PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	March 31, 2020		December 31, 2019
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	18,542	$	18,365
Marketable securities	22,487		29,907
Accounts receivable, net of allowance for doubtful accounts of $1,722 and $1,589 as of March 31, 2020 and December 31, 2019, respectively	28,968		32,891
Inventories, net	25,555		23,465
Prepaid expenses and other current assets	3,422		3,188
Current contract assets	1,424		1,458
Total current assets	100,398		109,274
Property and equipment, net	54,756		53,584
Intangible assets, net	4,432		4,943
Goodwill	14,730		15,408
Right of use asset operating lease	5,026		6,286
Other non-current assets	6,644		6,443
Non-current contract assets	3,259		3,408

Non-current deferred income tax asset	40		45
Total assets	$	189,285	$	199,391
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,818	$	15,031
Accrued compensation and employee-related expenses	5,129		5,637
Accrued other	8,551		7,733
Accrued product warranty costs	2,212		2,194
Contract liabilities	4,933		4,443
Current operating lease liability	1,634		2,831
Liability for uncertain tax positions	532		521
Total current liabilities	36,809		38,390
Other long-term liabilities	1,138		1,292
Long-term operating lease liability	3,422		3,482
Long-term contract liabilities	5,221		5,476
Non-current deferred income tax liability	818		762
Total liabilities	$	47,408	$	49,402
Commitments and contingencies (Notes 2, 10, 12, and 19)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; NaN issued	—		—
Common stock, $0.01 par value. Authorized 30,000,000 shares; 19,419,121 and 19,398,699 shares issued at March 31, 2020 and December 31, 2019, respectively; and 17,986,427 and 18,001,261 shares outstanding at March 31, 2020 and December 31, 2019, respectively	194		194
Additional paid-in capital	145,457		144,485
Retained earnings	13,324		19,538
Accumulated other comprehensive loss	(5,247)		(2,767)
	153,728		161,450
Less: treasury stock at cost, common stock, 1,432,694 and 1,397,438 shares as of March 31, 2020 and December 31, 2019, respectively	(11,851)		(11,461)
Total stockholders’ equity	141,877		149,989
Total liabilities and stockholders’ equity	$	189,285	$	199,391

See accompanying Notes to Unaudited Consolidated Interim Financial Statements.

March 31,
2019 December 31,
2018
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 14,259
$ 18,050
Marketable securities 25
25
Accounts receivable, net of allowance for doubtful accounts of $2,555 and $2,685 as of March 31, 2019 and December 31, 2018, respectively 28,832
29,663
Inventories 26,062
22,942
Prepaid expenses and other current assets 4,320
3,494
Current contract assets 3,678
3,566
Total current assets 77,176
77,740
Property and equipment, net 53,697
53,248
Intangible assets, net 9,807
10,518
Goodwill 32,845
32,213
Right of use asset operating lease 9,411
—
Other non-current assets 7,021
6,736
Non-current contract assets 7,342
6,971
Non-current deferred income tax asset 210
226
Total assets $ 197,509
$ 187,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 20,270
$ 17,726
Accrued compensation and employee-related expenses 4,249
5,167
Accrued other 10,131
10,964
Accrued product warranty costs 2,021
1,916
Current portion of long-term debt 10,585
9,928
Contract liabilities 12,211
9,193
Current operating lease liability 4,749
—
Liability for uncertain tax positions 1,141
1,116
Total current liabilities 65,357
56,010
Other long-term liabilities 1,752
1,920
Long-term operating lease liability 4,672
—
Long-term contract liabilities 9,634
9,070
Long-term debt, excluding current portion 18,749
19,437
Non-current deferred income tax liability 1,747
1,700
Total liabilities $ 101,911
$ 88,137
Commitments and contingencies (Notes 2, 10, 12, and 19)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued —
—
Common stock, $0.01 par value. Authorized 30,000,000 shares; 19,134,469 and 19,026,393 shares issued at March 31, 2019 and December 31, 2018, respectively; and 17,852,047 and 17,743,971 shares outstanding at March 31, 2019 and December 31, 2018, respectively 191
190
Additional paid-in capital 140,790
139,617
Accumulated deficit (21,576 ) (15,397 )
Accumulated other comprehensive loss (13,643 ) (14,731 )
105,762
109,679
Less: treasury stock at cost, common stock, 1,282,422 and 1,282,422 shares as of March 31, 2019 and December 31, 2018, respectively (10,164 ) (10,164 )
Total stockholders’ equity 95,598
99,515
Total liabilities and stockholders’ equity $ 197,509
$ 187,652

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended
	March 31,
	2020		2019
Sales:
Product	$	13,094	$	13,215
Service	23,474		23,161
Net sales	36,568		36,376
Costs and expenses:
Costs of product sales	9,636		8,284
Costs of service sales	15,195		15,373
Research and development	4,287		3,868
Sales, marketing and support	8,700		8,130
General and administrative	6,398		6,955
Total costs and expenses	44,216		42,610
Loss from operations	(7,648)		(6,234)
Interest income	313		175
Interest expense	4		385
Other income (expense), net	1,502		(97)
Loss from continuing operations before income tax expense (benefit)	(5,837)		(6,541)
Income tax expense (benefit)	377		(44)
Net loss from continuing operations	(6,214)		(6,497)

Income from discontinued operations, net of tax	—		243
Net loss	$	(6,214)	$	(6,254)

Net loss from continuing operations per common share
Basic and diluted ^(a)	$	(0.35)	$	(0.38)

Net income from discontinued operations per common share
Basic and diluted ^(a)	$	0.00	$	0.01
Net loss per common share
Basic and diluted ^(a)	$	(0.35)	$	(0.36)
Weighted average number of common shares outstanding:
Basic and diluted	17,529		17,302

(a) Earnings per share components for 2019 do not sum due to rounding.

See accompanying Notes to Unaudited Consolidated Interim Financial Statements.

Three Months Ended
March 31,
2019 2018
Sales:
Product $ 12,874
$ 13,992
Service 27,098
26,109
Net sales 39,972
40,101
Costs and expenses:
Costs of product sales 7,853
8,923
Costs of service sales 16,697
13,816
Research and development 3,868
3,934
Sales, marketing and support 9,303
8,941
General and administrative 8,080
7,667
Total costs and expenses 45,801
43,281
Loss from operations (5,829 ) (3,180 )
Interest income 175
148
Interest expense 385
409
Other expense, net (106 ) (274 )
Loss before income tax expense (6,145 ) (3,715 )
Income tax expense 34
178
Net loss $ (6,179 ) $ (3,893 )

Net loss per common share

Basic and diluted $ (0.36 ) $ (0.23 )
Weighted average number of common shares outstanding:
Basic and diluted 17,302
16,742

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)


	Three Months Ended
	March 31,
	2020		2019
Net loss	$	(6,214)	$	(6,254)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment	(2,480)		1,080
Unrealized gain on derivative instruments, net	—		8
Other comprehensive (loss) income, net of tax⁽¹⁾	(2,480)		1,088
Total comprehensive loss	$	(8,694)	$	(5,166)

Three Months Ended
March 31,
2019 2018
Net loss $ (6,179 ) $ (3,893 )
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities —
1
Foreign currency translation adjustment 1,080
2,444
Unrealized gain on derivative instruments, net 8
22
Other comprehensive income, net of tax⁽¹⁾
1,088
2,467
Total comprehensive loss $ (5,091 ) $ (1,426 )

(1) Tax impact was nominal for all periods.

See accompanying Notes to Unaudited Consolidated Interim Financial Statements.

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, unaudited)


	Common Stock					Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss	Treasury Stock					Total Stockholders’ Equity
	Shares	Amount													Shares		Amount
Balance at December 31, 2019	19,399	$	194	$	144,485	$	19,538	$	(2,767)	(1,397)	$	(11,461)	$	149,989
Net loss	—	—		—		(6,214)		—		—	—		(6,214)
Other comprehensive loss	—	—		—		—		(2,480)		—	—		(2,480)
Stock-based compensation	—	—		805		—		—		—	—		805
Issuance of common stock under employee stock purchase plan	20	—		156		—		—		—	—		156
Acquisition of treasury stock	—	—		—		—		—		(36)	(390)		(390)
Exercise of stock options and issuance of restricted stock awards, net of forfeitures	—	—		11		—		—		—	—		11
Balance at March 31, 2020	19,419	$	194	$	145,457	$	13,324	$	(5,247)	(1,433)	$	(11,851)	$	141,877


	Common Stock					Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss	Treasury Stock					Total Stockholders’ Equity
	Shares	Amount													Shares		Amount
Balance at December 31, 2018	19,026	$	190	$	139,617	$	(15,397)	$	(14,731)	(1,282)	$	(10,164)	$	99,515
Net loss	—	—		—		(6,254)		—		—	—		(6,254)
Other comprehensive income	—	—		—		—		1,088		—	—		1,088
ASC 606 correction (FN 16)	—	—		—		1,680		—		—	—		1,680
Stock-based compensation	—	—		874		—		—		—	—		874
Issuance of common stock under employee stock purchase plan	23	—		218		—		—		—	—		218
Exercise of stock options and issuance of restricted stock awards, net of forfeitures	85	1		81		—		—		—	—		82
Balance at March 31, 2019	19,134	$	191	$	140,790	$	(19,971)	$	(13,643)	(1,282)	$	(10,164)	$	97,203

See accompanying Notes to Unaudited Consolidated Interim Financial Statements.

