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, and inertial navigation products for both the defense and commercial markets. 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 and Internet services, and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. KVH sells its mobile connectivity products through an extensive international network of dealers and distributors. KVH also sells and leases products to service providers and directly to end users.
KVH’s mobile connectivity service sales represent primarily sales earned from satellite voice and Internet airtime services. KVH provides, for monthly fixed and usage-based fees, satellite connectivity services, including broadband Internet, data and Voice over Internet Protocol (VoIP) services, to its mini-VSAT Broadband customers. Our AgilePlans program, a mini-VSAT Broadband service offering, is a monthly subscription model providing global connectivity to commercial maritime customers. AgilePlans include hardware, installation, broadband Internet, 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 mini-VSAT Broadband 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 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.
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.
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 governments, both U.S. and foreign, 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 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 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, 2020 filed on March 03, 2021 with the Securities and Exchange Commission. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of operating results for the remainder of the year.
Use of Estimates
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.
(3) Accounting Standards Issued and Not Yet Adopted
ASC Update No. 2016-13, ASC Update No. 2018-19, ASC Update No. 2019-04, ASC Update No. 2019-05, ASC Update No. 2019-10, ASC Update No. 2019-11 and ASC Update No. 2020-02
In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Codification (ASC) Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The purpose of Update No. 2016-13 is to replace the 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 with respect 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.
In May 2019, the FASB issued ASC Update No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. 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.
In November 2019, the FASB issued ASC Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The amendments in this update change some effective dates for certain new accounting standards including those pertaining to Topic 326 discussed above, for certain types of entities.
In November 2019, the FASB issued ASC Update No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (Topic 326). The update is effective for entities that have adopted ASU 2016-13. The purpose of Update No. 2019-11 is to clarify the scope of the recovery guidance to purchased financial assets with credit deterioration.
In February 2020, the FASB issued ASC Update No. 2020-02, Financial Instruments – Credit Losses (Topic 326) and
Leases (Topic 842). The purpose of Update No. 2020-02 is to clarify the scope and interpretation of the standard.
As a smaller reporting entity the effective date for Topic 326 will be the fiscal year beginning after December 15, 2022. The adoption of Update Nos. 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-20 is not expected to have a material impact on the Company's financial position or results of operations.
There are no other recent accounting pronouncements issued by the FASB that the Company expects would have a material impact on the Company's financial statements.
(4) Marketable Securities
Marketable securities as of September 30, 2021 and December 31, 2020 consisted of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
17,146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,146
|
|
Total marketable securities designated as available-for-sale
|
$
|
17,146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Money market mutual funds
|
$
|
20,142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,142
|
|
United States treasuries
|
4,999
|
|
|
—
|
|
|
—
|
|
|
4,999
|
|
|
|
|
|
|
|
|
|
Total marketable securities designated as available-for-sale
|
$
|
25,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,141
|
|
The effective maturity date of the United States treasuries is less than one year.
Interest income from marketable securities was $1 and $5 during the three months ended September 30, 2021 and 2020, respectively, and $5 and $132 during the nine months ended September 30, 2021 and 2020, 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 was $1,031 and $899, excluding $11 and $13 of compensation charges related to our Amended and Restated 1996 Employee Stock Purchase Plan, or the ESPP, for the three months ended September 30, 2021 and 2020, respectively, and $2,988 and $2,430, excluding $41 and $29 of compensation charges related to ESPP, for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was $4,045 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.62 years. As of September 30, 2021, there was $4,469 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.4 years.
Stock Options
During the three months ended September 30, 2021, the Company issued 18 shares of common stock upon the exercise of stock options and received $143 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, 2021, no stock options were granted and 48 stock options expired, were canceled or were forfeited.
During the nine months ended September 30, 2021, the Company issued 263 shares of common stock upon the exercise of stock options and received $2,615 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, 2021, 496 stock options were granted and 126 stock options expired, were canceled or were forfeited. During the nine months ended September 30, 2020, 654 stock options were granted. 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, 2021 and 2020 are as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
Risk-free interest rate
|
0.92
|
%
|
|
0.21
|
%
|
Expected volatility
|
44.98
|
%
|
|
44.03
|
%
|
Expected life (in years)
|
4.28
|
|
4.29
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
As of September 30, 2021, there were 2,142 options outstanding with a weighted average exercise price of $9.92 per share and 846 options exercisable with a weighted average exercise price of $9.33 per share.
