Notes to Consolidated Interim Financial Statements
(Unaudited, all amounts in thousands except per share amounts)
(1) Description of Business
KVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile connectivity products and services for the marine and land markets.
KVH’s satellite-only and hybrid products enable marine customers to receive data, voice, and value-added services via satellite, cellular, and shore-based Wi-Fi networks onboard commercial, leisure, and military/government vessels. In addition, the Company’s in-motion television terminals permit customers to receive live digital television via regional satellite services in marine vessels, recreational vehicles, buses and automobiles. KVH sells its products through an extensive international network of dealers and distributors. KVH also sells and leases products to service providers and end users.
KVH’s service sales represent primarily revenue earned from satellite Internet airtime services. KVH provides, for monthly fixed and per-usage fees, satellite connectivity encompassing broadband Internet and Voice over Internet Protocol (VoIP) services, to its TracNet-H series and TracPhone V-series customers via KVH’s global high-throughput satellite (HTS) network. Cellular airtime service increasingly supplements KVH’s satellite-only airtime revenue following the July 2022 launch of the KVH ONE hybrid network and TracNet H-series terminals. This product and service combination integrates global satellite service with KVH-provided cellular service in more than 150 countries, along with shore-based Wi-Fi access.
AgilePlans, KVH’s connectivity as a service offering, is a monthly subscription model that provides global connectivity to commercial maritime customers. The subscription includes the choice of satellite-only and hybrid terminals, airtime data service, VoIP, daily news, subsidized shipping and installation, and global support for a monthly fee with no minimum contract commitment. KVH offers AgilePlans subscribers a variety of airtime data plans with varying data speeds and fixed data usage levels with per megabyte overage charges. These airtime plans are similar to those the Company offers to customers who elect to purchase or lease a TracNet H-series or TracPhone V-series terminal.
The Company recognizes the monthly AgilePlans subscription fee as service revenue over the service delivery period. The Company retains ownership of the hardware it provides to AgilePlans customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. KVH records the cost of the hardware used by AgilePlans customers as revenue-generating assets and depreciates the cost over an estimated useful life of five years. Since the Company is retaining ownership of the hardware, it does not accrue any warranty costs for AgilePlans hardware; however, the Company expenses any maintenance costs on the hardware in the period these costs are incurred.
Service sales also include the distribution of commercially licensed entertainment, including news, sports, music, and movies to commercial customers in the maritime, hotel, and retail markets through the KVH Media Group, along with supplemental value-added services. In addition, KVH 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. Service sales also include sales from product repairs and extended warranty sales.
On August 9, 2022, the Company sold its inertial navigation business to EMCORE Corporation for gross proceeds of $55,000, less specified deductions and a holdback of $1,000 and subject to a working capital adjustment. The holdback was released to the Company on August 17, 2022. On August 9, 2022, the Company also entered into a Transition Services Agreement with EMCORE, pursuant to which the Company agreed to provide certain transition services to support the continued operation of the inertial navigation business for six months following the sale with two extension options of three months each. The fee is comprised of both fixed monthly fees of approximately $100 as well as variable amounts for certain additional services with escalation increases on the fixed and variable rates for each extension option. The working capital adjustment is expected to be finalized in the fourth quarter of 2022. 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 discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. Please see Note 18 for the discontinued operations disclosures.
(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 2021 consolidated interim financial statements reflect the sale of the inertial navigation business as discontinued operations. See Notes 1 and 18 for further information on the sale of the inertial navigation business.
The consolidated interim financial statements have not been audited by the Company’s independent registered public accounting firm and include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods presented. These consolidated interim financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2021 filed on March 11, 2022 with the Securities and Exchange Commission. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of operating results for the remainder of the year.
Significant Estimates and Assumptions and Other Significant Non-Recurring Transactions
The preparation of interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim financial statements and the reported amounts of sales and expenses during the reporting periods. As described in the Company’s annual report on Form 10-K, the estimates and assumptions used by management affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of long-lived assets, including goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, forfeitures and key valuation assumptions for its share-based awards, estimated fulfillment costs for warranty obligations, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance, and the valuation of right-of-use assets and lease liabilities.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.
