Introduction
The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products and services, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled "Risk Factors" in Item 1A of Part II of this quarterly report on Form 10-Q. These and many other factors could affect our future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by us or on our behalf. For example, our expectations regarding certain items as a percentage of sales assume that we will achieve our anticipated sales goals. The following discussion and analysis should be read in conjunction with our consolidated interim financial statements and related notes appearing elsewhere in this report. Overview
We design, develop, manufacture and market mobile connectivity products and services for the marine and land mobile markets, and inertial navigation products for the defense and commercial markets. Our reporting segments are as follows:
•the mobile connectivity segment and •the inertial navigation segment. 25 -------------------------------------------------------------------------------- Through these segments, we manufacture and sell our solutions in a number of major geographic areas, including internationally. We generate a majority of our revenues from various international locations, primarily consisting ofSingapore ,Canada , countries inEurope , countries inAfrica , otherAsia/Pacific countries, theMiddle East , andIndia .
Disposition of Assets
OnAugust 9, 2022 , we entered into an Asset Purchase Agreement with EMCORE Corporation to sell to EMCORE the Company's inertial navigation business for gross proceeds of$55,000 , less specified deductions and a holdback of$1,000 and subject to a working capital adjustment. The sale was completed simultaneously with the execution and delivery of the Asset Purchase Agreement. Simultaneously with the execution of the Asset Purchase Agreement, we entered into a Transition Services Agreement with EMCORE, pursuant to which we agreed to provide certain transition services to support the continued operation of the inertial navigation business for a specified period of time following the sale. The inertial navigation business did not meet the ASC 205-20 criteria to be classified as held for sale as ofJune 30, 2022 . OnAugust 9, 2022 , we also terminated the 2018 Credit Agreement and the related security and pledge agreements withBank 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. Disposition of Business OnApril 29, 2022 ,KVH Media Group Limited , our wholly owned subsidiary, sold its subsidiaryKVH Media Group Entertainment Limited , which is in theKVH Media Group reporting unit of our mobile connectivity segment, for net cash proceeds of approximately$2.4 million . This transaction did not meet the criteria as a discontinued operation under ASC 205-20. We recorded a gain on the sale of approximately$0.6 million , which is recorded in other income, net in the accompanying consolidated statements of operations. See Note 14 to our consolidated interim financial statements for the reduction of goodwill and intangibles associated with theKVH Media Group reporting unit as it relates to the sale of this subsidiary.
Management Transition and Restructuring
OnMarch 7, 2022 , we announced that our 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 us.Brent C. Bruun , our then Chief Operating Officer, was appointed as our interim President and Chief Executive Officer. Subsequently, onJune 15, 2022 , he was appointed as our President and Chief Executive Officer and as a Class II member of the Board of Directors. We have incurred approximately$0.5 million of costs associated with the management transition throughJune 30, 2022 , including a separation payment, consulting fees and health insurance coverage forMr. Kits van Heyningen , as well as professional and advisory fees, and expect to continue to incur ongoing compensation expenses untilMarch 2023 . Approximately$0.4 million is accrued as ofJune 30, 2022 . InMarch 2022 , we also restructured our operations to reduce costs and better pursue a more focused strategy. We reduced our workforce by approximately 10% and began incurring reduced expenses from these actions beginning in the second quarter of 2022. Approximately$2.2 million of severance payments, other employee benefits, and legal and advisory fees were incurred for the six months endedJune 30, 2022 . We expect to incur an additional$0.2 million in severance payments and other employee benefit costs throughDecember 31, 2022 arising from this restructuring. We also modified impacted employee's stock option and restricted stock awards. Please see Note 5 to our consolidated interim financial statements for further discussion.
Executive Employment Agreements
26 -------------------------------------------------------------------------------- InMay 2022 , we entered into executive employment agreements with each ofBrent C. Bruun ,Roger A. Kuebel ,Felise Feingold andRobert Balog in order to retain their services and provide them with certain benefits in the event that we terminate 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 throughDecember 31, 2022 (the "Retention Date"), we will pay the executive a retention bonus equal to 75% of the executive's base salary at the agreement date, and we 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 to our consolidated interim financial statements for further discussion regarding the equity compensation modifications. If a Qualifying Termination occurs beforeDecember 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. For the three months endedJune 30, 2022 , we accrued approximately$0.3 million for the executive employment agreements.
Mobile Connectivity Segment
Our mobile connectivity segment offers satellite communications products and services. Our 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. We sell our mobile connectivity products through an extensive international network of dealers and distributors. We also sell and lease products to service providers and directly to end users. Our mobile connectivity service sales include sales of satellite voice and Internet airtime services, engineering services provided under development contracts, sales from product repairs, and extended warranty sales. This segment's sales also include the distribution of entertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets throughKVH Media Group . We typically recognize revenue from media content sales ratably over the period of the service contract. We provide, for monthly fixed fees and usage-based fees, satellite connectivity services for broadband Internet, data and VoIP service to our mini-VSAT Broadband customers. We also earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose to activate their subscriptions with us. Within the mobile connectivity segment, our marine leisure business is highly seasonal, and seasonality can also impact our commercial marine business. Historically, we have generated the majority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year, compared to the first two quarters. Temporary suspensions of our airtime services typically increase in the third and fourth quarters of each year as boats are placed out of service during the winter months.