Common Stock
Additional
Paid-in
Capital
Accumulated Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance at December 31, 2018 19,026
$ 190
$ 139,617
$ (15,397 ) $ (14,731 ) (1,282 ) $ (10,164 ) $ 99,515
Net loss —
—
—
(6,179 ) —
—
—
(6,179 )
Other comprehensive income —
—
—
—
1,088
—
—
1,088
Stock-based compensation —
—
874
—
—
—
—
874
Issuance of common stock under employee stock purchase plan 23
—
218
—
—
—
—
218
Exercise of stock options and issuance of restricted stock awards, net of forfeitures 85
1
81
—
—
—
—
82
Balance at March 31, 2019 19,134
$ 191
$ 140,790
$ (21,576 ) $ (13,643 ) (1,282 ) $ (10,164 ) $ 95,598

Common Stock
Additional
Paid-in
Capital
Accumulated Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance at December 31, 2017 18,788
$ 188
$ 134,361
$ (4,417 ) $ (11,317 ) (1,659 ) $ (13,150 ) $ 105,665
Net loss —
—
—
(3,893 ) —
—
—
(3,893 )
Other comprehensive income —
—
—
—
2,467
—
—
2,467
ASC 606 adoption —
—
—
(2,748 ) —
—
—
(2,748 )
Stock-based compensation —
—
853
—
—
—
—
853
Sale of treasury stock —
—
1,478
—
—
377
2,986
4,464
Exercise of stock options and issuance of restricted stock awards, net of forfeitures 16
—
26
—
—
—
—
26
Balance at March 31, 2018 18,804
$ 188
$ 136,718
$ (11,058 ) $ (8,850 ) (1,282 ) $ (10,164 ) $ 106,834

KVH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)


	Three Months Ended
	March 31,
	2020		2019
Cash flows from operating activities:
Net loss	$	(6,214)	$	(6,254)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts	238		(65)
Depreciation and amortization	2,650		3,527
Deferred income taxes	—		71
Loss on disposals of fixed assets	54		56

Compensation expense related to stock-based awards and employee stock purchase plan	805		874
Unrealized currency translation (gain) loss	(1,065)		1,082
Changes in operating assets and liabilities:
Accounts receivable	3,577		944
Inventories	(2,094)		(3,117)
Prepaid expenses, other current assets and current contract assets	(243)		952
Other non-current assets and non-current contract assets	(47)		1,236
Accounts payable	(1,174)		2,627
Contract liabilities and long-term contract liabilities	317		(1,254)
Accrued compensation, product warranty and other	246		(1,738)
Other long-term liabilities	2		(15)
Net cash used in operating activities	$	(2,948)	$	(1,074)
Cash flows from investing activities:
Capital expenditures	(3,277)		(3,027)
Cash paid for acquisition of intangible asset	(22)		(25)
Purchases of marketable securities	(79)		—
Maturities and sales of marketable securities	7,500		—
Net cash provided by (used in) investing activities	$	4,122	$	(3,052)
Cash flows from financing activities:
Repayments of long-term debt	—		(31)


Proceeds from stock options exercised and employee stock purchase plan	156		314
Repurchase of common stock	(390)		—
Payment of finance lease	(156)		(152)
Net cash (used in) provided by financing activities	$	(390)	$	131
Effect of exchange rate changes on cash and cash equivalents	(607)		204
Net increase (decrease) in cash and cash equivalents	177		(3,791)
Cash and cash equivalents at beginning of period	18,365		18,050
Cash and cash equivalents at end of period	$	18,542	$	14,259
Supplemental disclosure of non-cash investing activities:
Changes in accrued other and accounts payable related to property and equipment additions	$	423	$	161

See accompanying Notes to Unaudited Consolidated Interim Financial Statements.

Three Months Ended
March 31,
2019 2018
Cash flows from operating activities:
Net loss $ (6,179 ) $ (3,893 )
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts (65 ) 28
Depreciation and amortization 3,527
3,050
Deferred income taxes 16
9
Loss on disposals of fixed assets 56
—
Compensation expense related to stock-based awards and employee stock purchase plan 874
853
Unrealized currency translation loss 47
40
Changes in operating assets and liabilities:
Accounts receivable 944
(91 )
Inventories (3,117 ) (558 )
Prepaid expenses, other current assets and current contract assets (891 ) (651 )
Other non-current assets and non-current contract assets (705 ) (836 )
Accounts payable 2,627
1,067
Contract liabilities and long-term contract liabilities 3,526
1,094
Accrued compensation, product warranty and other (1,719 ) (1,303 )
Other long-term liabilities and long-term operating lease liabilities (15 ) (6 )
Net cash used in operating activities $ (1,074 ) $ (1,197 )
Cash flows from investing activities:
Capital expenditures (3,027 ) (3,189 )
Cash paid for acquisition of intangible asset (25 ) —
Purchases of marketable securities —
(1,026 )
Maturities and sales of marketable securities —
6,013
Net cash (used in) provided by investing activities $ (3,052 ) $ 1,798
Cash flows from financing activities:
Repayments of long-term debt (31 ) (44 )
Repayments of term note borrowings —
(2,825 )
Proceeds from stock options exercised and employee stock purchase plan 314
—
Sale of treasury stock —
4,500
Payment of finance lease (152 ) (107 )
Net cash provided by financing activities $ 131
$ 1,524
Effect of exchange rate changes on cash and cash equivalents 204
1,047
Net (decrease) increase in cash and cash equivalents (3,791 ) 3,172
Cash and cash equivalents at beginning of period 18,050
34,596
Cash and cash equivalents at end of period $ 14,259
$ 37,768
Supplemental disclosure of non-cash investing activities:
Changes in accrued other and accounts payable related to property and equipment additions $ 161
$ 537

KVH INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Interim Financial Statements

(Unaudited, all amounts in thousands except per share amounts)

(1) Description of Business

KVH Industries, Inc. (together with its subsidiaries, the Company or KVH) ~~is a leading manufacturer of solutions that provide global high-speed Internet, television,~~designs, develops, manufactures and ~~voice~~markets mobile connectivity products and services ~~via satellite to mobile users at sea~~for the marine and ~~on land. KVH is also a leading provider of commercially licensed entertainment, including news, sports, music,~~land markets, and ~~movies, to~~inertial navigation products for both the commercial and ~~leisure customers in the maritime, hotel, and retail~~defense markets. In addition, the Company develops and distributes training films and eLearning computer-based training courses to commercial maritime customers. KVH is also a premier manufacturer of high-performance navigational sensors and integrated inertial systems for defense and commercial applications. KVH’sKVH's reporting segments are as follows:

•the mobile connectivity segment and

•the inertial navigation segment

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

KVH’s mobile connectivity service sales represent primarily ~~represent~~ sales earned from satellite voice and Internet airtime services. KVH provides, for monthly fixed and usage fees, satellite connectivity services, including broadband Internet, data and VoIP services, to its TracPhone V-series customers. ~~The Company offers~~ AgilePlans, a ~~monthly~~ mini-VSAT Broadband service offering, is a monthly subscription model providing global connectivity to commercial maritime customers, including hardware, installation, broadband Internet, Voice over Internet Protocol (VoIP), entertainment and training content and global support for a monthly fee with no minimum commitment. KVH offers AgilePlans customers a variety of airtime data plans with varying data speeds and fixed data usage levels with overage charges per megabyte, which is similar to the plans that the Company offers to its other customers. The Company recognizes the monthly subscription fee as service revenue over the service delivery period. The Company retains ownership of the hardware that it provides to AgilePlans customers, who must return the hardware to KVH if they decide to terminate the service. Because KVH does not sell the hardware under AgilePlans, the Company does not recognize any product revenue when the hardware is deployed to an AgilePlans customer. KVH records the cost of the hardware used by AgilePlans customers as revenue-generating assets and depreciates the cost over an estimated useful life of five years. Since the Company ~~retains~~is retaining ownership of the hardware, it does not accrue any warranty costs for AgilePlans hardware; however, any maintenance costs ~~for~~on the hardware are expensed in the period these costs are incurred.

Mobile connectivity service sales also include the distribution of commercially licensed entertainment, including news, sports, music, and movies to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group, and the distribution of training films and eLearning computer-based training courses to commercial customers in the maritime market through Super Dragon Limited and Videotel Marine Asia Limited (together referred to as Videotel).Group. KVH also earns monthly usage fees from third-party satellite connectivity services, including voice, data and Internet services, provided to its Inmarsat and Iridium customers who choose to activate their subscriptions with KVH. Mobile connectivity service sales also include engineering services provided under development contracts, sales from product repairs, and extended warranty sales.