Management Transition and Restructuring
On March 7, 2022, the Company announced that its President and Chief Executive Officer, Martin Kits van Heyningen, was retiring from his executive and Board roles after more than 40 years of service and assuming a consulting position with the Company. Brent C. Bruun, its then Chief Operating Officer, was appointed as its interim President and Chief Executive Officer. Subsequently, on June 15, 2022, he was appointed as its President and Chief Executive Officer and as a Class II member of the Board of Directors. As of March 31, 2022, the Company accrued approximately $539 in consulting fees associated with a maximum of 50 hours of transition services through March 2023, which is being paid to Mr. Kits van Heyningen over the 12 months following his retirement. Approximately $269 is accrued as of September 30, 2022. In addition, the Company agreed to a separation payment of $201, which was inclusive of any amount which he may have otherwise earned under the executive bonus plan for 2021, which was paid in April 2022. The associated expenses were included in general and administrative expenses in the accompanying consolidated statements of operations. There were also modifications to Mr. Kits van Heyningen's stock option and restricted stock awards. Please see Note 5 for further discussion.
In March 2022, the Company also restructured its operations to reduce costs and better pursue a more focused strategy. The Company reduced its workforce by approximately 10% and began incurring reduced expenses from these actions beginning in the second quarter of 2022. For the three months ended September 30, 2022, the Company incurred $83 in severance payments and other employee benefit costs for employees who had a severance date of December 31, 2022, none of which was paid as of September 30, 2022. For the nine months ended September 30, 2022, the Company incurred $1,901 in severance and health insurance costs and $327 in legal and advisory fees. The combined expense of $2,228 was included in the
financial statement line items of the accompanying consolidated statements of operations as follows: costs of product sales of $17, costs of service sales of $55, research and development of $392, sales, marketing and support of $977, and general and administrative expenses of $787. The Company expects to incur an additional $83 in severance payments and other employee benefit costs through December 31, 2022 arising from this restructuring. The Company also modified impacted employee's stock option and restricted stock awards. Please see Note 5 for further discussion.
For the three months ended September 30, 2022, we restructured our foreign operations by closing our India and Cyprus offices and our Denmark warehouse to reduce costs. Approximately $370 of severance payments, other employee benefits, and legal and advisory fees were incurred for the three and nine months ended September 30, 2022. We expect to incur an additional $100 in severance payments and other employee benefit costs through December 31, 2022 arising from this restructuring.
Dispositions; Termination of Credit Facility
On April 29, 2022, KVH Media Group Limited, the Company's wholly owned subsidiary, sold its subsidiary KVH Media Group Entertainment Limited for net cash proceeds of $2,378. This transaction did not meet the criteria for reporting as discontinued operations under ASC 205-20. The Company recorded a gain on the sale of approximately $630, which is recorded in other income, net in the accompanying consolidated statements of operations. See Note 14 for the reduction of goodwill and intangibles associated with the KVH Media Group reporting unit as it relates to the sale of this subsidiary.
On August 9, 2022, the Company sold its inertial navigation business to EMCORE Corporation. Please see Notes 1 and 18 for further discussion.
On August 9, 2022, the Company also terminated its senior secured credit facility agreement (the 2018 Credit Agreement) and the related security and pledge agreements with Bank of America, N.A., as Administrative Agent. At the time of termination, no borrowings were outstanding under the 2018 Credit Agreement. With the termination of this agreement, all associated liens were released.
Executive Employment Agreements
In May 2022, the Company entered into executive employment agreements with each of Brent C. Bruun, Roger A. Kuebel, Felise Feingold and Robert Balog in order to retain their services and provide them with certain benefits in the event that the Company terminates the executive’s employment without cause (as defined in the agreement) or the executive terminates his or her employment for good reason (as defined in the agreement) (either such termination, a “Qualifying Termination”), including following a change of control. The terms of the agreements are substantially identical except as to title, salary, target bonus and reporting responsibilities. The agreements provide that, if the executive continues to serve as an employee through December 31, 2022 (the “Retention Date”), the Company will pay the executive a retention bonus equal to 75% of the executive’s base salary on the agreement date, and the Company will accelerate the vesting of the executive’s equity awards that would otherwise have vested in the twelve months after the Retention Date. Please see Note 5 for further discussion regarding the equity compensation modifications. If a Qualifying Termination occurs before December 31, 2022, the executive will receive a pro rata portion of the retention bonus. If in connection with such a termination the executive becomes entitled to receive the change in control severance payments and benefits, the executive will also become entitled to receive the full retention bonus, and the Retention Date will be the later of the date of such change in control or such termination of employment.
On October 11, 2022, the Company entered into an amendment to the employment agreement with Mr. Bruun that, among other things, increased his annual base salary to $448 per year, retroactive to July 1, 2022, increased his target annual incentive compensation for the second half of 2022 to 80% of his base salary (without changing his target annual incentive compensation for the first half of 2022), extended his Retention Date from December 31, 2022 to December 31, 2023, which effectively extended the period during which Mr. Bruun must remain employed by the Company in order to earn his retention bonus, and modified the amount of the retention bonus from 75% of his base salary in effect on May 2, 2022 to 75% of the highest base salary in effect for Mr. Bruun on or before the date he becomes entitled to receive the retention bonus or the “Partial Retention Bonus” (as defined in the employment agreement). The amendment did not modify the terms of the employment agreement relating to acceleration of vesting of certain equity awards if Mr. Bruun remains employed by the Company through December 31, 2022. As of September 30, 2022, the Company accrued approximately $649 for the executive employment agreements.