Inertial Navigation Segment
Our inertial navigation segment offers precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing, and guidance. Our inertial navigation products also include TACNAV systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. Our inertial navigation products are sold directly to governments, bothU.S. and foreign, and government contractors, as well as through an international network of authorized independent sales representatives. In addition, our inertial navigation products are 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. Our inertial navigation service sales include engineering services provided under development contracts, product repairs and extended warranty sales. 27 --------------------------------------------------------------------------------
Sales by Segment
We generate sales primarily from the sale of our mobile connectivity products and services and our inertial navigation products and services. The following table provides, for the periods indicated, our sales by segment: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (in thousands) (in thousands)
Mobile connectivity
$ 41,837 $ 43,363 $ 82,931 $ 85,655 Product sales within the mobile connectivity segment accounted for 16% and 19% of our consolidated net sales for the three months endedJune 30, 2022 and 2021, respectively, and 16% and 17% of our consolidated net sales for the six months endedJune 30, 2022 and 2021, respectively. Sales of mini-VSAT Broadband airtime service accounted for 62% and 53% of our consolidated net sales for the three months endedJune 30, 2022 and 2021, respectively, and 60% and 52% of our consolidated net sales for the six months endedJune 30, 2022 and 2021, respectively.
Within our inertial navigation segment, net sales of FOG-based guidance and
navigation systems accounted for 15% and 17% of our consolidated net sales for
the three months ended
No other single product class accounted for 10% or more of our consolidated net sales for the three months endedJune 30, 2022 or 2021 or the six months endedJune 30, 2022 or 2021. No individual customer accounted for 10% or more of our consolidated net sales for the three months endedJune 30, 2022 or 2021 or the six months endedJune 30, 2022 or 2021. We operate in a number of major geographic areas across the globe. We generate our international net sales, based upon customer location, primarily from customers located inSingapore ,Canada , countries inEurope , countries inAfrica , otherAsia/Pacific countries, theMiddle East , andIndia . Revenues are based upon customer location and internationally represented 63% and 60% of our consolidated net sales for the three months endedJune 30, 2022 and 2021, respectively, and 63% and 61% of our consolidated net sales for the six months endedJune 30, 2022 and 2021, respectively. Sales toSingapore customers represented 13% and 10% of our consolidated net sales for the three months endedJune 30, 2022 and 2021, respectively. No other individual foreign country represented 10% or more of the our consolidated net sales for the three months endedJune 30, 2022 and 2021. Sales toSingapore customers represented 13% and 10% of our consolidated net sales for the six months endedJune 30, 2022 and 2021, respectively. No other individual foreign country represented 10% or more of the our consolidated net sales for the six months endedJune 30, 2022 and 2021. See Note 11 to our consolidated interim financial statements for more information on our segments.
28 -------------------------------------------------------------------------------- In addition to our internally funded research and development efforts, we also conduct research and development activities that are funded by our customers. These activities relate primarily to engineering studies, surveys, prototype development, program management, and standard product customization. In accordance with accounting principles generally accepted inthe United States of America , we account for customer-funded research as service revenue, and we account for the associated research and development costs as costs of service and product sales. As a result, customer-funded research and development are not included in the research and development expense that we present in our statement of operations. The following table presents our total annual research and development effort, representing the sum of research costs of service and product sales and the operating expense of research and development as described in our statement of operations. Our management believes this information is useful because it provides a better understanding of our total expenditures on research and development activities. Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (in thousands) (in thousands)
Research and development expense presented on the statement of operations
$ 3,759
53 78 70 489
Total consolidated statements of operations expenditures on research and development activities
$ 3,812 $ 4,583 $ 8,478 $ 9,561 Supply Chain During the six months endedJune 30, 2022 , we continued to experience delays in the availability and delivery of certain raw material components, which has impacted our manufacturing as well as resulted in shipping delays in getting products out to our customers. We also experienced increase in raw material costs, which we expect to continue throughout 2022. We are continuing to monitor global developments and are prepared to implement any actions that we determine to be necessary to sustain our business.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these interim financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our interim financial statements. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the year endedDecember 31, 2021 . Critical accounting estimates are those estimates made that involve a significant level of estimation uncertainty and have had or are reasonably likely to have an impact on our statement of operations. As described in our annual report on Form 10-K for the year endedDecember 31, 2021 , our accounting policies for goodwill, intangible assets, and other long-lived assets were the only estimates critical to an understanding and evaluation of our consolidated financial statements. We have reviewed our accounting policies and critical accounting estimates and determined that these remain our most critical accounting policies and estimates for the six months endedJune 30, 2022 .