Restricted Stock
During the three months ended September 30, 2021, 60 shares of restricted stock were granted with a weighted average grant date fair value of $11.00 per share and 17 shares of restricted stock were forfeited. Additionally, during the three months ended September 30, 2021, 68 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, 2021, 217 shares of restricted stock were granted with a weighted average grant date fair value of $12.23 per share and 37 shares of restricted stock were forfeited. Additionally, during the nine months ended September 30, 2021, 228 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, 2021, there were 509 shares of restricted stock outstanding that were still subject to service-based vesting conditions.
As of September 30, 2021, 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.
(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 and nine months ended September 30, 2021, 26 shares were issued under the ESPP plan. During the three and nine months ended September 30, 2020, 0 and 20 shares were issued under the ESPP plan, respectively. The Company recorded compensation charges related to the ESPP of $11 and $13 for the three months ended September 30, 2021 and 2020, respectively, and $41 and $29 for the nine months ended September 30, 2021 and 2020, respectively.
(c) Stock-Based Compensation Expense
The following table presents stock-based compensation expense, including under the ESPP, in the Company's consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Cost of product sales
|
$
|
78
|
|
|
$
|
41
|
|
|
$
|
194
|
|
|
$
|
115
|
|
Cost of service sales
|
3
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Research and development
|
150
|
|
|
118
|
|
|
491
|
|
|
408
|
|
Sales, marketing and support
|
239
|
|
|
163
|
|
|
664
|
|
|
456
|
|
General and administrative
|
572
|
|
|
590
|
|
|
1,672
|
|
|
1,480
|
|
|
$
|
1,042
|
|
|
$
|
912
|
|
|
$
|
3,029
|
|
|
$
|
2,459
|
|
(d) Accumulated Other Comprehensive Income (Loss) (AOCI)
Comprehensive income (loss) includes net income (loss) and unrealized gains and losses from foreign currency translation. 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, 2021 and 2020 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Total Accumulated Other Comprehensive Loss
|
Balance, June 30, 2021
|
$
|
(2,968)
|
|
|
$
|
(2,968)
|
|
Other comprehensive loss
|
(370)
|
|
|
(370)
|
|
Net other comprehensive loss
|
(370)
|
|
|
(370)
|
|
Balance, September 30, 2021
|
$
|
(3,338)
|
|
|
$
|
(3,338)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
|
|
Unrealized Loss on Available for Sale Marketable Securities
|
|
Total Accumulated Other Comprehensive Loss
|
Balance, June 30, 2020
|
$
|
(5,377)
|
|
|
|
|
$
|
—
|
|
|
$
|
(5,377)
|
|
Other comprehensive income (loss)
|
1,103
|
|
|
|
|
(1)
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
1,103
|
|
|
|
|
(1)
|
|
|
1,102
|
|
Balance, September 30, 2020
|
$
|
(4,274)
|
|
|
|
|
$
|
(1)
|
|
|
$
|
(4,275)
|
|
The balances for the nine months ended September 30, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
|
|
Total Accumulated Other Comprehensive Loss
|
Balance, December 31, 2020
|
$
|
(3,232)
|
|
|
|
|
$
|
(3,232)
|
|
Other comprehensive loss
|
(106)
|
|
|
|
|
(106)
|
|
Net other comprehensive loss
|
(106)
|
|
|
|
|
(106)
|
|
Balance, September 30, 2021
|
$
|
(3,338)
|
|
|
|
|
$
|
(3,338)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
|
|
Unrealized Loss on Available for Sale Marketable Securities
|
|
Total Accumulated Other Comprehensive Loss
|
Balance, December 31, 2019
|
$
|
(2,767)
|
|
|
|
|
$
|
—
|
|
|
$
|
(2,767)
|
|
Other comprehensive loss
|
(1,507)
|
|
|
|
|
(1)
|
|
|
(1,508)
|
|
|
|
|
|
|
|
|
|
Net other comprehensive loss
|
(1,507)
|
|
|
|
|
(1)
|
|
|
(1,508)
|
|
Balance, September 30, 2020
|
$
|
(4,274)
|
|
|
|
|
$
|
(1)
|
|
|
$
|
(4,275)
|
|
(6) Net Income (Loss) per Common Share