In addition to the amendment to Mr. Bruun’s employment agreement, the Compensation Committee also granted Mr. Bruun a restricted stock award and a non-statutory stock option, which together had an aggregate grant date fair value of
approximately $100,000. The restricted stock award and the non-statutory stock option have terms that are materially consistent with the previously disclosed terms of similar grants to the Company’s executive officers.
(3) 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, ASC Update No. 2020-02, and ASC Update No. 2022-02
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.
In March 2022, the FASB issued ASC update 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures. The vintage disclosure portion of this guidance is applicable to the Company, which requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must included the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination.
As a smaller reporting company 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, 2020-20 and 2022-02 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, 2022 and December 31, 2021 consisted of the following:
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September 30, 2022 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Money market mutual funds | $ | 50,265 | | | $ | — | | | $ | — | | | $ | 50,265 | |
United States treasuries | 4,906 | | | | | — | | | 4,906 | |
Total marketable securities designated as available-for-sale | $ | 55,171 | | | $ | — | | | $ | — | | | $ | 55,171 | |
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December 31, 2021 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Money market mutual funds | $ | 13,147 | | | $ | — | | | $ | — | | | $ | 13,147 | |
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| | | | | | | |
Total marketable securities designated as available-for-sale | $ | 13,147 | | | $ | — | | | $ | — | | | $ | 13,147 | |
Interest income from marketable securities was $193 and $1 during the three months ended September 30, 2022 and 2021, respectively, and $203 and $5 during the nine months ended September 30, 2022 and 2021, respectively.
(5) Stockholder's Equity
(a) Stock Equity and Incentive Plan
The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation. On June 8, 2022, at the Company's 2022 Annual Meeting of Stockholders, the stockholders of the Company approved an amendment and restatement of the Company’s current equity compensation plan to increase the number of shares of common stock reserved for issuance under the plan by 1,280 shares, from 4,800 shares to 6,080 shares (excluding rollover shares). Stock-based compensation expense was $1,103 and $1,031, excluding $6 and $11 of compensation charges related to our Amended and Restated 1996 Employee Stock Purchase Plan, or the ESPP, for the three months ended September 30, 2022 and 2021, respectively, and $2,663 and $2,988, excluding $32 and $41 of compensation charges related to ESPP, for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there was $2,887 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.61 years. As of September 30, 2022, there was $3,129 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.44 years.
Stock Options
During the three months ended September 30, 2022, the Company issued 53 shares of common stock upon the exercise of stock options and received $464 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, 2022, no stock options were granted and 87 stock options expired, were canceled or were forfeited.
During the nine months ended September 30, 2022, upon the net exercise of 301 stock options, the Company issued 94 shares of common stock and received $613 as payment for the exercise price, 14 shares were surrendered to the Company to satisfy minimum tax withholding obligations, and 193 shares were cancelled. Additionally, during the nine months ended September 30, 2022, 398 stock options were granted and 416 stock options expired, were canceled or were forfeited. During the nine months ended September 30, 2021, 496 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, 2022 are as follows:
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| | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Risk-free interest rate | 2.97 | % | | 0.92 | % |
Expected volatility | 43.16 | % | | 44.98 | % |
Expected life (in years) | 4.24 | | 4.28 |
Dividend yield | 0 | % | | 0 | % |
During the nine months ended September 30, 2022, there were accelerated vesting and extended exercise term modifications of stock options as it related to the retirement of Mr. Kits van Heyningen, which resulted in a reduction of approximately $85 in compensation cost. During the three and nine months ended September 30, 2022, there were accelerated vesting term modifications of stock options for employees terminated as part of the Company's restructuring, which resulted in a reduction of approximately $28 for the three months ended September 30, 2022 and approximately $109 for the nine months ended September 30, 2022 in compensation cost. During the three and nine months ended September 30, 2022, there were accelerated vesting term modifications of stock options for executive employment agreements, which resulted in an acceleration of compensation expense of approximately $72 for the three months ended September 30, 2022 and approximately $120 for the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, there were accelerated vesting term modifications of stock options for employees transitioned as part of the sale of the Company's inertial navigation business, which resulted in an acceleration of compensation expense of approximately $81, included in discontinued operations.