Readers should refer to our annual report on Form 10-K for the year ended
29 --------------------------------------------------------------------------------
Results of Operations
The following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales:
Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Sales: Product 32.5 % 39.8 % 33.7 % 41.7 % Service 67.5 60.2 66.3 58.3 Net sales 100.0 100.0 100.0 100.0 Cost and expenses: Costs of product sales 26.6 27.4 26.3 27.0 Costs of service sales 36.9 37.2 36.7 36.8 Research and development 9.0 10.4 10.1 10.6 Sales, marketing and support 16.7 18.3 18.5 18.1 General and administrative 16.5 20.1 16.8 18.5 Total costs and expenses 105.7 113.4 108.4 111.0 Loss from operations (5.7) (13.4) (8.4) (11.0) Interest income 0.5 0.5 0.5 0.5 Interest expense - - - - Other income (expense), net 2.2 - 1.3 (0.9) Loss before income tax expense (benefit) (3.0) (12.9) (6.6) (11.4) Income tax expense (benefit) 0.6 0.2 0.7 (0.1) Net loss (3.6) % (13.1) % (7.3) % (11.3) %
Three months ended
As discussed further under the heading "Segment Discussion" below, product sales decreased$3.7 million , or 21%, to$13.6 million for the three months endedJune 30, 2022 from$17.3 million for the three months endedJune 30, 2021 , due to a decrease in inertial navigation product sales of$2.3 million and a decrease in mobile connectivity product sales of$1.4 million . Service sales for the three months endedJune 30, 2022 increased$2.2 million , or 8%, to$28.3 million from$26.1 million for the three months endedJune 30, 2021 , primarily due to an increase in mobile connectivity service sales of$2.2 million , partially offset by a decrease in inertial navigation service sales of$0.1 million .
Costs of Sales
Costs of sales consists of costs of product sales and costs of service sales. Costs of sales decreased by$1.5 million , or 5%, in the three months endedJune 30, 2022 to$26.5 million from$28.0 million in the three months endedJune 30, 2021 . The decrease in costs of sales was driven by a$0.8 million decrease in costs of product sales and a$0.7 million decrease in costs of service sales. As a percentage of net sales, costs of sales were 63% and 65% for the three months endedJune 30, 2022 and 2021, respectively. 30 -------------------------------------------------------------------------------- Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For the three months endedJune 30, 2022 , costs of product sales decreased by$0.8 million , or 7%, to$11.1 million from$11.9 million in the three months endedJune 30, 2021 . As a percentage of product sales, costs of product sales were 82% and 69% for the three months endedJune 30, 2022 and 2021, respectively. Mobile connectivity costs of product sales decreased by$1.0 million , or 16%, primarily due to a$0.9 million decrease in our marine mobile connectivity cost of product sales. Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 79% and 77% for the three months endedJune 30, 2022 and 2021, respectively. The decrease was primarily driven by sales volume and product mix within our marine mobile connectivity cost of product sales. Inertial navigation costs of product sales increased by$0.2 million , or 4%, primarily due to a$1.3 million increase in expensed material and other manufacturing period costs, partially offset by a$0.5 million decrease in FOG and OEM costs of product sales and a$0.5 million decrease in our TACNAV costs of product sales. As a percentage of inertial navigation product sales, costs of inertial navigation product sales were 85% and 62% for the three months endedJune 30, 2022 and 2021, respectively. Our costs of service sales consist primarily of satellite service capacity, depreciation, service network overhead expense associated with our mini-VSAT Broadband network infrastructure, direct network service labor, Inmarsat service costs, product installation costs, engineering and related direct costs associated with customer-funded research and development, media materials and distribution costs, and service repair materials. For the three months endedJune 30, 2022 , costs of service sales decreased by$0.7 million , or 4%, to$15.4 million from$16.1 million for the three months endedJune 30, 2021 . As a percentage of service sales, costs of service sales were 55% and 62% for the three months endedJune 30, 2022 and 2021, respectively. Mobile connectivity costs of service sales decreased by$0.8 million , or 5%, primarily due to a$0.4 million decrease in mini-VSAT airtime costs of service sales. This decrease was primarily driven by the shutdown of our legacy Arclight network, partially offset by an increase in costs associated with our HTS network due to increased capacity required for additional customers. In addition, there was a$0.3 million decrease in content services cost of service sales, primarily driven by the sale of a subsidiary inApril 2022 . As a percentage of mobile connectivity service sales, costs of mobile connectivity service sales were 54% and 62% for the three months endedJune 30, 2022 and 2021, respectively. Inertial navigation costs of service sales increased by$0.1 million , or 73%, primarily due to an increase in repair services cost of service sales. As a percentage of inertial navigation service sales, costs of inertial navigation service sales were 68% and 33% for the three months endedJune 30, 2022 and 2021, respectively.