Basic net income (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 nine months ended September 30, 2021, since there was a net loss, the Company excluded all 756 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, 2020, since there was a net loss, the Company excluded all 1,705 and 1,430, 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 is as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Weighted average common shares outstanding—basic
|
18,341
|
|
|
17,723
|
|
|
18,152
|
|
|
17,634
|
|
Dilutive common shares issuable in connection with stock plans
|
225
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
18,566
|
|
|
17,723
|
|
|
18,152
|
|
|
17,634
|
|
(7) Inventories
Inventories, net are stated at the lower of cost and net realizable value using the first-in first-out costing method. Inventories as of September 30, 2021 and December 31, 2020 include the costs of material, labor, and factory overhead. Components of inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Raw materials
|
$
|
15,024
|
|
|
$
|
13,957
|
|
Work in process
|
4,383
|
|
|
3,996
|
|
Finished goods
|
5,232
|
|
|
6,721
|
|
|
$
|
24,639
|
|
|
$
|
24,674
|
|
(8) Property and Equipment
Property and equipment, net, as of September 30, 2021 and December 31, 2020 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Land
|
$
|
3,828
|
|
|
$
|
3,828
|
|
Building and improvements
|
24,261
|
|
|
24,197
|
|
Leasehold improvements
|
473
|
|
|
482
|
|
Machinery and equipment
|
16,584
|
|
|
15,536
|
|
Revenue-generating assets
|
61,527
|
|
|
56,336
|
|
Office and computer equipment
|
14,751
|
|
|
13,855
|
|
Motor vehicles
|
31
|
|
|
31
|
|
|
121,455
|
|
|
114,265
|
|
Less accumulated depreciation
|
(61,491)
|
|
|
(57,992)
|
|
|
$
|
59,964
|
|
|
$
|
56,273
|
|
Depreciation expense was $3,532 and $2,624 for the three months ended September 30, 2021 and 2020, respectively, and $9,939 and $7,537 for the nine months ended September 30, 2021 and 2020, 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, 2021 and December 31, 2020, the Company had accrued product warranty costs of $1,418 and $1,812, respectively.
The following table summarizes product warranty activity during 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
2021
|
|
2020
|
Beginning balance
|
$
|
1,812
|
|
|
$
|
2,194
|
|
Charges to expense
|
307
|
|
|
1,039
|
|
Costs incurred
|
(701)
|
|
|
(1,100)
|
|
Ending balance
|
$
|
1,418
|
|
|
$
|
2,133
|
|
(10) Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
PPP loan
|
$
|
—
|
|
|
$
|
6,927
|
|
Total long-term debt
|
—
|
|
|
6,927
|
|
Less amounts classified as current
|
—
|
|
|
4,992
|
|
Long-term debt, excluding current portion
|
$
|
—
|
|
|
$
|
1,935
|
|
Paycheck Protection Program Loan
In May 2020, the Company received a $6,927 loan (the PPP Loan) from Bank of America, N.A., (the Lender) under the Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (as modified by the Paycheck Protection Flexibility Act of 2020, the CARES Act) and is administered by the U.S. Small Business Administration (the SBA).
The term of the PPP Loan is two years from the funding date of the PPP Loan. The interest rate on the PPP Loan is 1.00%. Under the terms of the PPP Loan, interest accrues from the funding date of the PPP Loan but is deferred until the lender determines the amount of loan forgiveness. Principal and interest on the PPP Loan will be payable in monthly installments, except that the Company will not be obligated to repay amounts that are forgiven. The promissory note evidencing the PPP Loan contains various events of default relating to, among other things, insolvency, bankruptcy or the like, payment defaults under the PPP Loan or other loans by the lender, certain defaults under other indebtedness, breach of representations and warranties, the occurrence of a material adverse event, changes in ownership, or breach of other provisions of the promissory note. Upon an event of default, all principal and accrued interest on the PPP Loan and any and all other loans made by the lender to the Company would at the lender’s option become immediately due and payable. The Company agreed that it will not receive any other loan under the Paycheck Protection Program.