On May 13, 2019, the Company and its wholly owned subsidiary, KVH Media Group Limited (KMG), entered into a Share Purchase Agreement (the Purchase Agreement) with Pelican Holdco Limited, an affiliate of Oakley Capital IV Master SCSp, a UK company (together, Oakley), pursuant to which KMG sold all of the issued share capital of Super Dragon Limited and Videotel Marine Asia Limited (together referred to as Videotel) to Oakley for $89,387 in cash, on a cash-free, debt-free basis, subject to a working capital adjustment. Videotel comprised the Company’s maritime training business, which offered video, animation, eLearning computer-based training and interactive distance learning services to the maritime industry. The sale was completed immediately upon execution of definitive agreements. The Company received payment of the initial purchase price pursuant to a loan agreement (the Bridge Loan) on June 21, 2019. The Bridge Loan was secured by a charge (a type of foreign security interest) over the shares of Super Dragon Limited and Videotel Marine Asia Limited and was further backed by an equity commitment letter from Oakley Capital IV Master SCSp. The Bridge Loan’s interest rate was 5% per year during the period from closing until and including the 15th business day after the closing and increased to 12% per year during the period after the 15th business day until the maturity date. In December 2019, the Company finalized the working capital adjustment, which reduced the proceeds from the sale of Videotel to $88,447. The Company does not have any continuing involvement in these operations other than to provide 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 20 for the discontinued operations disclosures.

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

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

(2) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company has evaluated all subsequent events through the date of this filing. All significant intercompany accounts and transactions have been eliminated in consolidation.

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

The consolidated interim financial statements have not been audited by the Company’s independent registered public accounting firm and include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods presented. These consolidated interim financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, ~~2018~~2019 filed on ~~March 1, 2019~~February 28, 2020 with the Securities and Exchange Commission. The results for the three months ended March 31, ~~2019~~2020 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 financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. As described in the Company’s annual report on Form 10-K, the most significant estimates and assumptions by management affect the Company’s revenue recognition, valuation of accounts receivable, valuation of inventory, ~~valuations and deferred purchase price consideration related to asset acquisition,~~ expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of long-lived assets, including goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, 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.~~allowance, and the valuation of right-of-use assets and lease liabilities. The Company has reviewed these estimates and determined that these remain the most significant estimates ~~in addition to the valuation of right-of-use assets and lease liabilities,~~ for the three months ended March 31, ~~2019.~~2020.

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.

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

During the third quarter of 2019, the Company identified an out-of-period immaterial error related to the ~~significant accounting policies disclosed in~~implementation and application of ASC 606 with respect to the ~~Company’s annual report on Form 10-K for the year ended December~~recognition of revenue associated with sales-type leases, which impacted our March 31, ~~2018 was the Company’s adoption of Accounting Standards Codification (ASC) 842,~~ ~~Leases,~~ ~~effective January 1, 2019.~~2019 consolidated interim financial statements. Please see Note ~~19 for further discussion.~~

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

~~During the first quarter of 2018, the Company entered into a five-year capital lease for three satellite hubs for the HTS network. Please see Note 19~~16 for further discussion.

(3) Accounting Standards Issued and Not Yet Adopted

ASC Update No. 2016-13, ASC Update No. 2018-19, ASC Update No. 2019-04, ASC Update No. 2019-05, ASC Update No. 2019-10, ASC Update No. 2019-11 and ASC Update No. ~~2018-19~~2020-02.

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

In November 2018, the FASB issued ASC Update No. 2018-19, Codification ~~Improvements to Topic 326,~~Improvements: Financial ~~Instruments—~~Instruments – Credit ~~Losses.~~Losses (Topic 326). This update introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. 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: Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Financial Instruments (Topic 825). 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 for certain types of entities. The update amends ASC 326 and ASC 350's effective date for all SEC filers other than smaller reporting companies to be the fiscal years beginning after December 15, 2019, and interim periods therein. The effective date for all other entities, including smaller reporting companies, will be the fiscal years beginning after December 15, 2022, and interim periods therein. The update does not change the effective date of ASC 815 and ASC 842 for public business entities (PBEs), but amends the effective date for all other entities to be the fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

In November 2019, the FASB issued ASC Update No. 2019-11, Codification Improvements: Financial Instruments – Credit Losses (Topic 326). The update is effective for entities that have adopted ASU 2016-13, and the amendments in ASU 2019-11 are effective for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted in any interim period after issuance of this update as long as an entity has adopted the amendments in Update 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 amend SEC paragraphs in the ASC that describe SEC guidance or SEC staff views that the Financial Accounting Standards Board (FASB) includes as a convenience to Codification users.

As a current smaller reporting entity, the effective date will be the fiscal years beginning after December 15, 2022. The adoption of Update ~~No.~~Nos. 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and ~~2018-19 is~~2020-02 are not expected to have a material impact on the Company's financial position or results of operations.

ASC Update No. ~~2018-13~~2019-12

In ~~August 2018,~~December 2019, the FASB issued ASC Update No. ~~2018-13,~~ ~~Fair Value Measurement~~2019-12, Income Taxes (Topic ~~820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.~~ 740). The update is effective for annual periods beginning on or after December 15, 2019. Early adoption is permitted upon issuance of this update. The purpose of Update No. 2018-13 is to modify and eliminate some of the disclosure requirements on fair value measurements found in Topic 820, Fair Value Measurement, for both public and nonpublic entities. Through the inclusion of this update, FASB aims to facilitate a clear communication of the information required by GAAP that is most important to users of each entity's financial statements, thus helping to improve the effectiveness of disclosures in the notes to financial statements. Update No. 2018-13 is not expected to have a material impact on the Company's financial position or results of operations.

~~ASC Update No. 2018-15~~

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

~~ASC Update No. 2018-18~~

~~In November 2018, the FASB issued ASC Update No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This~~ update is effective for public business entities for fiscal years, ~~beginning after December 15, 2019,~~ and ~~the~~ interim periods within those fiscal ~~years.~~years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period, for public business entities for periods for which financial statements have not yet been issued. The purpose of Update No. ~~2018-18~~2019-12 is to ~~help make clarifications on~~remove certain exceptions for recognizing deferred taxes for investments and simplify the ~~interactions between Topic 808, Collaborative Arrangement,~~accounting for income taxes in certain areas, including recognizing deferred taxes for tax goodwill and ~~Topic 606, Revenue from Contracts with Customers.~~allocating taxes to members of a consolidated group. It amends the requirements relating to the accounting for "hybrid" tax regimes. Update No. ~~2018-18~~2019-12 is not expected to have a material impact on the Company's financial position or results of ~~operation.~~operations.

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


~~(4)~~	~~Marketable Securities~~

(4) Marketable Securities

Marketable securities as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 consisted of the following:


March 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2020									March 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Money market mutual funds	$	25	$	—	$	—	$	25	Money market mutual funds	$	22,487	$	—	$	—	$	22,487
Total marketable securities designated as available-for-sale	$	25	$	—	$	—	$	25	Total marketable securities designated as available-for-sale	$	22,487	$	—	$	—	$	22,487

December 31, 2018
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
Money market mutual funds $ 25
$ —
$ —
$ 25
Total marketable securities designated as available-for-sale $ 25
$ —
$ —
$ 25

The amortized costs and fair value of marketable securities as of March 31, 2019 and December 31, 2018 are shown below by effective maturity. Effective maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.



~~March 31, 2019~~	~~Amortized~~ ~~Cost~~		~~Fair~~ ~~Value~~
~~Due in less than one year~~	$	—	$	—
~~December 31, 2018~~	~~Amortized~~ ~~Cost~~		~~Fair~~ ~~Value~~
~~Due in less than one year~~	$	—	$	—


December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Money market mutual funds	$	29,907	$	—	$	—	$	29,907
Total marketable securities designated as available-for-sale	$	29,907	$	—	$	—	$	29,907

Interest income from marketable securities was $113 and less than $1 ~~and $12~~ during the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

(5) Stockholder's Equity

(a) Stock Equity and Incentive Plan

The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation-Stock Compensation. Stock-based compensation expense, excluding compensation charges related to our employee stock purchase plan, or the ESPP, was ~~$860~~$789 and ~~$843~~$860 for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. As of March 31, ~~2019,~~2020, there was ~~$2,152~~$2,724 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of ~~2.68~~2.41 years. As of March 31, ~~2019,~~2020, there was ~~$3,743~~$2,869of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of ~~1.93~~2.29 years.

Stock Options

During the three months ended March 31, ~~2019, 7~~2020, 0 stock options were exercised for common stock, and no shares of common stock were delivered to the Company as payment for the exercise price or related minimum tax withholding obligations for the exercise of such options. During the three months ended March 31, ~~2019, no~~2020, 0 stock options were granted and 295 stock options expired, were canceled or were forfeited. The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model.

As of March 31, ~~2019,~~2020, there were ~~1,267~~1,529 options outstanding with a weighted average exercise price of ~~$10.29~~$9.68 per share and ~~514~~370options exercisable with a weighted average exercise price of ~~$10.37~~$9.60 per share.

Restricted Stock

During the three months ended March 31, ~~2019, 78~~2020, 0shares of restricted stock were granted ~~with a weighted average grant date fair value of $10.59 per share,~~ and no0 shares of restricted stock were forfeited. Additionally, during the three months ended March 31, ~~2019, 194~~2020, 102 shares of restricted stock vested, ~~none~~NaN of which were surrendered to the Company to satisfy minimum tax withholding obligations for the vesting of such shares.

As of March 31, ~~2019,~~2020, there were ~~409~~397 shares of restricted stock outstanding that were subject to service-based vesting conditions.