Operating Expenses
Research and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internally funded product development and product sustaining engineering activities. Research and development expense for the three months endedJune 30, 2022 decreased by$0.7 million , or 17%, to$3.8 million from$4.5 million for the three months endedJune 30, 2021 . The primary reason for the decrease in research and development expense was a$0.9 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce inMarch 2022 . This decrease was partially offset by a$0.3 million increase in unfunded engineering expenses. There was also a corresponding reallocation of the expense of the underlying engineering work from costs of service sales, where funded engineering expenses are reflected, to research and development expense, where unfunded engineering expenses are reflected. As a percentage of net sales, research and development expense was 9% and 10% for the three months endedJune 30, 2022 and 2021, respectively. Sales, marketing, and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in-house and third-party representatives, costs related to the co-development of certain content, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and support costs, warranty-related costs and bad debt expense. Sales, marketing and support expense also includes the operating expenses of our sales office subsidiaries inDenmark ,Singapore ,Brazil , andJapan . Sales, marketing and support expense for the three months endedJune 30, 2022 decreased by$1.0 million , or 12%, to$7.0 million from$7.9 million for the three months endedJune 30, 2021 . The decrease primarily resulted from a$1.0 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce inMarch 2022 . This decrease was partially offset by a$0.3 million increase in warranty expense. As a percentage of net sales, sales, marketing and support expense was 17% and 18% for the three months endedJune 30, 2022 and 2021, respectively. 31 -------------------------------------------------------------------------------- General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources, certain outside professional services, and other administrative costs. General and administrative expense for the three months endedJune 30, 2022 and 2021 decreased by$1.8 million , or 21%, to$6.9 million compared to$8.7 million , respectively. The decrease primarily resulted from a$2.4 million decrease in professional fees, primarily arising from a stockholder's nomination of a completing slate of directors at our annual meeting of stockholders in 2021. This decrease was partially offset by a$0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two departed members of our board of directors. As a percentage of net sales, general and administrative expense was 16% and 20% for the three months endedJune 30, 2022 and 2021, respectively.
Interest and Other Income (Expense), Net
Interest income represents interest earned on our cash and cash equivalents, as well as from investments and our sale-type lease receivables. Interest income remained flat period-over-period at$0.2 million for both of the three months endedJune 30, 2022 and 2021. Interest expense remained flat period-over-period at less than$0.1 million for both of the three months endedJune 30, 2022 and 2021. Other income (expense), net increased to other income, net of$0.9 million for the three months endedJune 30, 2022 from other expense, net of less than$0.1 million for the three months endedJune 30, 2021 primarily due to the sale ofKVH Media Group Entertainment Limited during the three months endedJune 30, 2022 . Income Tax Expense Income tax expense for the three months endedJune 30, 2022 was$0.2 million and related to taxes on income earned in foreign jurisdictions. Income tax expense for the three months endedJune 30, 2021 was$0.1 million and related to taxes on income earned in foreign jurisdictions. 32 --------------------------------------------------------------------------------
Segment Discussion - Three months ended
Our net sales by segment for the three months endedJune 30, 2022 and 2021 were as follows: Change For the three months ended June 30, 2022 vs. 2021 2022 2021 $ % (dollars in thousands) Mobile connectivity sales: Product$ 6,620 $ 8,046 $ (1,426) (18) % Service 27,933 25,709 2,224 9 % Net sales$ 34,553 $ 33,755 $ 798 2 % Inertial navigation sales: Product$ 6,959 $ 9,223 $ (2,264) (25) % Service 325 385 (60) (16) % Net sales$ 7,284 $ 9,608 $ (2,324) (24) % Operating income (loss) by segment for the three months endedJune 30, 2022 and 2021 were as follows: Change For the three months ended June 30, 2022 vs. 2021 2022 2021 $ % (dollars in thousands) Mobile connectivity$ 4,525 $ 580 $ 3,945 680 % Inertial navigation (1,289) 645 (1,934) (300) %$ 3,236 $ 1,225 $ 2,011 164 % Unallocated (5,568) (7,027) 1,459 21 % Loss from operations$ (2,332) $ (5,802) $ 3,470 60 % Mobile Connectivity Segment Net sales in the mobile connectivity segment increased by$0.8 million , or 2%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . Mobile connectivity product sales decreased by$1.4 million , or 18%, to$6.6 million for the three months endedJune 30, 2022 from$8.0 million for the three months endedJune 30, 2021 . The decrease in mobile connectivity product sales was primarily due to a$1.3 million decrease in mini-VSAT Broadband product sales. The decrease in mini-VSAT product sales was primarily due to a decrease in unit sales volume. Mobile connectivity service sales increased by$2.2 million , or 9%, to$27.9 million for the three months endedJune 30, 2022 from$25.7 million for the three months endedJune 30, 2021 . The increase was primarily due to a$2.7 million increase in our mini-VSAT service sales, partially offset by a$0.6 million decrease in our content service sales, primarily driven by the sale of a subsidiary inApril 2022 . The shutdown of our legacy Arclight network onDecember 31, 2021 impacted sales of mini-VSAT products in 2021 and mini-VSAT services in 2022. During 2021, mini-VSAT product sales benefited from the demand for units needed to migrate from the legacy network to our HTS network. During 2022, mini-VSAT service sales have been impacted by the loss of revenue from customers who did not migrate. As ofDecember 31, 2021 , the monthly recurring revenue associated with those customers was approximately$0.3 million . A number of these customer have since returned, and when combined with new customers, mini-VSAT service revenue for the three months endedJune 30, 2022 was up 12% from the same quarter in 2021. 33 -------------------------------------------------------------------------------- Operating income for the mobile connectivity segment increased$3.9 million for the three months endedJune 30, 2022 to operating income of$4.5 million as compared to operating income of$0.6 million for the three months endedJune 30, 2021 . This increase resulted primarily from an increase in sales less associated costs of$2.6 million and a$1.2 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce inMarch 2022 .