Pursuant to the terms of the CARES Act, the Company is permitted to apply for forgiveness for all or a portion of the PPP Loan. In August 2021, the Company applied for forgiveness of the full amount of the PPP Loan. On September 24, 2021, the Company received notification from the Lender that, on September 19, 2021, the SBA had determined that the PPP Loan forgiveness application was approved and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA. The forgiveness of the PPP Loan is recognized in Other income (expense), net in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2021.
Term Note and Line of Credit
Effective October 30, 2018, the Company entered into an amended and restated three-year senior secured 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 indebtedness under the Company’s then-outstanding senior credit facility agreement. The Company's obligations under the 2018 Credit Agreement are secured by substantially all of its assets and the pledge of equity interests in certain of its subsidiaries.
On June 27, 2019, the Company used the proceeds of the sale of its former Videotel business unit to repay in full the then-outstanding balance of $21,375 under the 2018 Term Loan and to repay $13,000 of the then-outstanding balance under the 2018 Revolver. As of September 30, 2021, no amounts were outstanding under the 2018 Revolver.
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. As of September 30, 2021, the full balance of the $15,000 facility was available for borrowing.
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 could not exceed 2.50:1.00 through December 31, 2020 and may not exceed 2.00:1.00 after December 31, 2020. The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00.
On July 30, 2020, the Company amended the 2018 Credit Agreement to reflect the incurrence of the PPP Loan. Under the amended facility, the principal and interest on the PPP Loan are not included in the maximum Consolidated Leverage Ratio or the minimum Consolidated Fixed Charge Coverage Ratio calculations except as to any portion of the PPP Loan that is not ultimately forgiven. In September 2021, the PPP Loan was forgiven in full.
On October 29, 2021, the Company amended the 2018 Credit Agreement to maintain the $15,000 2018 Revolver, extend the maturity date of the 2018 Revolver to October 28, 2022, eliminate the Consolidated Fixed Charge Coverage Ratio financial covenant, add a minimum trailing four-quarter Consolidated Adjusted EBITDA financial covenant of $3,000, modify the definition of Consolidated Adjusted EBITDA, modify the interest rate margins and certain lender fees, and transition the interest rate provisions based on LIBOR to the Bloomberg Short Term Bank Yield Index. In addition, Bank of America became the sole lender under the 2018 Credit Agreement.
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.
(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.
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 16% and 18% of the Company's consolidated net sales for the three months ended September 30, 2021 and 2020, respectively, and 17% and 18% of the Company's consolidated net sales for the nine months ended September 30, 2021 and 2020, respectively. Service sales of mini-VSAT Broadband airtime service accounted for 57% and 53% of the Company's consolidated net sales for the three months ended September 30, 2021 and 2020, respectively, and 54% and 53% of the Company's consolidated net sales for the nine months ended September 30, 2021 and 2020, respectively.
The inertial navigation segment manufactures and distributes a portfolio of digital compass and 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 (TACNAV) 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 18% of the Company's consolidated net sales for the three months ended September 30, 2021 and 2020, respectively, and 16% of the Company's consolidated net sales for both the nine months ended September 30, 2021 and 2020.
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 Singapore, Canada, Europe, countries in Africa, other Asia/Pacific countries, the Middle East, and India. Revenues are based upon customer location and internationally represented 58% and 59% of the Company's consolidated net sales for the three months ended September 30, 2021 and 2020, respectively, and 60% and 58% of the Company's consolidated net sales for the nine months ended September 30, 2021 and 2020, respectively. Sales to Singapore customers represented 11% of the Company's consolidated net sales for the three months ended September 30, 2021. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended September 30, 2021. No individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended September 30, 2020. Sales to Singapore customers represented 11% and 10% of the Company's consolidated net sales for the nine months ended September 30, 2021 and 2020, respectively. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the nine months ended September 30, 2021 and 2020.
As of September 30, 2021 and December 31, 2020, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets.