As of March 31, ~~2019,~~2020, the Company had no unvested outstanding options and no shares of restricted stock that were subject to performance-based or market-based vesting conditions.

(b) Employee Stock Purchase Plan

The Company's Amended and Restated 1996 Employee Stock Purchase Plan (ESPP) affords eligible employees the right to purchase common stock, via payroll deductions, through various offering periods at a purchase price equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the three months ended March 31, 2020 and 2019, 20 and ~~2018,~~ 23 ~~and 0~~ shares were issued under the ESPP plan, respectively. The Company recorded compensation charges of ~~$14~~$16 and ~~$10~~$14 for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, related to the ESPP.

The following table presents stock-based compensation expense, including under the ESPP, in the Company's consolidated statements of operations for the three months ended March 31, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended March 31,
	2020		2019
Cost of product sales	$	40	$	41
Cost of service sales	—		—
Research and development	153		172
Sales, marketing and support	154		182
General and administrative	458		479
	$	805	$	874

Three Months Ended
March 31,
2019 2018
Cost of product sales $ 41
$ 71
Cost of service sales —
—
Research and development 172
170
Sales, marketing and support 182
181
General and administrative 479
431
$ 874
$ 853

(d) Accumulated Other Comprehensive Loss (AOCI)

Comprehensive income (loss) includes net income (loss), unrealized gains and losses from foreign currency translation, unrealized gains and losses from available for sale marketable securities and changes in fair value related to interest rate swap derivative instruments, net of tax attributes. The components of the Company’s comprehensive income (loss) and the effect on earnings for the periods presented are detailed in the accompanying consolidated statements of comprehensive income (loss).

Foreign Currency Translation Unrealized (Loss) Gain on Available for Sale Marketable Securities Interest Rate Swaps Total Accumulated Other Comprehensive Loss
Balance, December 31, 2018 $ (14,720 ) $ —
$ (11 ) $ (14,731 )
Other comprehensive income before reclassifications 1,080
—
—
1,080
Amounts reclassified from AOCI to Other income, net —
—
8
8
Net other comprehensive income, March 31, 2019 1,080

—
8
1,088
Balance, March 31, 2019 $ (13,640 ) $ —
$ (3 ) $ (13,643 )


	Foreign Currency Translation		Total Accumulated Other Comprehensive Loss
Balance, December 31, 2019	$	(2,767)	$	(2,767)
Other comprehensive loss	(2,480)		(2,480)
Net other comprehensive loss	(2,480)		(2,480)
Balance, March 31, 2020	$	(5,247)	$	(5,247)

Foreign Currency Translation Unrealized (Loss) Gain on Available for Sale Marketable Securities Interest Rate Swaps Total Accumulated Other Comprehensive Loss
Balance, December 31, 2017 $ (11,247 ) $ (1 ) $ (69 ) $ (11,317 )
Other comprehensive income before reclassifications 2,444
1
7
2,452
Amounts reclassified from AOCI to Other income, net —
—
15
15
Net other comprehensive income, March 31, 2018 2,444
1
22
2,467
Balance, March 31, 2018 $ (8,803 ) $ —
$ (47 ) $ (8,850 )


	Foreign Currency Translation		Interest Rate Swaps		Total Accumulated Other Comprehensive Loss
Balance, December 31, 2018	$	(14,720)	$	(11)	$	(14,731)
Other comprehensive income before reclassifications	1,080		—		1,080
Amounts reclassified from AOCI	—		8		8
Net other comprehensive income	1,080		8		1,088
Balance, March 31, 2019	$	(13,640)	$	(3)	$	(13,643)

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

(6) Net Loss per Common Share

Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net loss per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined with the treasury stock accounting method. For the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, since there was a net loss from continuing operations, the Company excluded ~~1,042~~1,341and ~~251,~~1,042, respectively, in outstanding stock options and non-vested restricted shares from its diluted loss per share calculation, as inclusion of these securities would have reduced the net loss per share.

A reconciliation of the basic and diluted weighted average common shares outstanding is as follows:


	Three Months Ended
	March 31,
	2020	2019
Weighted average common shares outstanding—basic	17,529	17,302
Dilutive common shares issuable in connection with stock plans	—	—
Weighted average common shares outstanding—diluted	17,529	17,302

Three Months Ended
March 31,
2019 2018
Weighted average common shares outstanding—basic 17,302
16,742
Dilutive common shares issuable in connection with stock plans —
—
Weighted average common shares outstanding—diluted 17,302
16,742

(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 March 31, ~~2019~~2020 and December 31, ~~2018~~2019 include the costs of material, labor, and factory overhead. Components of inventories consist of the following:


	March 31, 2020		December 31, 2019
Raw materials	$	14,203	$	12,755
Work in process	2,793		3,117
Finished goods	8,559		7,593
	$	25,555	$	23,465

March 31,
2019 December 31,
2018
Raw materials $ 14,822
$ 13,698
Work in process 3,513
2,489
Finished goods 7,727
6,755
$ 26,062
$ 22,942

(8) Property and Equipment

Property and equipment, net, as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 consist of the following:


	March 31, 2020		December 31, 2019
Land	$	3,828	$	3,828
Building and improvements	24,185		24,172
Leasehold improvements	499		501
Machinery and equipment	18,381		18,022
Revenue-generating assets	49,810		47,010
Office and computer equipment	14,259		14,054
Motor vehicles	31		31
	110,993		107,618
Less accumulated depreciation	(56,237)		(54,034)
	$	54,756	$	53,584

March 31,
2019 December 31,
2018
Land $ 3,828
$ 3,828
Building and improvements 24,059
24,060
Leasehold improvements 483
483
Machinery and equipment 17,345
17,239
Revenue-generating assets 44,442
42,424
Office and computer equipment 14,428
13,980
Motor vehicles 31
31
104,616
102,045
Less accumulated depreciation (50,919 ) (48,797 )
$ 53,697
$ 53,248

Depreciation expense was ~~$2,568~~$2,402 and ~~$1,953~~$2,093 for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, 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 March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had accrued product warranty costs of ~~$2,021~~$2,212 and ~~$1,916,~~$2,194, respectively.

The following table summarizes product warranty activity during ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended
	March 31,
	2020		2019
Beginning balance	$	2,194	$	1,916
Charges to expense	470		453
Costs incurred	(452)		(348)
Ending balance	$	2,212	$	2,021

Three Months Ended
March 31,
2019 2018
Beginning balance $ 1,916
$ 2,074
Charges to expense 453
741
Costs incurred (348 ) (788 )
Ending balance $ 2,021
$ 2,027

(10) Debt

~~Long-term debt consisted of the following:~~

March 31,
2019 December 31,
2018
2018 term notes $ 21,938
$ 21,938
Line of credit 5,000
5,000
Mortgage loan 2,551
2,597
Total long-term debt 29,489
29,535
Less debt issuance costs for 2018 term note(a) 155
170
Total long-term debt less debt issuance costs $ 29,334
$ 29,365
Less amounts classified as current 10,585
9,928
Long-term debt, excluding current portion $ 18,749
$ 19,437

~~(a)- Debt issuance costs classified as current and long-term are $60 and $95, respectively.~~

Term Note and Line of Credit

OnEffective October 30, 2018, the Company entered into an amended and restated ~~the 2014 Credit Agreement by entering into (i) a three-year~~three-year senior credit facility agreement (the 2018 Credit Agreement) with Bank of America, N.A., as Administrative Agent, and the lenders named from time to time as parties thereto (the 2018 Lenders), for an aggregate amount of up to $42,500, including a term loan (2018 Term Loan) of $22,500 and a reducing revolving credit facility (the 2018 Revolver) of up to $20,000 initially and reducing to $15,000 on December 31, 2019, each to be used for general corporate purposes, including the refinancing of indebtedness under the Company’s then-outstanding ~~indebtedness under the 2014 Credit Agreement as described below, (ii) a Security Agreement with respect to the grant by~~senior credit facility agreement.

On May 13, 2019, the Company entered into a consent with Bank of ~~a security interest~~America, N.A., as Administrative Agent, authorizing the Purchase Agreement and Bridge Loan, as discussed in ~~substantially all~~Note 1. On June 27, 2019, the Company used the proceeds of the ~~assets~~sale of Videotel to repay in full the Company in order to secure the obligations of the Company under the 2018 Credit Agreement, and (iii) Pledge Agreements with respect to the grant by the Company of a security interest in 65% of the capital stock of each of KVH Industries A/S and KVH Industries U.K. Limited held by the Company in order to secure the obligations of the Company under the 2018 Credit Agreement. On the closing date, the Company repaid $17,225 on the 2014 Term Loan and refinanced its remaining balance. On the closing date, the Company also borrowed $5,000 under the 2018 Revolver.