As of September 30, 2022, there were 1,808 options outstanding with a weighted average exercise price of $9.82 per share and 844 options exercisable with a weighted average exercise price of $10.13 per share.
Restricted Stock
During the three months ended September 30, 2022, 60 shares of restricted stock were granted with a weighted average grant date fair value of $9.14 per share and 10 shares of restricted stock were forfeited. Additionally, during the three months ended September 30, 2022, 102 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, 2022, 243 shares of restricted stock were granted with a weighted average grant date fair value of $8.50 per share and 96 shares of restricted stock were forfeited. Additionally, during the nine months ended September 30, 2022, 249 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, 2022, there were 388 shares of restricted stock outstanding that were still subject to service-based vesting conditions. During the nine months ended September 30, 2022, there were accelerated vesting term modifications of restricted stock as it related to the retirement of Mr. Kits van Heyningen, which resulted in an acceleration in compensation expense of approximately $186. During the three and nine months ended September 30, 2022, there were accelerated vesting term modifications of restricted stock for employees terminated as part of the Company's restructuring, which resulted in an acceleration in compensation expense of approximately $31 for the three months ended September 30, 2022 and approximately $156 for the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, there were accelerated vesting term modifications of restricted stock for executive employment agreements, which resulted in an acceleration in compensation expense of approximately $99 for the three months ended September 30, 2022 and approximately $167 for the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, there were accelerated vesting term modifications of restricted stock for employees transitioned as part of the sale of the Company's inertial navigation business, which resulted in an acceleration in compensation expense of approximately $374, included in discontinued operations.
As of September 30, 2022, 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, 2022, 0 and 22 shares were issued under the ESPP plan, respectively. During the three and nine months ended September 30, 2021, 26 shares were issued under the ESPP plan. The Company recorded compensation charges related to the ESPP of $6 and $11 for the three months ended September 30, 2022 and 2021, respectively, and $32 and $41 for the nine months ended September 30, 2022 and 2021, 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, 2022 and 2021:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cost of product sales | $ | 333 | | | $ | 78 | | | $ | 468 | | | $ | 194 | |
Cost of service sales | 3 | | | 3 | | | 8 | | | 8 | |
Research and development | 371 | | | 150 | | | 702 | | | 491 | |
Sales, marketing and support | 14 | | | 239 | | | 225 | | | 664 | |
General and administrative | 388 | | | 572 | | | 1,292 | | | 1,672 | |
| $ | 1,109 | | | $ | 1,042 | | | $ | 2,695 | | | $ | 3,029 | |
(d) Accumulated Other Comprehensive Loss (AOCL)
Comprehensive loss includes net loss and unrealized gains and losses from foreign currency translation. The components of the Company’s comprehensive loss and the effect on earnings for the periods presented are detailed in the accompanying consolidated statements of comprehensive loss.
The balances for the three months ended September 30, 2022 and 2021 are as follows:
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| | | |
| Foreign Currency Translation | | Total Accumulated Other Comprehensive Loss |
Balance, June 30, 2022 | $ | (4,021) | | | $ | (4,021) | |
Other comprehensive loss | (646) | | | (646) | |
Net other comprehensive loss | (646) | | | (646) | |
Balance, September 30, 2022 | $ | (4,667) | | | $ | (4,667) | |
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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) | |
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Net other comprehensive loss | (370) | | | | | | | (370) | |
Balance, September 30, 2021 | $ | (3,338) | | | | | | | $ | (3,338) | |
The balances for the nine months ended September 30, 2022 and 2021 are as follows:
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| Foreign Currency Translation | | | | Total Accumulated Other Comprehensive Loss |
Balance, December 31, 2021 | $ | (3,409) | | | | | $ | (3,409) | |
Other comprehensive loss | (1,258) | | | | | (1,258) | |
Net other comprehensive loss | (1,258) | | | | | (1,258) | |
Balance, September 30, 2022 | $ | (4,667) | | | | | $ | (4,667) | |
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| Foreign Currency Translation | | | | | | Total Accumulated Other Comprehensive Loss |
Balance, December 31, 2020 | $ | (3,232) | | | | | | | $ | (3,232) | |
Other comprehensive loss | (106) | | | | | | | (106) | |
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Net other comprehensive loss | (106) | | | | | | | (106) | |
Balance, September 30, 2021 | $ | (3,338) | | | | | | | $ | (3,338) | |
(6) Net (Loss) Income from Continuing Operations per Common Share
Basic net (loss) income per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined with the treasury stock accounting method. For the three and nine months ended September 30, 2022, since there was a net loss from continuing operations, the Company excluded all 1,572 and 1,763, 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 nine months ended September 30, 2021, since there was a net loss from continuing operations, 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.