Net sales and operating income (loss) for the Company's reporting segments and the Company's income (loss) before income tax expense (benefit) for the three and nine months ended September 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net sales:
|
|
|
|
|
|
|
|
Mobile connectivity
|
$
|
34,388
|
|
|
$
|
31,383
|
|
|
$
|
98,650
|
|
|
$
|
89,465
|
|
Inertial navigation
|
8,596
|
|
|
9,729
|
|
|
29,989
|
|
|
25,141
|
|
Consolidated net sales
|
$
|
42,984
|
|
|
$
|
41,112
|
|
|
$
|
128,639
|
|
|
$
|
114,606
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Mobile connectivity
|
$
|
1,545
|
|
|
$
|
2,285
|
|
|
$
|
1,728
|
|
|
$
|
570
|
|
Inertial navigation
|
314
|
|
|
1,408
|
|
|
3,049
|
|
|
741
|
|
Subtotal
|
1,859
|
|
|
3,693
|
|
|
4,777
|
|
|
1,311
|
|
Unallocated, net
|
(5,088)
|
|
|
(4,196)
|
|
|
(17,415)
|
|
|
(12,898)
|
|
Loss from operations
|
(3,229)
|
|
|
(503)
|
|
|
(12,638)
|
|
|
(11,587)
|
|
Net interest and other income (expense)
|
7,263
|
|
|
(143)
|
|
|
6,896
|
|
|
1,721
|
|
Income (loss) before income tax expense (benefit)
|
$
|
4,034
|
|
|
$
|
(646)
|
|
|
$
|
(5,742)
|
|
|
$
|
(9,866)
|
|
Depreciation expense and amortization expense for the Company's reporting segments for the three and nine months ended September 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Depreciation expense:
|
|
|
|
|
|
|
|
Mobile connectivity
|
$
|
2,963
|
|
|
$
|
2,160
|
|
|
$
|
8,263
|
|
|
$
|
6,159
|
|
Inertial navigation
|
397
|
|
|
318
|
|
|
1,165
|
|
|
934
|
|
Unallocated
|
172
|
|
|
146
|
|
|
511
|
|
|
444
|
|
Total consolidated depreciation expense
|
$
|
3,532
|
|
|
$
|
2,624
|
|
|
$
|
9,939
|
|
|
$
|
7,537
|
|
|
|
|
|
|
|
|
|
Amortization expense:
|
|
|
|
|
|
|
|
Mobile connectivity
|
$
|
277
|
|
|
$
|
251
|
|
|
$
|
833
|
|
|
$
|
740
|
|
Inertial navigation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unallocated
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consolidated amortization expense
|
$
|
277
|
|
|
$
|
251
|
|
|
$
|
833
|
|
|
$
|
740
|
|
(12) 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.
(13) Share Buyback Program
On October 4, 2019, the Company's Board of Directors authorized a share repurchase program pursuant to which the Company was authorized to purchase up to 1,000 shares of the Company’s common stock. The program expired on October 4, 2020. Under the repurchase program, the Company, at management’s discretion, was authorized to repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement.
In January 2020, the Company repurchased 36 shares of common stock in open market transactions at a cost of approximately $390. The total amount the Company repurchased under the repurchase program since the inception of the October 4, 2019 repurchase program was 151 shares of common stock for an approximate cost of $1,690. There were no repurchase programs outstanding during the nine months ended September 30, 2021.
(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 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, 2021 and December 31, 2020 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
17,146
|
|
|
$
|
17,146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Valuation
Technique
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
20,142
|
|
|
$
|
20,142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a)
|
United States treasuries
|
4,999
|
|
|
4,999
|
|
|
—
|
|
|
—
|
|
|
(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 an impairment exists. During 2020, the Company recorded an impairment charge of $10,490 to goodwill and intangible assets. There was no additional impairment of the Company's non-financial assets noted as of September 30, 2021. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis.
