

 
446

 

Proprietary content
 
153

 
153

 

Intellectual property
 
2,284

 
2,284

 

 
 
$
14,794

 
$
9,133

 
$
5,661


Amortization expense related to intangible assets for the three and nine months ended September 30, 2019 and 2018 was as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Expense Category
2019
 
2018
 
2019
 
2018
General and administrative expense
$
237

 
$
246

 
$
732

 
$
764


As of September 30, 2019, the total weighted average remaining useful lives of the definite-lived intangible assets was 4.7 years and the weighted average remaining useful lives by the definite-lived intangible asset category are as follows:

Intangible Asset
Weighted Average Remaining Useful Life in Years
Subscriber relationships
3.7
Distribution rights
8.6

Estimated future amortization expense remaining at September 30, 2019 for intangible assets acquired is as follows:

Remainder of 2019
$
237

2020
947

2021
947

2022
947

2023
524

Thereafter
1,238

Total future amortization expense
$
4,840



23



For intangible assets, the Company assesses the carrying value of these assets whenever events or circumstances indicate that the carrying value may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset, or asset group, to the future undiscounted cash flows expected to be generated by the asset, or asset group. There were no events or changes in circumstances during the third quarter of 2019 which indicated that an assessment of the impairment of goodwill and intangible assets was required.

(16)     Revenue from Contracts with Customers (ASC 606)

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 represented a change in accounting principle that was expected to more closely align revenue recognition with the delivery of the Company's products and services and was expected to provide financial statement readers with enhanced disclosures. 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 to which the Company expects to be entitled to receive in exchange for these products and services.

During the three months ended September 30, 2019, the Company identified an out-of-period immaterial error related to the implementation and application of ASC 606 with respect to the recognition of revenue associated with sales-type leases. During the implementation of ASC 606 effective January 1, 2018, the Company treated the leased products and services for these contracts as single performance obligations as if they were not distinct in the context of the contract; however, the leased product portion should have continued to have been accounted for under ASC 840 (now ASC 842). In general, the error was to defer recognition of product revenue and associated expenses for sales-type leases rather than to recognize those items upon shipment. In accordance with ASC 250, Accounting Changes and Error Corrections, the immaterial cumulative correction was recorded during the three and nine months ended September 30, 2019. During the nine months ended September 30, 2019, the Company corrected 2019 sales-type leases deferred as of March 31, 2019 and June 30, 2019 by adjusting product sales, cost of product sales and net loss for each of the three months ended March 31, 2019 and June 30, 2019. During the three months ended September 30, 2019, the Company corrected the amount of revenue not previously recognized related to the deferral of the 2018 sales-type leases. During the three and nine months ended September 30, 2019, the Company also corrected sales-type leases in effect on January 1, 2018 through an adjustment to accumulated deficit as of January 1, 2019, because during the ASC 606 implementation, sales-type lease revenue and the associated cost had been deferred on the balance sheet as contract liabilities and assets. The cumulative correction of the immaterial error for the the three months ended September 30, 2019 had the effect of increasing net loss by $336, comprised primarily of a $514 increase in product sales, a $818 increase in costs of product sales, and a $20 increase in sales, marketing and support expenses. The cumulative correction for the nine months ended September 30, 2019 comprised of corrections made to earlier interim periods in 2019 as well as the impact discussed above related to the three months ended September 30, 2019, which had the effect of increasing net loss by $250, comprised primarily of a $1,350 increase in product sales, a $1,591 increase in costs of product sales, and a $15 increase in sales, marketing and support expenses. The portion of the correction for the nine months ended September 30, 2019 impacting earlier interim periods in 2019 was made by adjusting the three months ended March 31, 2019 and June 30, 2019, which had the effect of increasing net loss by $75 and decreasing net loss by $161 for the three months ended March 31, 2019 and June 30, 2019, respectively, comprised of a $341 and $495, respectively, increase in product sales and a $431 and $341, respectively, increase in costs of product sales. The following table reflects these financial statement line items as of and for the three months ended March 31, 2019 and June 30, 2019, as reported and as adjusted (in thousands):

 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2019
 
June 30, 2019
 
 
As reported
 
As adjusted
 
As reported
 
As adjusted
Product sales
 
$
12,874

 
$
13,215

 
$
14,694

 
$
15,189

Cost of product sales
 
7,853

 
8,284

 
12,308

 
12,649

Net loss
 
(6,179
)
 
(6,254
)
 
(3,454
)
 
(3,293
)

For the balance sheet impact of correcting January 1, 2019 sales-type leases in effect as of January 1, 2018, accumulated deficit was reduced by $1,680, comprised of a reduction in current contract assets of $2,132, non-current contract assets of $3,110, current contract liabilities of $2,970, non-current contract liabilities of $4,018 and non-current deferred income tax asset of $66. The following table reflects these financial statement line items as of March 31, 2019 and June 30, 2019, as reported and as adjusted:


24



 
 
 
 
 
 
 
At March 31, 2019
 
At June 30, 2019
 
 
As reported
 
As adjusted
 
As reported
 
As adjusted
Current contract assets
 
$
3,678

 
$
1,439

 
$
3,834

 
$
1,655

Non-current contract assets
 
7,342

 
3,912

 
7,577

 
3,747

Current contract liabilities
 
12,211

 
9,252

 
8,119

 
5,153

Non-current contract liabilities
 
9,634

 
5,263

 
10,056

 
5,198

Non-current deferred tax asset
 
1,747

 
1,692

 
868

 
820

(Accumulated deficit) retained earnings
 
(21,576
)
 
(19,971
)
 
25,600

 
27,365

 
The Company has evaluated this error and does not believe the amounts are material to any of the periods impacted.

Disaggregation of Revenue

The following table summarizes net sales from contracts with customers for the three and nine months ended September 30, 2019:

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