The Company is required to make principal repayments on the 2018 Term Loan in the amount of $563 at the end of each of the first four three-month periods following the closing (ending with the period ending September 30, 2019); thereafter, the principal repayment amount increases to $703 for the four succeeding three-month periods (ending with the period ending September 30, 2020) and further increases to $844 for each succeeding three-month period (ending with the period ending June 30, 2021) until the maturity of the loan on October 30, 2021. The first principal payment on the 2018 Term Loan was due on December 31, 2018. As of March 31, 2019, due to the timing of the payment schedule, no payment occurred during the three months ended March 31, 2019 and there are five quarters of principal repayments outstanding in the current portion of long-term debt. On October 30, 2021, the entire remaining principalthen-outstanding balance of $21,375 under the 2018 Term Loan and to repay $13,000 of the then-outstanding balance under the 2018 Revolver. Under the terms of the consent, the 2018 Revolver will remain at $20,000 through the term of the Credit Agreement. On October 30, 2021, the entire principal balance of any outstanding loans under the 2018 Revolver ~~are~~will be due and payable, together with all accrued and unpaid interest, fees and any other amounts due and payable under the 2018 Credit Agreement. ~~The 2018 Credit Agreement contains provisions requiring the mandatory prepayment~~As of March 31, 2020, 0 amounts were outstanding under the 2018 ~~Term Loan and the 2018 Revolver under specified circumstances, including (i) 100%~~Revolver.

Borrowings of ~~the net cash proceeds from certain dispositions~~up to the extent not reinvested in the Company’s business within a stated period, (ii) 50% of the net cash proceeds from stated equity issuances and (iii) 100% of the net cash proceeds from certain receipts above certain threshold amounts outside the ordinary course of business. The prepayments are first applied to the 2018 Term Loan, in inverse order of maturity, and then to the 2018 Revolver.

Loans under the 2018 Credit Agreement bear interest at varying rates determined in accordance with the 2018 Credit Agreement. Each Eurodollar Rate Loan, as defined in the 2018 Credit Agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at a rate per annum equal to the LIBOR Daily Floating Rate or Eurodollar Rate, each as defined in the 2018 Credit Agreement, as elected by the Company, plus the Applicable Margin, as defined in the 2018 Credit Agreement, and each Base Rate Loan, as defined in the 2018 Credit Agreement, bears interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the 2018 Credit Agreement, plus the Applicable Margin. The Applicable Margin ranges from 1.50% to 2.375% on Eurodollar Rate Loans and from 0.50% to 1.375% on Base Rate Loans, each depending on the Company’s Consolidated Leverage Ratio, as defined in the 2018 Credit Agreement. The highest Applicable Margin applies initially until the Compliance Certificate, as defined in the 2018 Credit Agreement, is delivered for the quarter ending June 30, 2019 and subsequently when the Consolidated Leverage Ratio exceeds 2.50:1.00. Upon certain defaults, including failure to make payments when due, interest becomes payable at a higher default rate.

~~Borrowings~~$20,000 under the 2018 Revolver are subject to the satisfaction of various conditions precedent at the time of each borrowing, including the continued accuracy of the Company’s representations and warranties and the absence of any default under the 2018 Credit Agreement. As of March 31, ~~2019, there was $5,000 outstanding under~~2020, the ~~2018 Revolver and the remaining balance of $15,000 was available for borrowing.~~Company is not able to draw on these funds due to covenant restrictions.

The 2018 Credit Agreement contains ~~two~~2 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 ~~initially~~ may not be greater than ~~3.00:1.00 and declines to 2.75:1.00 on September 30, 2019, to~~ 2.50:1.00 on December 31, 2019 and declines to 2.00:1.00 on December 31, 2020. The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00.

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

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

Mortgage Loan

~~As of March 31, 2019, the~~The Company previously had a mortgage loan ~~(as amended, the Mortgage~~(Mortgage Loan) ~~in the amount of $4,000~~ related to its headquarters facility in Middletown, Rhode Island. ~~The loan term was ten years, with a principal amortization of 20 years. The interest rate was based~~On April 1, 2019, on the ~~BBA LIBOR Rate plus 2.00 percentage points. The~~ Mortgage ~~Loan was secured by~~Loan’s original termination date, the ~~underlying property and improvements. The monthly mortgage payment was approximately $15, plus interest. Due to~~Company repaid in full the ~~difference in the term~~outstanding balance of ~~the loan and amortization of the principal, a balloon payment of $2,551 was due on April 1, 2019.~~

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

(11) Segment Reporting

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

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

The mobile connectivity segment primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and services that provide access to television, the Internet and voice services while on the move. Product sales within the mobile connectivity segment accounted for 18% and 20% of the Company's consolidated net sales for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Sales of mini-VSAT Broadband airtime service accounted for ~~46%~~53% and ~~41%~~50% of the Company's consolidated net sales for the three months ended March 31, ~~2019~~2020 and 2018, respectively. Sales of content and training services within the mobile connectivity segment accounted for 16% and 19% of the Company's consolidated net sales for the three months ended March 31, 2019, ~~and 2018,~~ respectively.

The inertial navigation segment manufactures and distributes a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address the rigorous requirements of military and commercial customers and provide reliable, easy-to-use and continuously available navigation and pointing data. The principal product categories in this segment include the FOG-based inertial measurement units (IMUs) for precision guidance, FOGs for tactical navigation as well as pointing and stabilization systems, and digital compasses that provide accurate heading information for demanding applications, security, automation and access control equipment and systems. Sales of FOG-based guidance and navigation systems within the inertial navigation segment accounted for 14% and 13% of the Company's consolidated net sales for ~~each of~~ the three months ended March 31, 2020 and 2019, ~~and 2018.~~respectively.

No other single product class accounts for 10% or more of the Company's consolidated net sales.

The Company operates in a number of major geographic areas across the globe. The Company generates international net sales, based upon customer location, primarily from customers located in Canada, Europe, Africa, Asia/Pacific, the Middle East, and India. International revenues represented ~~62%~~58% of the Company's consolidated net sales for each of the three months ended March 31, 2020 and ~~58%~~2019. Sales to Singapore represented 11% of the Company's consolidated net sales for the three months ended March 31, ~~2019 and 2018, respectively.~~2020. No other individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended March 31, 2020. No individual foreign country represented 10% or more of the Company's consolidated net sales for the three months ended ~~March��~~March 31, ~~2019 or 2018.~~2019.

As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of the Company’s long-lived tangible assets and were deemed not material.

Net sales and operating (loss) income for the Company's reporting segments and the Company's loss before income tax expense for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


	Three Months Ended March 31,							Three Months Ended March 31,
	2019			2018				2020		2019
Net sales:							Net sales:
Mobile connectivity	$	32,510		$	32,749		Mobile connectivity	$	28,896	$	28,914
Inertial navigation	7,462			7,352			Inertial navigation	7,672		7,462
Consolidated net sales	$	39,972		$	40,101		Consolidated net sales	$	36,568	$	36,376

Operating (loss) income:							Operating (loss) income:
Mobile connectivity	$	(1,039	)	$	1,072		Mobile connectivity	$	(2,299)	$	(1,444)
Inertial navigation	443			334			Inertial navigation	(821)		443
Subtotal	(596		)	1,406			Subtotal	(3,120)		(1,001)
Unallocated, net	(5,233		)	(4,586		)	Unallocated, net	(4,528)		(5,233)
Loss from operations	(5,829		)	(3,180		)	Loss from operations	(7,648)		(6,234)
Net interest and other expense	(316		)	(535		)
Loss before income tax expense	$	(6,145	)	$	(3,715	)
Net interest and other income (expense)							Net interest and other income (expense)	1,811		(307)
Loss from continuing operations before income tax expense (benefit)							Loss from continuing operations before income tax expense (benefit)	$	(5,837)	$	(6,541)

Depreciation expense and amortization expense for the Company's reporting segments for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


	Three Months Ended March 31,
	2020		2019
Depreciation expense:
Mobile connectivity	$	1,958	$	1,670
Inertial navigation	293		286
Unallocated	151		137
Total consolidated depreciation expense	$	2,402	$	2,093

Amortization expense:
Mobile connectivity	$	248	$	248
Inertial navigation	—		—
Unallocated	—		—
Total consolidated amortization expense	$	248	$	248

Three Months Ended
March 31,
2019 2018
Depreciation expense:
Mobile connectivity $ 2,145
$ 1,470
Inertial navigation 286
218
Unallocated 137
265
Total consolidated depreciation expense $ 2,568
$ 1,953

Amortization expense:
Mobile connectivity $ 959
$ 1,097
Inertial navigation —
—
Unallocated —
—
Total consolidated amortization expense $ 959
$ 1,097

(12) Legal Matters

From time to time, the Company is involved in litigation incidental to the conduct of its business. In the ordinary course of business, the Company is a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. The Company is not a party to any lawsuit or proceeding that, in management's opinion, is likely to materially harm the Company's business, results of operations, financial condition or cash flows.

(13) Share Buyback Program

On November 26, 2008, the Company’s Board of Directors authorized a program to repurchase up to 1,000 shares of the Company’s common stock. AsThe program was superseded on October 4, 2019. On October 4, 2019, the Company's Board of ~~March 31, 2019, 341~~Directors authorized a new share repurchase program pursuant to which the Company may purchase up to 1,000 shares of the Company’s common ~~stock remain available for repurchase under the authorized program.~~stock. The repurchase program is expected to be funded using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchase program, the Company, at management’s discretion, may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. The repurchase program has ~~no expiration date. There were no other~~a duration of one year. Under the Company's 2018 Credit Agreement, the Company may not repurchase ~~programs outstanding during the three months ended March~~more than $5,000 of shares before October 31, ~~2019 and no repurchase programs expired during the period.~~2021 without appropriate consent.