(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, 2021:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
Balance at December 31, 2020
|
|
$
|
6,592
|
|
Foreign currency translation adjustment
|
|
(30)
|
|
Balance at September 30, 2021
|
|
$
|
6,562
|
|
Intangible Assets
The changes in the carrying amount of intangible assets during the nine months ended September 30, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
Balance at December 31, 2020
|
|
$
|
2,254
|
|
Amortization expense
|
|
(833)
|
|
Intangible assets acquired in asset acquisition
|
|
47
|
|
|
|
|
Foreign currency translation adjustment
|
|
(6)
|
|
Balance at September 30, 2021
|
|
$
|
1,462
|
|
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 were amortized on a straight-line basis over an estimated useful life of 7 years. 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. Due to the impairment of distribution rights during the Company's 2020 annual impairment test, the estimated useful life of distribution rights was reduced from 15 years to 1 year. The intangibles arising from the KVH Media Group acquisition were recorded in pounds sterling and fluctuations in exchange rates 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 includes a component of contingent consideration under which the Company is 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, 2021, the carrying value of the intangible assets acquired in the asset acquisition was $393. 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. An additional $47 and $58 of consideration was earned under the contingent consideration arrangement during the nine months ended September 30, 2021 and 2020, respectively.
Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at September 30, 2021 and December 31, 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
September 30, 2021
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
8,014
|
|
|
$
|
6,552
|
|
|
$
|
1,462
|
|
Distribution rights
|
|
315
|
|
|
315
|
|
|
—
|
|
Internally developed software
|
|
446
|
|
|
446
|
|
|
—
|
|
Proprietary content
|
|
153
|
|
|
153
|
|
|
—
|
|
Intellectual property
|
|
2,284
|
|
|
2,284
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
11,212
|
|
|
$
|
9,750
|
|
|
$
|
1,462
|
|
December 31, 2020
|
|
|
|
|
|
|
Subscriber relationships
|
|
$
|
7,977
|
|
|
$
|
5,958
|
|
|
$
|
2,019
|
|
Distribution rights
|
|
311
|
|
|
76
|
|
|
235
|
|
Internally developed software
|
|
446
|
|
|
446
|
|
|
—
|
|
Proprietary content
|
|
153
|
|
|
153
|
|
|
—
|
|
Intellectual property
|
|
2,284
|
|
|
2,284
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
11,171
|
|
|
$
|
8,917
|
|
|
$
|
2,254
|
|
Amortization expense related to intangible assets was $277 and $251 for the three months ended September 30, 2021 and 2020, respectively, and $833 and $740 for the nine months ended September 30, 2021 and 2020, respectively. Amortization expense was categorized as general and administrative expense.
As of September 30, 2021, the total weighted average remaining useful lives of the definite-lived intangible assets was 1.8 years.
Estimated future amortization expense remaining at September 30, 2021 for intangible assets acquired was as follows:
Years ending December 31,
|
|
|
|
|
|
Remainder of 2021
|
$
|
194
|
|
2022
|
774
|
|
2023
|
312
|
|
2024
|
57
|
|
2025
|
57
|
|
Thereafter
|
68
|
|
Total future amortization expense
|
$
|
1,462
|
|
For definite-lived 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. The COVID-19 pandemic has impacted various aspects of the Company's operations, and the Company has been monitoring the impact of this global crisis carefully. The Company has particularly monitored the operations of KVH Media Group, which depends heavily on travel and travel-related industries. The revenues and cash flows of KVH Media Group have been significantly impacted by the global reduction in travel since the start of the pandemic. Prior to the Company's 2020 annual impairment test in the fourth quarter of 2020, based on the Company's quarterly review of the impact of this global crisis on the Company's forecasted revenues and cash flows, there were no indication of impairment to the carrying value of goodwill or other intangible assets. However, in the fourth quarter of 2020, there were increases in the number of reported COVID-19 cases, and substantial shutdowns were reinstated in the United States, UK and Europe, which caused continued disruptions to our KVH Media Group business as the global travel and related industries remained at historically depressed levels. In response to the impact of the pandemic, particularly with respect to the Company's KVH Media Group business, during the Company's 2020 annual budgeting and long-term planning process, the Company conducted detailed discussions with many of the Company's largest customers in the KVH Media Group to validate the Company's assumptions, which indicated further expected delays in recovery, and certain areas of the KVH Media Group business that may not recover completely or at all. Accordingly, the Company updated its long-term revenue and cash flow forecast to reflect these most recent observations. Based on the Company's other long-lived asset impairment analysis and annual goodwill impairment test, the Company recognized an intangible asset impairment charge of $1,758 and a goodwill impairment charge of $8,732 for the year ended December 31, 2020 related to KVH Media Group.