Inertial Navigation Segment
Net sales in the inertial navigation segment decreased$2.3 million , or 24%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . Inertial navigation product sales decreased$2.3 million , or 25%, to$7.0 million for the three months endedJune 30, 2022 from$9.2 million for the three months endedJune 30, 2021 , primarily as a result of a$1.3 million decrease in our TACNAV product sales and a$1.0 million decrease in FOG and OEM product sales. Inertial navigation service sales decreased$0.1 million , or 16%, to$0.3 million for the three months endedJune 30, 2022 from$0.4 million for the three months endedJune 30, 2021 . The decrease was due to a$0.1 million decrease in repair services revenue. Our operating loss for the inertial navigation segment changed by$1.9 million to an operating loss of$1.3 million for the three months endedJune 30, 2022 as compared to operating income of$0.6 million for the three months endedJune 30, 2021 . This change resulted primarily from a decrease in sales less associated costs of$2.6 million , partially offset by a$0.9 million decrease in salaries, benefits and taxes, which was driven by the reduction in our workforce inMarch 2022 . Unallocated
Certain corporate-level costs have not been allocated because they are not attributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance, information technology, and costs associated with corporate actions.
Unallocated operating loss decreased$1.5 million , or 21%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 , primarily due to a$2.6 million decrease in non-recurring legal and advisory fees. In 2021, these fees were incurred as a result of a stockholder's nomination of a competing slate of directors for our annual meeting of stockholders. Partially offsetting this decrease was a$0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two departed members of our board of directors, and$0.3 million of one-time costs related to the reduction in our workforce inMarch 2022 .
Six months ended
As discussed further under the heading "Segment Discussion" below, product sales decreased$7.8 million , or 22%, to$27.9 million for the six months endedJune 30, 2022 from$35.7 million for the six months endedJune 30, 2021 , due to a decrease in inertial navigation product sales of$6.0 million and a decrease in mobile connectivity product sales of$1.8 million . Service sales for the six months endedJune 30, 2022 increased$5.0 million , or 10%, to$55.0 million from$50.0 million for the six months endedJune 30, 2021 due to an increase in mobile connectivity service sales of$5.2 million , partially offset by a decrease in inertial navigation service sales of$0.2 million .
Costs of Sales
Costs of sales decreased by$2.4 million , or 4%, in the six months endedJune 30, 2022 to$52.3 million from$54.7 million in the six months endedJune 30, 2021 . The decrease in costs of sales was driven by a$1.3 million decrease in costs of product sales and a$1.1 million decrease in costs of service sales. As a percentage of net sales, costs of sales were 63% and 64% for the six months endedJune 30, 2022 and 2021, respectively. For the six months endedJune 30, 2022 , costs of product sales decreased by$1.3 million , or 5%, to$21.8 million from$23.1 million in the six months endedJune 30, 2021 . As a percentage of product sales, costs of product sales were 78% and 65% for the six months endedJune 30, 2022 and 2021, respectively. Mobile connectivity costs of product sales decreased by$0.7 million , or 6%, due to a$0.5 million decrease in our marine mobile connectivity cost of product sales and a$0.2 million decrease in our land mobile connectivity costs of product sales. Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 81% and 76% for the six months endedJune 30, 2022 and 2021, respectively. The increase was primarily driven by product mix within our marine mobile connectivity cost of product sales. Inertial navigation 34 -------------------------------------------------------------------------------- costs of product sales decreased by$0.6 million , or 5%, primarily due to a$1.8 million decrease in our TACNAV costs of product sales, partially offset by a$1.0 million increase in expensed material and other manufacturing period costs. Inertial navigation costs of product sales as a percentage of inertial navigation product sales were 76% and 57% for the six months endedJune 30, 2022 and 2021, respectively. The increase was primarily driven by product mix with a decrease in higher margin TACNAV product sales. For the six months endedJune 30, 2022 , costs of service sales decreased by$1.1 million , or 4%, to$30.4 million from$31.5 million for the six months endedJune 30, 2021 . As a percentage of service sales, costs of service sales were 55% and 63% for the six months endedJune 30, 2022 and 2021, respectively. Mobile connectivity costs of service sales decreased by$0.8 million , or 3%, primarily due to a$0.4 million decrease in mini-VSAT airtime costs of service sales. This decrease was primarily driven by the shutdown of our legacy Arclight network, partially offset by an increase in costs associated with our HTS network due to increased capacity required for additional customers. In addition, there was a$0.3 million decrease in content services cost of service sales, primarily driven by the sale of a subsidiary inApril 2022 . Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales were 55% and 63% for the six months endedJune 30, 2022 and 2021, respectively. Inertial navigation costs of service sales decreased by$0.3 million , or 52%, due to a decrease in contract engineering services sales. Inertial navigation costs of service sales as a percentage of inertial navigation service sales were 62% and 95% for the six months endedJune 30, 2022 and 2021, respectively. This decrease in costs of inertial navigation service sales was primarily due to a decrease in costs relating to an engineering and services development contract from a majorU.S. defense contractor. Operating Expenses Research and development expense for the six months endedJune 30, 2022 decreased by$0.7 million , or 7%, to$8.4 million from$9.1 million for the six months endedJune 30, 2021 . The primary reason for the decrease in research and development expense was a$1.4 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in force) and a$0.4 million decrease in consulting fees. These decreases were partially offset by a$0.7 million increase in unfunded engineering expenses and$0.4 million in one-time costs related to the reduction in our workforce inMarch 2022 . With respect to the decrease in funded engineering expenses, there was also a corresponding reallocation of the expense of the underlying engineering work from costs of service sales, where funded engineering expenses are reflected, to research and development expense, where unfunded engineering expenses are reflected. As a percentage of net sales, research and development expense was 10% and 11% for the six months endedJune 30, 2022 and 2021, respectively. Sales, marketing and support expense for the six months endedJune 30, 2022 decreased by$0.2 million , or 1%, to$15.3 million from$15.5 million for the six months endedJune 30, 2021 . The decrease in sales, marketing and support expense resulted primarily from a$1.2 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce inMarch 2022 ), a$0.2 million decrease in marketing expense and a$0.2 million decrease in external commission expense, partially offset by$0.9 million in one-time costs related to the reduction in our workforce inMarch 2022 and a$0.5 million increase in warranty expense. As a percentage of net sales, sales, marketing and support expense was 18% for both the six months endedJune 30, 2022 and 2021. General and administrative expense for the six months endedJune 30, 2022 decreased by$1.9 million , or 12%, to$14.0 million from$15.8 million for the six months endedJune 30, 2021 . The decrease in general and administrative expense resulted primarily from a$3.1 million decrease in non-recurring legal and advisory fees, primarily arising from a stockholder's nomination of a competing slate of directors at our annual meeting of stockholders in 2021. This decrease in expense was partially offset by a$0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two recently departed members of our board of directors,$0.5 million in expenses related to the separation and retirement ofMr. Kits van Heyningen inMarch 2022 , and$0.5 million in one-time costs related to the reduction in our workforce inMarch 2022 . As a percentage of net sales, general and administrative expense was 17% and 19% for the six months endedJune 30, 2022 and 2021, respectively.
Interest and Other Income (Expense), Net
Interest income decreased by less than$0.1 million to$0.4 million for the six months endedJune 30, 2022 from$0.5 million for the six months endedJune 30, 2021 . Interest expense remained flat period-over-period at less than$0.1 million for both the six months endedJune 30, 2022 and 2021. Other income (expense), net increased to other income, net of$1.1 million for the six months endedJune 30, 2022 from other expense, net of$0.8 million for the prior period primarily due to an increase in foreign exchange gains from ourUK operations and the sale ofKVH Media Group Entertainment Limited during the six months endedJune 30, 2022 . 35 --------------------------------------------------------------------------------
Income Tax Expense (Benefit)
Income tax expense for the six months endedJune 30, 2022 was$0.6 million and related to taxes on income earned in foreign jurisdictions. Income tax benefit for the six months endedJune 30, 2021 was$0.1 million and related to losses generated in foreign jurisdictions.