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, |
| 2022 | | 2021 | | 2022 | | 2021 |
Weighted average common shares outstanding—basic | 18,706 | | | 18,341 | | | 18,574 | | | 18,152 | |
Dilutive common shares issuable in connection with stock plans | — | | | 225 | | | — | | | — | |
Weighted average common shares outstanding—diluted | 18,706 | | | 18,566 | | | 18,574 | | | 18,152 | |
(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, 2022 and December 31, 2021 include the costs of material, labor, and factory overhead. Components of inventories consist of the following:
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| September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 14,974 | | | $ | 9,412 | |
Work in process | 4,473 | | | 2,861 | |
Finished goods | 4,431 | | | 3,560 | |
| $ | 23,878 | | | $ | 15,833 | |
(8) Property and Equipment
Property and equipment, net, as of September 30, 2022 and December 31, 2021 consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Land | $ | 2,833 | | | $ | 2,833 | |
Building and improvements | 18,839 | | | 18,822 | |
Leasehold improvements | 455 | | | 472 | |
Machinery and equipment | 5,683 | | | 5,233 | |
Revenue-generating assets | 70,292 | | | 63,587 | |
Office and computer equipment | 14,377 | | | 14,633 | |
Motor vehicles | 31 | | | 31 | |
| 112,510 | | | 105,611 | |
Less accumulated depreciation | (59,580) | | | (52,666) | |
| $ | 52,930 | | | $ | 52,945 | |
Depreciation expense was $3,239 and $3,179 for the three months ended September 30, 2022 and 2021, respectively, and $9,542 and $8,918 for the nine months ended September 30, 2022 and 2021, 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, 2022 and December 31, 2021, the Company had accrued product warranty costs of $1,284 and $1,084, respectively.
The following table summarizes product warranty activity during 2022 and 2021:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
Beginning balance | $ | 1,084 | | | $ | 1,725 | |
Charges to expense | 964 | | | 280 | |
Costs incurred | (764) | | | (786) | |
Ending balance | $ | 1,284 | | | $ | 1,219 | |
(10) Debt
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 (PPP), 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 was two years from the funding date, and the interest rate was 1.00%. Interest on the loan accrued from the funding date, but was deferred. 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, net in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2021.
Line of Credit
On August 9, 2022, the Company terminated the 2018 Credit Agreement and the related security and pledge agreements with Bank of America, N.A., as Administrative Agent. At the time of termination, no borrowings were outstanding under the 2018 Credit Agreement. With the termination of this agreement, all associated liens were released.
(11) Segment Reporting
The Company operates as one reportable segment as a result of the sale of its inertial navigation business on August 9, 2022.
The Company's performance is impacted by the levels of activity in the marine and land mobile markets, among others. Performance in any particular period could be impacted by the timing of sales to certain large customers.
The Company primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to television, the Internet and voice services while on the move. Product sales accounted for 19% and 20% of the Company's consolidated net sales for the three months ended September 30, 2022 and 2021, respectively, and 19% and 22% of the Company's consolidated net sales for the nine months ended September 30, 2022 and 2021, respectively. Service sales of mini-VSAT Broadband airtime service accounted for 76% and 72% of the Company's consolidated net sales for the three months ended September 30, 2022 and 2021, respectively, and 74% and 70% of the Company's consolidated net sales for the nine months ended September 30, 2022 and 2021, respectively. The balance of service sales are comprised of distribution of commercially licensed entertainment, product repairs, and extended warranty sales.
No other single product class accounts for 10% or more of the Company's consolidated net sales.
The Company operates in a number of major geographic areas, including internationally. Revenues from international locations primarily include Singapore, Canada, European Union countries, and other European countries, as well as countries in Africa, Asia/Pacific, the Middle East, and India. Revenues are based upon customer location and internationally represented 62% and 58% of consolidated net sales for the three months ended September 30, 2022 and 2021, respectively, and 61% and 58% of consolidated net sales for the nine months ended September 30, 2022 and 2021, respectively. Sales to Singapore customers represented 17% and 14% of the Company's consolidated net sales for the three months ended September 30, 2022 and 2021, respectively. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended September 30, 2022 and 2021. Sales to Singapore customers represented 16% and 13% of the Company's consolidated net sales for the nine months ended September 30, 2022 and 2021, respectively. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the nine months ended September 30, 2022 and 2021.
As of September 30, 2022 and December 31, 2021, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets.