As of September 30, 2021, the Company has reviewed, and will continue to review, the forecasted revenues and cash flows of our content business for possible indications that the goodwill or other intangible assets associated with this component of our business might be impaired. However, it is uncertain how long the global pandemic will continue to disrupt global businesses, particularly travel, and therefore it is possible that the value of these assets may become impaired in the future if the COVID-19 pandemic worsens or continues for a prolonged period. The Company's review indicates that, as of September 30, 2021, there are no indications of further impairment.
(16) Revenue from Contracts with Customers (ASC 606)
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
The following table summarizes net sales from contracts with customers for the three and nine months ended September 30, 2021 and 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Mobile connectivity product, transferred at point in time
|
|
$
|
6,361
|
|
|
$
|
6,671
|
|
|
$
|
19,741
|
|
|
$
|
18,737
|
|
Mobile connectivity product, transferred over time
|
|
490
|
|
|
549
|
|
|
2,047
|
|
|
1,778
|
|
Mobile connectivity service
|
|
27,537
|
|
|
24,163
|
|
|
76,862
|
|
|
68,950
|
|
Inertial navigation product
|
|
8,388
|
|
|
9,430
|
|
|
29,152
|
|
|
23,178
|
|
Inertial navigation service
|
|
208
|
|
|
299
|
|
|
837
|
|
|
1,963
|
|
Total net sales
|
|
$
|
42,984
|
|
|
$
|
41,112
|
|
|
$
|
128,639
|
|
|
$
|
114,606
|
|
|
|
|
|
|
|
|
|
|
Revenue recognized during the three months ended September 30, 2021 and 2020 from amounts included in contract liabilities at the beginning of the period was $430 and $523, respectively. Revenue recognized during the nine months ended September 30, 2021 and 2020 from amounts included in contract liabilities at the beginning of the period was $1,899 and $1,739, respectively.
For mobile connectivity product sales, the delivery of the Company’s performance obligations, are generally transferred to the customer, and associated revenue is recognized, at a point in time, with the exception of certain mini-VSAT contracts which are transferred to customers over time. For mobile connectivity service sales, the delivery of the Company’s performance obligations are transferred to the customer, and associated revenue is recognized, over time. For inertial navigation product sales, the delivery of the Company’s performance obligations are generally transferred to the customer, and associated revenue is recognized, at a point in time. For inertial navigation service sales, the Company's performance obligations are generally transferred to customers, and associated revenue is recognized, over time.
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 potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations for future collectability concerns. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral.
No single customer accounted for 10% or more of consolidated net sales for the three or nine months ended September 30, 2021 or 2020 or accounts receivable at September 30, 2021 or December 31, 2020.
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.
(17) Income Taxes
The Company’s effective tax rate for the three and nine months ended September 30, 2021 was 0.4% and 1.0%, respectively, compared with 16.9% and (4.4)% for the corresponding periods in the prior year, respectively. 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, 2021 and 2020, the effective tax rates were lower than the statutory tax rate primarily due to the Company maintaining a valuation allowance reserve on its US deferred tax assets and to the composition of income from foreign jurisdictions taxed at lower rates.
As of September 30, 2021 and December 31, 2020, the Company had reserves for uncertain tax positions of $604 and $560, respectively. There were no material changes during the nine months ended September 30, 2021 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, 2021 may decrease $26 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 2017, 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.