Segment Discussion - Six months ended
Our net sales by segment for the six months endedJune 30, 2022 and 2021 were as follows: Change For the six months ended June 30, 2022 vs. 2021 2022 2021 $ % (dollars in thousands) Mobile connectivity sales: Product$ 13,183 $ 14,937 $ (1,754) (12) % Service 54,521 49,325 5,196 11 % Net sales$ 67,704 $ 64,262 $ 3,442 5 % Inertial navigation sales: Product$ 14,766 $ 20,764 $ (5,998) (29) % Service 461 629 (168) (27) % Net sales$ 15,227 $ 21,393 $ (6,166) (29) % Operating income (loss) by segment for the six months endedJune 30, 2022 and 2021 were as follows: Change For the six months ended June 30, 2022 vs. 2021 2022 2021 $ % (dollars in thousands) Mobile connectivity$ 5,830 $ 183 $ 5,647 3,086 % Inertial navigation (1,749) 2,735 (4,484) (164) %$ 4,081 $ 2,918 $ 1,163 40 % Unallocated (11,121) (12,327) 1,206 10 % Loss from operations$ (7,040) $ (9,409) $ 2,369 25 %
Mobile Connectivity Segment
Net sales in the mobile connectivity segment increased by$3.4 million , or 5%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . Mobile connectivity product sales decreased by$1.8 million , or 12%, to$13.2 million for the six months endedJune 30, 2022 from$14.9 million for the six months endedJune 30, 2021 . The decrease in mobile connectivity product sales was primarily due to a$1.1 million decrease in mini-VSAT Broadband product sales and a$0.3 million decrease in TracVision product sales. The decrease in mini-VSAT Broadband product sales was primarily due to a decrease in unit sales volume. Mobile connectivity service sales increased by$5.2 million , or 11%, to$54.5 million for the six months endedJune 30, 2022 from$49.3 million for the six months endedJune 30, 2021 . The increase was primarily due to a$5.4 million increase in our mini-VSAT service sales, partially offset by a$0.4 million decrease in our content services sales, primarily driven by the sale of a subsidiary inApril 2022 . 36 -------------------------------------------------------------------------------- Operating income for the mobile connectivity segment increased by$5.6 million to$5.8 million for the six months endedJune 30, 2022 as compared to$0.2 million for the six months endedJune 30, 2021 . This increase resulted primarily from an increase in sales less associated costs of$4.9 million , a$1.5 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce inMarch 2022 ) and a$0.4 million decrease in legal and professional fees, partially offset by$1.1 million in one-time costs related to the reduction in our workforce inMarch 2022 and a$0.4 million increase in warranty expense.
Inertial Navigation Segment
Net sales in the inertial navigation segment decreased$6.2 million , or 29%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . Inertial navigation product sales decreased by$6.0 million , or 29%, to$14.8 million for the six months endedJune 30, 2022 from$20.8 million for the six months endedJune 30, 2021 . This decrease was primarily due to a$5.8 million decrease in TACNAV product sales.
Inertial navigation service sales decreased
Our operating loss for the inertial navigation segment changed by$4.5 million to an operating loss of$1.7 million for the six months endedJune 30, 2022 as compared to operating income of$2.7 million for the six months endedJune 30, 2021 . This change resulted primarily from a decrease in sales less associated costs of$5.3 million and$0.3 million in one-time costs related to the reduction in our workforce inMarch 2022 , partially offset by a$1.4 million decrease in salaries, benefits and taxes (excluding costs associated with the previously mentioned reduction in workforce inMarch 2022 ).
Unallocated
Unallocated operating loss decreased$1.2 million , or 10%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 primarily due to a$3.1 million decrease in non-recurring legal and advisory fees. In 2021, these fees were incurred as a result of a stockholder's nomination of a competing slate of directors for our annual meeting of stockholders. Partially offsetting this decrease was$0.6 million of expenses related to the separation and retirement ofMr. Kits van Heyningen inMarch 2022 , a$0.6 million increase in recruiting expenses, which was driven by professional fees associated with the search for a new Chief Executive Officer and replacements for two recently departed members of our board of directors, and$0.4 million in one-time costs related to the reduction in our workforce inMarch 2022 .
Backlog
Backlog is not a meaningful indicator for predicting revenue in future periods. Commercial resellers for our mobile connectivity products and legacy products typically do not carry extensive inventories and rely on us to ship products quickly. Generally, due to rapid delivery of our commercial products, our backlog for those products is not significant.