(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) 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, 2022 and December 31, 2021 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | Total | | Level 1 | | Level 2 | | Level 3 | | Valuation Technique |
Assets | | | | | | | | | |
Money market mutual funds | $ | 50,265 | | | $ | 50,265 | | | $ | — | | | $ | — | | | (a) |
United States treasuries | 4,906 | | | 4,906 | | | — | | | — | | | (a) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Total | | Level 1 | | Level 2 | | Level 3 | | Valuation Technique |
Assets | | | | | | | | | |
Money market mutual funds | $ | 13,147 | | | $ | 13,147 | | | $ | — | | | $ | — | | | (a) |
| | | | | | | | | |
(a)Market approach—prices and other relevant information generated by market transactions involving identical or comparable assets.
The carrying amount of certain financial instruments approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of the Company's operating and financing lease liabilities approximates fair value based on currently available quoted rates of similarly structured borrowings.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company's non-financial assets, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if indications of impairment exist. There was no impairment of the Company's non-financial assets noted as of September 30, 2022. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis.
(14) 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, 2022:
| | | | | | | | |
| | Amounts |
Balance at December 31, 2021 | | $ | 6,570 | |
Sale of KVH Media Group Entertainment Limited | | (1,038) | |
Foreign currency translation adjustment | | (295) | |
Balance at September 30, 2022 | | $ | 5,237 | |
Intangible Assets
The changes in the carrying amount of intangible assets during the nine months ended September 30, 2022 are as follows:
| | | | | | | | |
| | Amounts |
Balance at December 31, 2021 | | $ | 1,287 | |
Amortization expense | | (409) | |
Intangible assets acquired in asset acquisition | | 42 | |
Sale of KVH Media Group Entertainment Limited | | (352) | |
Foreign currency translation adjustment | | (101) | |
Balance at September 30, 2022 | | $ | 467 | |
Intangible assets arose from the acquisition of KVH Media Group (acquired as Headland Media Limited) in May 2013. These intangible assets are being amortized on a straight-line basis over the estimated useful life of 10 years for acquired subscriber relationships. The intangible assets were recorded in pounds sterling and fluctuations in exchange rates cause these amounts to increase or decrease from time to time. As a result of the sale of KVH Media Group Entertainment Limited in April 2022, the Company determined the goodwill and intangible assets associated with this business based on an income approach which estimated the fair value of the reporting unit before and after the sale, and included such amounts in the determination of the gain on sale of the subsidiary.
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, 2022, the carrying value of the intangible assets acquired in the asset acquisition was $450. 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 $42 and $47 of consideration was earned under the contingent consideration arrangement during the nine months ended September 30, 2022 and 2021, respectively.
Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at September 30, 2022 and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
September 30, 2022 | | | | | | |
Subscriber relationships | | $ | 7,624 | | | $ | 7,157 | | | $ | 467 | |
Distribution rights | | 315 | | | 315 | | | — | |
Internally developed software | | 446 | | | 446 | | | — | |
Proprietary content | | 153 | | | 153 | | | — | |
Intellectual property | | 2,284 | | | 2,284 | | | — | |
| | | | | | |
| | $ | 10,822 | | | $ | 10,355 | | | $ | 467 | |
December 31, 2021 | | | | | | |
Subscriber relationships | | $ | 8,033 | | | $ | 6,746 | | | $ | 1,287 | |
Distribution rights | | 315 | | | 315 | | | — | |
Internally developed software | | 446 | | | 446 | | | — | |
Proprietary content | | 153 | | | 153 | | | — | |
Intellectual property | | 2,284 | | | 2,284 | | | — | |
| | | | | | |
| | $ | 11,231 | | | $ | 9,944 | | | $ | 1,287 | |
Amortization expense related to intangible assets was $90 and $277 for the three months ended September 30, 2022, respectively, and $409 and $833 for the nine months ended September 30, 2022 and 2021, respectively. Amortization expense was categorized as general and administrative expense.
As of September 30, 2022, the total weighted average remaining useful lives of the definite-lived intangible assets was 3.2 years.
Estimated future amortization expense remaining at September 30, 2022 for intangible assets acquired was as follows:
Years ending December 31,
| | | | | |
Remainder of 2022 | $ | 87 | |
2023 | 168 | |
2024 | 68 | |
2025 | 68 | |
2026 | 68 | |
Thereafter | 8 | |
Total future amortization expense | $ | 467 | |
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. There were no events or changes in circumstances during the nine months ended September 30, 2022 which indicated that an assessment of the impairment of goodwill and intangible assets was required.