(18) Leases
The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense was $920 and $435 for the three months ended September 30, 2021 and 2020, respectively, and was $2,824 and $2,688 for the nine months ended September 30, 2021 and 2020, respectively. Short-term operating lease costs were $66 and $65 for the three months ended September 30, 2021 and 2020, respectively, and were $181 and $188 for the nine months ended September 30, 2021 and 2020, respectively. Sublease income was $34 for both the three months ended September 30, 2021 and 2020 and was $101 for both the nine months ended September 30, 2021 and 2020. Maturities of lease liabilities as of September 30, 2021 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows:
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|
|
|
|
|
Remainder of 2021
|
$
|
906
|
|
2022
|
1,649
|
|
2023
|
751
|
|
2024
|
411
|
|
2025 and thereafter
|
249
|
|
Total minimum lease payments
|
$
|
3,966
|
|
|
|
Less amount representing interest
|
$
|
(254)
|
|
Present value of net minimum operating lease payments
|
$
|
3,712
|
|
Less current installments of obligation under current-operating lease liabilities
|
$
|
2,012
|
|
Obligations under long-term operating lease liabilities, excluding current installments
|
$
|
1,700
|
|
|
|
Weighted-average remaining lease term - operating leases (years)
|
2.24
|
Weighted-average discount rate - operating leases
|
5.50
|
%
|
During the first quarter of 2018, the Company entered into a five-year financing lease for three satellite hubs for its HTS network. During the first quarter of 2021, the terms of this lease were adjusted and the Company discontinued use of two satellite hubs and was released from the related payment obligation in exchange for additional satellite service capacity. As of September 30, 2021, the gross cost and accumulated amortization associated with this lease for the remaining satellite hub is included in revenue generating assets and amounted to $1,268 and $664, respectively. The obligation under capital leases are stated at the present value of minimum lease payments.
The property and equipment held under this financing lease are amortized on a straight-line basis over the seven-year estimated useful life of the asset, since the lease meets the bargain purchase option criteria. Amortization of assets held under financing leases is included within depreciation expense. Depreciation expense for the remaining capital assets was $45 for both the three months ended September 30, 2021 and 2020 and was $136 for both the nine months ended September 30, 2021 and 2020.
The future minimum lease payments under this financing lease as of September 30, 2021 are:
|
|
|
|
|
|
Remainder of 2021
|
$
|
66
|
|
2022
|
264
|
|
2023
|
22
|
|
|
|
Total minimum lease payments
|
$
|
352
|
|
|
|
Less amount representing interest
|
$
|
(4)
|
|
Present value of net minimum financing lease payments
|
$
|
348
|
|
Less current installments of obligation under accrued other
|
$
|
260
|
|
Obligations under other long-term liabilities, excluding current installments
|
$
|
88
|
|
|
|
Weighted-average remaining lease term - finance leases (years)
|
1.42
|
Weighted-average discount rate - finance leases
|
1.53
|
%
|
Lessor
The Company enters into leases with certain customers primarily for the TracPhone mini-VSAT systems. These leases are classified as sales-type leases as title of 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 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 $3,962 as of September 30, 2021 and the non-current portion of the net investment in these leases was $6,905 as of September 30, 2021. 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 $218 and $670 during the three and nine months ended September 30, 2021, respectively, and was $223 and $623 during the three and nine months ended September 30, 2020.
The future undiscounted cash flows from these leases as of September 30, 2021 are:
|
|
|
|
|
|
Remainder of 2021
|
$
|
1,726
|
|
2022
|
3,869
|
|
2023
|
3,286
|
|
2024
|
2,344
|
|
2025
|
963
|
|
2026
|
158
|
Total undiscounted cash flows
|
$
|
12,346
|
|
|
|
Present value of lease payments
|
$
|
10,867
|
|
Difference between undiscounted cash flows and discounted cash flows
|
$
|
1,479
|
|
In 2021, the Company entered into three-year leases for its TracPhone mini-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, 2021, the gross costs and accumulated depreciation associated with these operating leases are included in revenue generating assets and amounted to $1,060 and $89, respectively. They are depreciated on a straight-line basis over a five-year estimated useful life. Depreciation expense for these assets was $43 and $88 for the three and nine months ended September 30, 2021, respectively.
Lease revenue recognized was $68 and $141 for the three and nine months ended September 30, 2021, respectively.
As of September 30, 2021, minimum future lease payments to be received on the operating leases are as follows:
|
|
|
|
|
|
2021
|
$
|
83
|
|
2022
|
332
|
|
2023
|
331
|
|
2024
|
108
|
|
Total
|
$
|
854
|
|