Our backlog for all products and services was
Backlog consists of orders evidenced by written agreements and specified delivery dates for customers who are acceptable credit risks. We do not include satellite connectivity service sales in our backlog even though many of our satellite connectivity customers have signed annual or multi-year service contracts providing for a fixed monthly fee. Military orders included in backlog are generally subject to cancellation for the convenience of the customer. When orders are canceled, we generally recover actual costs incurred through the date of cancellation and the costs resulting from termination. As ofJune 30, 2022 , our backlog included$0.0 million in orders that are subject to cancellation for convenience by the customer. Individual orders for inertial navigation products are often large and may require procurement of specialized long-lead components and allocation of manufacturing resources. The complexity of planning and executing larger orders generally requires customers to order well in advance of the required delivery date, resulting in backlog. 37 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our primary liquidity needs have been to fund general business requirements, including working capital requirements and capital expenditures. In recent years, we have funded our operations primarily from the sale of a business in 2019, a PPP loan, cash flows from operations, bank financings and proceeds received from exercises of stock options and the issuance of stock. InMay 2020 , we received a$6.9 million loan fromBank of America, N.A . (the Lender), under the PPP, which was established under the CARES Act. Pursuant to the terms of the CARES Act, inAugust 2021 , we applied for forgiveness of the full amount of the PPP Loan. OnSeptember 24, 2021 , we received notification from the bank that, onSeptember 19, 2021 , theU.S. Small Business Administration (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. As ofJune 30, 2022 , we had$15.6 million in cash, cash equivalents, and marketable securities, of which$2.7 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries. Our foreign subsidiaries held no marketable securities as ofJune 30, 2022 . As ofJune 30, 2022 , we had$52.0 million in working capital. Based upon our current working capital position, current operating plans and expected business conditions, we expect to have sufficient funds, through at least twelve months from the date that this report is filed with theSEC , to fund our short-term and long-term working capital requirements, including capital expenditures and contractual obligations, primarily using our existing cash, cash equivalents and marketable securities and any operating cash flow. Our funding plans for our working capital needs and other commitments may be adversely impacted if our underlying assumptions regarding our anticipated revenues and expenses are not realized. If our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In that event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise funds by issuing equity securities, our stockholders may experience dilution. Net cash used in operations was$3.2 million for the six months endedJune 30, 2022 compared to net cash provided by operations of$4.8 million for the six months endedJune 30, 2021 . The$8.0 million change in cash used in operations is primarily due to an$8.7 million increase in cash outflows relating to inventories, a$1.7 million decrease in non-cash items, a$1.1 million increase in cash outflows related to accounts payable and accrued expenses, and a$1.1 million decrease in cash inflows relating to accounts receivable. Partially offsetting these items was a$3.6 million decrease in net loss, a$0.7 million decrease in cash outflows related to contract liabilities and long-term contract liabilities, and a$0.4 million decrease in cash outflows related to other non-current assets and non-current contract assets. Net cash provided by investing activities was$2.3 million for the six months endedJune 30, 2022 compared to net cash used in investing activities of$10.5 million for the six months endedJune 30, 2021 . The$12.8 million change in net cash provided by investing activities was primarily the result of an$8.0 million increase in net cash inflows relating to the purchase and sales of marketable securities and a$2.5 million decrease in capital expenditures, as well as$2.4 million in proceeds from the sale ofKVH Media Group Entertainment Limited . Net cash provided by financing activities was$0.2 million for the six months endedJune 30, 2022 compared to net cash provided by financing activities of$2.3 million for the six months endedJune 30, 2021 . The$2.1 million decrease in net cash provided by financing activities is primarily attributable to the$2.1 million decrease in cash inflows relating to proceeds from stock options exercised and the employee stock purchase plan.
Borrowing Arrangements
Paycheck Protection Program Loan
InMay 2020 , we received a$6.9 million loan from the Lender under the PPP, which was established under the CARES Act and is administered by 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. InAugust 2021 , we applied for forgiveness of the full amount of the PPP Loan. OnSeptember 24, 2021 , we received notification from the Lender that, onSeptember 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. 38 --------------------------------------------------------------------------------
Line of Credit
EffectiveOctober 30, 2018 , we entered into an amended and restated three-year senior secured credit facility agreement (the 2018 Credit Agreement) withBank of America, N.A ., as Administrative Agent, and the lenders named from time to time as parties thereto (the 2018 Lenders), which included a reducing revolving credit facility (the 2018 Revolver) of up to$20.0 million initially and reducing to$15.0 million onDecember 31, 2019 , to be used for general corporate purposes. Our obligations under the 2018 Credit Agreement are secured by substantially all of our assets and the pledge of equity interests in certain of our subsidiaries. As ofJune 30, 2022 , 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 our representations and warranties and the absence of any default under the 2018 Credit Agreement. As ofJune 30, 2022 , the full balance of the$15.0 million 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 throughDecember 31, 2020 and may not exceed 2.00:1.00 afterDecember 31, 2020 . The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00. OnJuly 30, 2020 , we 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 were 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. InSeptember 2021 , the PPP Loan was forgiven in full. OnOctober 29, 2021 , we amended the 2018 Credit Agreement to maintain the$15.0 million 2018 Revolver, extend the maturity date of the 2018 Revolver toOctober 28, 2022 , eliminate the Consolidated Fixed Charge Coverage Ratio financial covenant, add a minimum trailing four-quarter Consolidated Adjusted EBITDA financial covenant of$3.0 million , 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. We were in compliance with these financial covenants as ofJune 30, 2022 . 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 our business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements.
Other Matters
We intend to continue to invest in the mini-VSAT Broadband network on a global basis. As part of the future potential capacity expansion, we plan to acquire additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel. From time to time we have entered into multi-year agreements to lease satellite capacity, and we have also purchased numerous satellite hubs to support the added capacity. These transactions can involve millions of dollars.
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