During the three months ended March 31, ~~2019 and 2018,~~2020, the Company ~~did not repurchase any~~repurchased 36 shares of ~~its~~ common stock in open market ~~transactions.~~transactions at a cost of approximately $390. The total amount the Company repurchased on the open market since the inception of the October 4, 2019 repurchase program was 151 shares of common stock for an approximate cost of $1,690. Except as noted above, there were no other repurchase programs outstanding.

(14) Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:


~~Level 1:~~	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments in money market mutual funds.

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company’s Level 1 assets are investments in money market mutual funds.


~~Level 2:~~	Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based on directly or indirectly market-corroborated inputs. The Company’s Level 2 liabilities are interest rate swaps.


~~Level 3:~~	~~Unobservable inputs that are supported by little or no market activity and are developed based on the best information available given the circumstances. The Company has no Level 3 assets.~~

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 valuation techniques are:~~


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

~~(b)~~

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

The following tables present financial assets and liabilities at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 for which the Company measures fair value on a recurring basis, by level, within the fair value hierarchy:

March 31, 2019 Total Level 1 Level 2 Level 3
Valuation
Technique
Assets
Money market mutual funds $ 25
$ 25
$ —
$ —
(a)
Liabilities
Interest rate swaps $ 3
$ —
$ 3
$ —
(b)


March 31, 2020	Total		Level 1		Level 2		Level 3		Valuation Technique
Assets
Money market mutual funds	$	22,487	$	22,487	$	—	$	—	(a)

December 31, 2018 Total Level 1 Level 2 Level 3
Valuation
Technique
Assets
Money market mutual funds $ 25
$ 25
$ —
$ —
(a)
Liabilities
Interest rate swaps $ 11
$ —
$ 11
$ —
(b)


December 31, 2019	Total		Level 1		Level 2		Level 3		Valuation Technique
Assets
Money market mutual funds	$	29,907	$	29,907	$	—	$	—	(a)

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

Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of the Company's ~~debt~~operating and financing lease liabilities approximates fair value based on currently available quoted rates of similarly structured ~~debt.~~borrowings.

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company's non-financial assets, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if an impairment exists. There were no impairments of the Company’s non-financial assets noted as of March 31, ~~2019.~~2020. The Company does not have any liabilities that are recorded at fair value on a non-recurring basis.

(15) Goodwill and Intangible Assets

Goodwill

The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, ~~2019:~~2020:

Amounts
Balance at December 31, 2018 $ 32,213
Foreign currency translation adjustment 632
Balance at March 31, 2019 $ 32,845


	Amounts
Balance at December 31, 2019	$	15,408

Foreign currency translation adjustment	(678)
Balance at March 31, 2020	$	14,730

Intangible Assets

The changes in the carrying amount of intangible assets during the three months ended March 31, ~~2019~~2020 are as follows:

Amounts
Balance at December 31, 2018 $ 10,518
Amortization expense (959 )
Intangible assets acquired in asset acquisition 25
Foreign currency translation adjustment 223
Balance at March 31, 2019 $ 9,807


	Amounts
Balance at December 31, 2019	$	4,943
Amortization expense	(248)
Intangible assets acquired in asset acquisition	22
Foreign currency translation adjustment	(285)
Balance at March 31, 2020	$	4,432

Intangible assets arose from an acquisition made prior to 2013 and the acquisition of KVH Media Group (acquired as Headland Media Limited) in May ~~2013 and the acquisition of Videotel in July 2014.~~2013. Intangibles arising from the acquisition made prior to 2013 ~~are being~~were amortized on a straight-line basis over an estimated useful life of 7 years. Intangibles arising from the acquisition of KVH Media Group are being amortized on a straight-line basis over the estimated useful life of: (i) 10 years for acquired subscriber relationships and (ii) 15 years for distribution rights, (iii) 3 years for internally developed software and (iv) 2 years for proprietary content. Intangibles arising from the acquisition of Videotel are being amortized on a straight-line basis over the estimated useful life of: (i) 8 years for acquired subscriber relationships, (ii) 5 years for favorable leases, (iii) 4 years for internally developed software and (iv) 5 years for proprietary content.rights. The intangibles arising from the KVH Media Group ~~and Videotel acquisitions~~acquisition were recorded in pounds sterling and fluctuations in exchange rates could cause these amounts to increase or decrease from time to time.

In January 2017, the Company completed the acquisition of certain subscriber relationships from a third party. This acquisition did not meet the definition of a business under ASC 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business, which the Company adopted on October 1, 2016. The Company ascribed $100 of the initial purchase price to the acquired subscriber relationships definite-lived intangible assets with an initial estimated useful life of 10 years. Under the asset purchase agreement, the purchase price 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 March 31, ~~2019,~~2020, the carrying value of the intangible assets acquired in the asset acquisition was ~~$202.~~$293. As the acquisition did not represent a business combination, the contingent consideration arrangement is recognized only when the contingency is resolved and the consideration is paid or becomes payable. The amounts payable under the contingent consideration arrangement, if any, will be included in the measurement of the cost of the acquired subscriber relationships. During the three months ended March 31, ~~2019, $25~~2020, $22 additional consideration was earned under the contingent consideration arrangement.

Acquired intangible assets are subject to amortization. The following table summarizes acquired intangible assets at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively:


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
March 31, 2020
Subscriber relationships	$	7,739	$	5,411	$	2,328
Distribution rights	4,171		2,067		2,104
Internally developed software	446		446		—
Proprietary content	153		153		—
Intellectual property	2,284		2,284		—

	$	14,793	$	10,361	$	4,432
December 31, 2019
Subscriber relationships	$	7,860	$	5,231	$	2,629
Distribution rights	4,313		1,999		2,314
Internally developed software	446		446		—
Proprietary content	153		153		—
Intellectual property	2,284		2,284		—

	$	15,056	$	10,113	$	4,943

Gross Carrying Amount
Accumulated Amortization
Net Carrying Value
March 31, 2019
Subscriber relationships $ 17,742
$ 10,825
$ 6,917
Distribution rights 4,290
1,799
2,491
Internally developed software 2,327
2,327
—
Proprietary content 8,181
7,812
369
Intellectual property 2,284
2,284
—
Favorable lease 645
615
30
$ 35,469
$ 25,662
$ 9,807
December 31, 2018
Subscriber relationships $ 17,570
$ 10,337
$ 7,233
Distribution rights 4,233
1,731
2,502
Internally developed software 2,327
2,327
—
Proprietary content 8,164
7,439
725
Intellectual property 2,284
2,284
—
Favorable lease 643
585
58
$ 35,221
$ 24,703
$ 10,518

Amortization expense related to intangible assets was $248 for the three months ended March 31, 2020 and 2019 and ~~2018~~ was categorized as ~~follows:~~general and administrative expense.

Three Months Ended March 31,
Expense Category 2019 2018
Cost of service sales $ 373
$ 399
General and administrative expense 586
698
Total amortization expense $ 959
$ 1,097

As of March 31, ~~2019,~~2020, the total weighted average remaining useful lives of the definite-lived intangible assets was ~~3.1~~4.3 years and the weighted average remaining useful lives by the definite-lived intangible asset category are as follows:



Intangible Asset			Weighted Average Remaining Useful Life in Years
Subscriber relationships			~~3.6~~3.2
Distribution rights			~~9.1~~8.1
~~Proprietary content~~			~~0.3~~
~~Favorable lease~~			~~0.3~~

Estimated future amortization expense remaining at March 31, ~~2019~~2020 for intangible assets acquired was as follows:



Years ending December 31,	Amortization Expense
Remainder of 2020	720
2021	959
2022	959
2023	534
2024	300
Thereafter	960
Total future amortization expense	$	4,432

Remainder of 2019 $ 2,069
2020 2,225
2021 2,225
2022 1,463
2023 544
Thereafter 1,281
Total future amortization expense $ 9,807

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~~Like most companies, the COVID-19 global pandemic has impacted many areas of our operations and the Company is monitoring the impact of this global crisis carefully. The operations of our KVH Media Group have been particularly impacted due in part to the global reduction in travel resulting from the pandemic. Consequently, the Company has reviewed, and will continue to review, the forecasted revenues and cash flows of our content business for possible indications that the goodwill or ~~changes~~other intangible assets associated with this component of our business might be impaired. At this point, our review indicates that 0 impairment to the carrying value of these assets has occurred. However, it is uncertain how long the global pandemic will continue to disrupt global businesses, particularly travel, and therefore it is possible that the value of these assets may become impaired in ~~circumstances during~~ the ~~first quarter of 2019 which indicated that an assessment~~future as a result of the ~~impairment~~COVID-19 pandemic. As of March 31, 2020, the carrying value of goodwill and other intangible assets associated with the KVH Media Group was ~~required.~~$10,329 and $4,432, respectively.

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

~~The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.~~ The adoption of ASC 606 represents a change in accounting principle that ~~is expected~~was intended to more closely align revenue recognition with the delivery of the Company's products and services and ~~is expected to~~ provide ~~financial statement readers with~~ enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products and services.