(15) 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 for Continuing Operations
The following table summarizes net sales from contracts with customers for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Product, transferred at point in time | | $ | 5,974 | | | $ | 6,361 | | | $ | 18,057 | | | $ | 19,741 | |
Product, transferred over time | | 651 | | | 490 | | | 1,751 | | | 2,047 | |
Service | | 28,544 | | | 27,537 | | | 83,065 | | | 76,862 | |
| | | | | | | | |
| | | | | | | | |
Total net sales | | $ | 35,169 | | | $ | 34,388 | | | $ | 102,873 | | | $ | 98,650 | |
| | | | | | | | |
Revenue recognized during the three months ended September 30, 2022 and 2021 from amounts included in contract liabilities at the beginning of the period was $572 and $430, respectively. Revenue recognized during the nine months ended September 30, 2022 and 2021 from amounts included in contract liabilities at the beginning of the period was $1,645 and $1,899, respectively.
For 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 service sales, the delivery of the Company’s performance obligations are transferred to the customer, 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 nine months ended September 30, 2022 or 2021. One customer accounted for 17% of accounts receivable at September 30, 2022. Two customers accounted for approximately 16% and 14% of accounts receivable at December 31, 2021. One customer accounted for 63% and 54% of long-term accounts receivable included in other non-current assets on the consolidated balance sheets related to sales-type leases at September 30, 2022 and December 31, 2021, respectively.
Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results.
(16) Income Taxes
The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2022 was (578.6)% and (16.5)%, respectively, compared with 0.4% and 0.7% for the corresponding period in the prior year. The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable periods, including retroactive changes in tax legislation, settlements of tax audits or assessments, and the resolution or identification of tax position uncertainties.
For the three and nine months ended September 30, 2022 and 2021, the effective tax rates from continuing operations were lower than the statutory tax rate primarily due to the Company maintaining a valuation allowance reserve on its U.S. deferred tax assets, the composition of income from foreign jurisdictions taxed at lower rates and foreign withholding taxes on payments to the U.S.
As of September 30, 2022 and December 31, 2021, the Company had reserves for uncertain tax positions of $624 and $592, respectively. There were no material changes during the nine months ended September 30, 2022 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, 2022 may decrease $20 in the next twelve months as a result of a lapse of statutes of limitations and settlements with taxing authorities.
The Company’s tax jurisdictions include the United States, the United Kingdom, Denmark, Cyprus, Norway, Brazil, Singapore, Japan and India. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to 2019, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state and foreign taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding year.
(17) Leases
Lessee
The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense from continuing operations was $507 and $920 for the three months ended September 30, 2022 and 2021, respectively, and was $1,588 and $2,824 for the nine months ended September 30, 2022 and 2021, respectively. Short-term operating lease costs were $41 and $66 for the three months ended September 30, 2022 and 2021, respectively, and were $139 and $181 for the nine months ended September 30, 2022 and 2021, respectively. Maturities of lease liabilities as of September 30, 2022 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows:
| | | | | |
Remainder of 2022 | $ | 436 | |
2023 | 744 | |
2024 | 308 | |
2025 | 8 | |
| |
Total minimum lease payments | $ | 1,496 | |
| |
Less amount representing interest | $ | (61) | |
Present value of net minimum operating lease payments | $ | 1,435 | |
Less current installments of obligation under current-operating lease liabilities | $ | 963 | |
Obligations under long-term operating lease liabilities, excluding current installments | $ | 472 | |
| |
Weighted-average remaining lease term - operating leases (years) | 1.44 |
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, 2022, 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 $846, 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, 2022 and 2021 and was $136 for both the nine months ended September 30, 2022 and 2021.
The future minimum lease payments under this financing lease as of September 30, 2022 are:
| | | | | |
Remainder of 2022 | $ | 66 | |
2023 | 22 | |
| |
| |
Total minimum lease payments | $ | 88 | |
| |
Less amount representing interest | $ | — | |
Present value of net minimum financing lease payments | $ | 88 | |
Less current installments of obligation under accrued other | $ | 88 | |
Obligations under other long-term liabilities, excluding current installments | $ | — | |
| |
Weighted-average remaining lease term - finance leases (years) | 0.42 |
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 product revenue, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the lease term (typically three to five years) using an implicit interest rate. The sales-type leases do not have unguaranteed residual assets.
The current portion of the net investment in these leases was $3,911 as of September 30, 2022 and the non-current portion of the net investment in these leases was $5,059 as of September 30, 2022. 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 $191 and $218 during the three months ended September 30, 2022 and 2021, respectively, and was $591 and $670 during the nine months ended September 30, 2022 and 2021, respectively.