During the three months ended September 30, 2019, the Company identified an out-of-period immaterial error related to the implementation and application of ASC 606 with respect to the recognition of revenue associated with sales-type leases. During the implementation of ASC 606 effective January 1, 2018, the Company treated the leased products and services for these contracts as single performance obligations as if they were not distinct in the context of the contract; however, the leased product portion should have continued to have been accounted for under ASC 840 (now ASC 842). In general, the error was to defer recognition of product revenue and associated expenses for sales-type leases rather than to recognize those items upon shipment. The following table reflects these financial statement line items for the three months ended March 31, 2019, as reported and as adjusted (in thousands):


	Three Months Ended
	March 31, 2019
	As reported		As adjusted
Product sales	$	12,874	$	13,215
Cost of product sales	7,853		8,284


Net loss	(6,179)		(6,254)

The Company has evaluated this error and does not believe the amounts are material for the three months ended March 31, 2019.

Disaggregation of Revenue

The following table summarizes net sales from contracts with customers for the three months ended March 31, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended
	March 31,
	2020		2019
Mobile connectivity product, transferred at point in time	$	5,986	$	6,922
Mobile connectivity product, transferred over time	606		481
Mobile connectivity service	22,304		21,511
Inertial navigation product	6,502		5,812
Inertial navigation service	1,170		1,650
Total net sales	$	36,568	$	36,376

Three Months Ended
March 31,
2019 2018
Mobile connectivity product, transferred at point in time $ 5,677
$ 6,670
Mobile connectivity product, transferred over time 1,385
1,250
Mobile connectivity service 25,448
24,829
Inertial navigation product 5,812
6,072
Inertial navigation service 1,650
1,280
Total net sales $ 39,972
$ 40,101

Revenue recognized ~~during~~during the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 from amounts included in contract liabilities at the beginning of the period was ~~$1,336~~$606 and ~~$1,215,~~$473, respectively.

For mobile connectivity product sales, the delivery of the Company’s performance obligations, and associated revenue, are generally transferred to the customer at a point in time, with the exception of certain mini-VSAT contracts which are transferred to customers over time. For mobile connectivity service sales, the delivery of the Company’s performance obligations and associated revenue are transferred to the customer over time. For inertial navigation product sales, the delivery of the Company’s performance obligations, and associated revenue, are generally transferred to the customer at a point in time. For inertial navigation service sales, the Company's performance obligations, and associated revenue, are generally transferred to customers 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 first quarter of ~~2019~~2020 or ~~2018~~2019 or accounts receivable at March 31, ~~2019~~2020 or December 31, ~~2018.~~2019.

Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’s revenues and operating results.

(17) Derivative Instruments and Hedging Activities

Effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, the Company entered into ~~two~~2 interest rate swap agreements. These interest rate swap agreements were intended to hedge the Company’s mortgage loan related to its headquarters facility in Middletown, Rhode Island by fixing the interest rates specified in the mortgage loan to 5.9% for half of the principal amount outstanding and 6.1% for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan ~~expires~~expired on April 1, 2019. The Company does not use derivatives for speculative purposes. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in accumulated other comprehensive (loss) income ~~("AOCI")~~(AOCI) to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until the hedged item affects earnings. As the Company made the required principal and interest payments under the mortgage loan and the related interest rate swaps were settled, the Company reclassified the amounts recorded in AOCI related to the changes in the fair value of the settled interest rate swaps to earnings. To the extent there iswas any hedge ineffectiveness, changes in fair value relating to the ineffective portion ~~are~~were immediately recognized in earnings in other income (expense) in the ~~Consolidated Statements~~consolidated statements of ~~Operations.~~operations. The interest rate swap was recorded within accrued other liabilities on the balance sheet. The critical terms of the interest rate swaps were designed to mirror the terms of the Company’s mortgage loans. The Company designated these derivatives as cash flow hedges of the variability of the LIBOR-based interest payments on principal over a ~~nine-year~~nine-year period, which ended on April 1, 2019. ~~As of March 31,~~On April 1, 2019, the ~~Company determined that the existence of hedge ineffectiveness, if any, was immaterial and all changes in the fair value of the~~two interest rate ~~caps were recorded in the Consolidated Statements of Comprehensive (Loss) Income as a component of AOCI.~~

~~As of March 31, 2019,~~swaps matured and the Company ~~had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:~~made its final payment for its mortgage loan thereafter.

Interest Rate Derivatives
Notional
(in thousands)

Asset
(Liability)
Effective Date Maturity Date Index Strike Rate
Interest rate swap $ 1,275
(1 ) April 1, 2010 April 1, 2019 1-month LIBOR 5.91 %
Interest rate swap $ 1,275
(2 ) April 1, 2010 April 1, 2019 1-month LIBOR 6.07 %

~~As of December 31, 2018, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:~~

Interest Rate Derivatives
Notional
(in thousands)

Asset
(Liability)
Effective Date Maturity Date Index Strike Rate
Interest rate swap $ 1,299
(5 ) April 1, 2010 April 1, 2019 1-month LIBOR 5.91 %
Interest rate swap $ 1,299
(6 ) April 1, 2010 April 1, 2019 1-month LIBOR 6.07 %

(18) Income Taxes

The Company’s effective tax rate for the three months ended March 31, ~~2019~~2020 was ~~(0.6)~~(6.5)% compared with ~~(4.8)%~~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 months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the effective tax ~~rate was~~rates were lower than the statutory tax rate primarily due to the Company maintaining a valuation allowance reserve on its US deferred tax assets and to the composition of income from foreign jurisdictions taxed at lower rates.

As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had reserves for uncertain tax positions of ~~$1,141~~$532 and ~~$1,116,~~$521, respectively. There were no material changes during the three months ended March 31, ~~2019~~2020 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 March 31, ~~2019~~2020 may decrease ~~$359~~$32 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, Belgium, the Netherlands, Hong Kong, India and Japan. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to ~~2014,~~2016, 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.

(19) Leases

The Company adopted ASC 842 on January 1, 2019. ASC 842 requires the recognition of lease assets and lease liabilities for leases classified as operating leases. The original guidance required application of ASC 842 on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, ~~Targeted Improvements to ASC 842~~, which included an option to not restate comparative periods in transition and elect to use the effective date as the date of initial application of transition. The Company elected not to restate comparative periods and, accordingly, the financial results reported for periods prior to January 1, 2019 have not been restated. In ASC 842, a lease is defined as follows: “[a] contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”

Upon adoption, the Company recognized all leases greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. The Company made certain assumptions and judgments when applying ASC 842. The Company elected practical expedients available for the transition, such as whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. For all asset classes, the Company elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.

Many of our lease agreements contain renewal options which are recognized if it is determined that the Company is reasonably certain to renew the lease at inception or when a triggering event occurs. Some of our lease agreements contain rent escalation clauses, rent holidays, capital improvement funding or other lease concessions. The Company recognizes the minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement and amortize such expense over the term of the lease beginning with the commencement date. Variable lease components that are not fixed at the beginning of the lease are recognized as incurred.

Under certain third-party service agreements, the Company controls a specific space or underlying asset used in providing the service by the third-party service provider. These arrangements meet the definition under ASC 842 and therefore are accounted for under ASC 842. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when reasonably certain to be exercised. The present value of lease payments is determined using the incremental borrowing rate based on the information available at the lease commencement date.

The Company has operating leases for office facilities, equipment, and satellite service capacity and related equipment. Lease expense for the three months ended March 31, 2020 and 2019 was ~~$1,310.~~$1,262 and $1,265, respectively. Short-term operating lease costs for the three months ended March 31, 2020 and 2019 was $61 and $48, respectively. Sublease income for the three months ended March 31, 2020 and 2019 was $34. The future minimum lease payments under our operating leases as of March 31, ~~2019~~2020 are:



Remainder of 2020	$	1,804
2021	1,392
2022	1,298
2023	463
2024 and thereafter	589
Total minimum lease payments	$	5,546

Less amount representing interest	$	(490)
Present value of net minimum operating lease payments	$	5,056
Less current installments of obligation under current-operating lease liabilities	$	1,634
Obligations under long term - operating lease liabilities, excluding current installments	$	3,422

Weighted-average remaining lease term - operating leases (years)	3.24
Weighted-average discount rate - operating leases	5.50		%

Remainder of 2019 $ 3,883
2020 2,987
2021 1,275
2022 1,196
2023 386
2024 and thereafter 536
Total minimum lease payments $ 10,263

Less amount representing interest $ (842 )
Present value of net minimum operating lease payments $ 9,421
Less current installments of obligation under current-operating lease liabilities $ 4,749
Obligations under long term - operating lease liabilities, excluding current installments $ 4,672

Weighted-average remaining lease term - operating leases (years) 3.00
Weighted-average discount rate - operating leases 5.50 %

During the first quarter of 2018, the Company entered into a ~~five-year~~five-year financing lease for ~~three~~3 satellite hubs for its HTS network. As of March 31, ~~2019,~~2020, the gross costs and accumulated amortization associated with this lease are included in revenue generating assets and amounted to $3,068 and ~~$517,~~$955, respectively. Property and equipment 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~~straight-line basis over the ~~seven-year~~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 these capital assets was $110 ~~and $78~~ for ~~the~~both three months ended March 31, ~~2019~~2020 and ~~2018, respectively.~~2019.