The future undiscounted cash flows from these leases as of September 30, 2022 are:
| | | | | |
Remainder of 2022 | $ | 1,640 | |
2023 | 3,651 | |
2024 | 2,729 | |
2025 | 1,360 | |
2026 | 542 | |
2027 | 87 |
Total undiscounted cash flows | $ | 10,009 | |
| |
Present value of lease payments | $ | 8,970 | |
Difference between undiscounted cash flows and discounted cash flows | $ | 1,039 | |
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, 2022, the gross costs and accumulated depreciation associated with these operating leases are included in revenue generating assets and amounted to $1,856 and $423, respectively. They are depreciated on a straight-line basis over a five-year estimated useful life. Depreciation expense for these assets was $96 and $267 for the three and nine months ended September 30, 2022, respectively.
Lease revenue recognized was $141 and $400 for the three and nine months ended September 30, 2022, respectively.
As of September 30, 2022, minimum future lease payments to be recognized on the operating leases are as follows:
| | | | | |
Remainder of 2022 | $ | 274 | |
2023 | 548 | |
2024 | 338 | |
2025 | 20 | |
Total | $ | 1,180 | |
(18) Discontinued Operations
During the third quarter of 2022, the Company sold its inertial navigation business. The Company determined that the sale met the requirements for reporting as discontinued operations in accordance with Accounting Standards Codification (ASC) 205-20. Please see Note 1 for further discussion. The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the amounts presented separately in the Company's consolidated balance sheet:
| | | | | |
| December 31, 2021 |
| |
Accounts receivable, net | $ | 5,882 | |
Inventories, net | 8,807 | |
Prepaid expenses and other current assets | 1,152 | |
Current assets held for sale | $ | 15,841 | |
Property and equipment, net | 7,169 | |
| |
Non-current assets held for sale | $ | 7,169 | |
Accounts payable | 1,764 | |
Accrued compensation and employee-related expenses | 914 | |
Accrued other | 955 | |
Accrued product warranty costs | 95 | |
Contract liabilities | 211 | |
| |
Current liabilities held for sale | $ | 3,939 | |
Other long-term liabilities | 8 | |
| |
| |
Non-current liabilities held for sale | $ | 8 | |
Net assets held for sale | 19,063 | |
The following table presents a reconciliation of the major financial line items constituting the results for discontinued operations to the net income from discontinued operations, net of tax, presented separately in the Company's consolidated statements of operations (through August 9, 2022, the date the inertial navigation business was sold):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Sales: | | | | | | | |
Product | $ | 1,276 | | | $ | 8,388 | | | $ | 16,042 | | | $ | 29,152 | |
Service | 218 | | | 208 | | | 679 | | | 837 | |
Net sales | 1,494 | | | 8,596 | | | 16,721 | | | 29,989 | |
Costs and expenses: | | | | | | | |
Costs of product sales | 1,504 | | | 5,341 | | | 12,732 | | | 17,168 | |
Costs of service sales | 169 | | | 173 | | | 457 | | | 750 | |
Research and development | 374 | | | 1,507 | | | 3,147 | | | 5,137 | |
Sales, marketing and support | 348 | | | 1,261 | | | 3,035 | | | 3,885 | |
| | | | | | | |
Other income, net | 12 | | | 34 | | | 81 | | | 101 | |
(Loss) income from discontinued operations before income tax expense | (889) | | | 348 | | | (2,569) | | | 3,150 | |
Gain on sale of discontinued operations before tax expense | 30,858 | | | — | | | 30,858 | | | — | |
Total income from discontinued operations before tax expense | $ | 29,969 | | | $ | 348 | | | $ | 28,289 | | | $ | 3,150 | |
Income tax expense on discontinued operations | 228 | | | — | | | 228 | | | — | |
Net income from discontinued operations, net of tax | $ | 29,741 | | | $ | 348 | | | $ | 28,061 | | | $ | 3,150 | |
| | | | | | | |
Net income from discontinued operations per common share | | | | | | | |
Basic | $ | 1.59 | | | $ | 0.02 | | | $ | 1.51 | | | $ | 0.17 | |
Diluted | $ | 1.59 | | | $ | 0.02 | | | $ | 1.51 | | | $ | 0.17 | |
| | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | |
Basic | 18,706 | | | 18,341 | | | 18,574 | | | 18,152 | |
Diluted | 18,706 | | | 18,566 | | | 18,574 | | | 18,152 | |
The following table presents supplemental cash flow information of the discontinued operations:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
| | | |
Cash (used in) provided by operating activities-discontinued operations | $ | (3,853) | | | $ | 3,364 | |
Cash used in investing activities-discontinued operations | $ | (307) | | | $ | (846) | |
The following table presents non-cash expenses from discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Depreciation | $ | 269 | | | $ | 353 | | | $ | 805 | | | $ | 1,021 | |
Compensation expense related to stock-based awards and employee stock purchase plan | $ | 380 | | | $ | 207 | | | $ | 580 | | | $ | 407 | |