The future minimum lease payments under this financing lease as of March 31, ~~2019~~2020 are:



Remainder of 2020	$	468
2021	624
2022	624
2023	45
Total minimum lease payments	$	1,761

Less amount representing interest	$	(16)
Present value of net minimum financing lease payments	$	1,745
Less current installments of obligation under accrued other	$	615
Obligations under other long-term liabilities, excluding current installments	$	1,130

Weighted-average remaining lease term - finance leases (years)	2.92
Weighted-average discount rate - finance leases	1.53		%

Remainder of 2019 $ 468
2020 624
2021 624
2022 624
2023 45
2024 and thereafter —
Total minimum lease payments $ 2,385

Less amount representing interest $ (30 )
Present value of net minimum financing lease payments $ 2,355
Less current installments of obligation under accrued other $ 611
Obligations under other long-term liabilities, excluding current installments $ 1,744

Weighted-average remaining lease term - finance leases (years) 3.92
Weighted-average discount rate - finance leases 1.53 %
Lessor

The Company enters into leases with certain customers primarily of the TracPhone mini-VSAT systems. These leases are classified as sales-type leases as title of the equipment transfers to the customer at the end of the lease term. The Company records the leases at a price typically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the net present value of all payments under these leases as revenue, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the lease term (typically three to five years) using an implicit interest rate. The sales-type leases do not have unguaranteed residual assets.

The current portion of the net investment in these leases was $4,238 as of March 31, 2020 and the non-current portion of the net investment in these leases was $6,597 as of March 31, 2020. 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 $197and $168 during the three months ended March 31, 2020 and 2019, respectively.

The future undiscounted cash flows from these leases as of March 31, 2020 are:


Remainder of 2020	$	3,657
2021	3,407
2022	2,452
2023	1,776
2024	1,007
2025	53
Total undiscounted cash flows	$	12,352

Present value of lease payments	$	10,835
Difference between undiscounted cash flows and discounted cash flows	$	1,517

(20) Discontinued Operations

During the second quarter of 2019, the Company sold its Videotel 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 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 and comprehensive income (loss):


	Three Months Ended
	March 31,
	2020		2019
Sales:
Service sales	$	—	$	3,937

Costs, expenses and other expense, net:
Costs of service sales	—		1,324
Sales, marketing and support	—		1,169
General and administrative	—		1,125







Other expense, net	—		(9)
Income from discontinued operations before tax expense	—		310
Gain on sale of discontinued operations before tax expense	—		—
Total income from discontinued operations before tax expense	$	—	$	310
Income tax expense on discontinued operations	—		67
Income from discontinued operations, net of taxes	$	—	$	243

Net income from discontinued operations per common share
Basic and diluted	$	—	$	0.01

Weighted average number of common shares outstanding:
Basic and diluted	17,529		17,302

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


	Three Months Ended
	March 31,
	2020		2019

Cash provided by operating activities—discontinued operations	$	—	$	3,057


Cash used in investing activities—discontinued operations	$	—	$	(535)

(21) Subsequent Events

As a result of the COVID-19 pandemic, which has disrupted businesses around the world and led to the start of a global economic recession, we have developed and are implementing a plan to reduce costs and conserve cash balances in the event that the COVID-19 health crisis continues unabated through the remainder of this year or beyond. These plans include, among other things, a reduction in global salaries and benefits at most levels, implementation of a shortened work week in many areas, elimination of most non-essential or discretionary spending, and the indefinite delay of all capital outlays (except in connection with our AgilePlans program and Photonic Integrated Chip initiative). We have also developed contingent action plans that we may implement based on the duration of the health crisis and its continued negative global economic impact which includes furloughing some amount of our workforce or increasing the salary reduction at some or all levels of the Company. We are continuing to monitor global developments and are prepared to implement these and other actions should we consider it necessary.


~~ITEM 2.~~	~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The statements included in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, products and services, competitive positions and plans, customer preferences, consumer trends, anticipated product development, and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Risk Factors” in Item 1A of Part II of this quarterly report on Form 10-Q and in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, ~~2018.~~2019. 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 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 commercial and defense markets. ~~We operate in two operating~~Our reporting segments ~~based on product lines:~~are as follows:

•the mobile connectivity segment and

•the inertial navigation segment

Through these segments, we manufacture and ~~inertial navigation.~~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 of Canada, Europe (both inside and outside the European Union), Africa, Asia/Pacific, and the Middle East.

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. ~~Our CommBox offers a range of tools designed to increase communication efficiency, reduce costs, and manage network operations.~~ We sell and lease our mobile connectivity products through an extensive international network of dealers and distributors. We also sell and lease products 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. Our mobile connectivity service sales also include our distribution of entertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media ~~Group, as well as the distribution of training films and eLearning computer-based training courses to commercial customers in the maritime market through our Videotel business.~~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 Voice over Internet Protocol (VoIP) service to our TracPhone V-series 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. As a percentage of our consolidated net sales, our service sales were ~~68% and 65%~~64% for the three months ended March 31, ~~2019~~2020 and ~~2018, respectively.~~2019.

~~Our marine leisure business within~~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.

Sale of Videotel - Discontinued Operations

In May 2019, we sold our Videotel business, which provided eLearning computer-based training, to an affiliate of Oakley Capital, a UK company, for $89.4 million in cash, on a cash-free, debt-free basis, subject to a working capital adjustment. We made a bridge loan to the purchaser and received payment of the initial purchase price on June 21, 2019. We determined that the sale met the requirements for reporting as discontinued operations in accordance with ASC 205-20. Accordingly, we have classified the results of the Videotel business as discontinued operations for all periods presented. In December 2019, we finalized the working capital adjustment which reduced the proceeds from the sale of Videotel to $88.4 million. Please see Notes 1 and 20 for further discussion.

Out-of-Period Error

Each of mobile connectivity product sales, costs of product sales, sales, marketing and support expense, income tax benefit and net loss from continuing operations for the three months ended March 31, 2019 includes an adjustment to correct an immaterial prior period accounting error related to the implementation and application of ASC 606. See Note 16 of our consolidated interim financial statements for more information.

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 tactical navigation systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. Our inertial navigation products are sold directly to U.S. and foreign governments and government contractors, as well as through an international network of authorized independent sales representatives. In addition, 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.

We generate sales primarily from the sale of our mobile connectivity systems and services and our inertial navigation products and services. The following table provides, for the periods indicated, our sales by segment:


	Three Months Ended
	March 31,
	2020		2019
	(in thousands)
Mobile connectivity	$	28,896	$	28,914
Inertial navigation	7,672		7,462
Net sales	$	36,568	$	36,376

Three Months Ended
March 31,
2019 2018
(in thousands)
Mobile connectivity $ 32,510
$ 32,749
Inertial navigation 7,462
7,352
Net sales $ 39,972
$ 40,101

Product sales within the mobile connectivity segment accounted for 18% and 20% of our consolidated net sales for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Sales of mini-VSAT Broadband airtime services accounted for ~~approximately 46%~~53% and ~~41%~~50% of our consolidated net sales for the three months ended March 31, ~~2019~~2020 and ~~2018, respectively. Sales of content and training services within the mobile connectivity segment accounted for 16% and 19% of our consolidated net sales for the three months ended March 31,~~ 2019, ~~and 2018,~~ respectively.

Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems accounted for 14% and 13% of our consolidated net sales for ~~both~~ the three months ended March 31, 2020 and 2019, ~~and 2018.~~respectively.

No other single product class accounted for 10% or more of our consolidated net sales for the three months ended March 31, ~~2019~~2020 or ~~2018.~~2019. No individual customer accounted for 10% or more of our consolidated net sales for the three months ended March 31, ~~2019~~2020 or ~~2018.~~2019.

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 in Canada, Europe, Africa, Asia/Pacific, the Middle East, and India. Our international net sales totaled ~~62% and~~ 58% of our consolidated net sales for the three months ended March 31, ~~2019~~2020 and ~~2018, respectively.~~2019. Sales to Singapore represented 11% of our consolidated net sales for the three months ended March 31, 2020. No other individual foreign country represented 10% or more of our consolidated net sales for the three months ended March 31, 2020. No individual foreign country represented 10% or more of our consolidated net sales for the three months ended March 31, ~~2019 or 2018.~~2019. See Note 11 to our consolidated financial statements for more information on our segments.

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 in the 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 March 31,
	2020		2019
	(in thousands)
Research and development expense presented on the statement of operations	$	4,287	$	3,868
Costs of customer-funded research and development included in costs of service sales	834		1,048
Total consolidated statements of operations expenditures on research and development activities	$	5,121	$	4,916

Three Months Ended March 31,
2019 2018
(in thousands)
Research and development expense presented on the statement of operations $ 3,868
$ 3,934
Costs of customer-funded research and development included in costs of service sales 1,048
675
Total consolidated statements of operations expenditures on research and development activities $ 4,916
$ 4,609
COVID-19 Global Pandemic

The COVID-19 pandemic has disrupted businesses around the world and led to the start of a global economic recession. We began to observe the impact of the pandemic on our operating results in our first quarter, particularly in areas of our business impacted by global commerce (for example maritime shipping), travel and leisure. It is not possible to know how long the pandemic will continue or what the ongoing economic impact will be on our business or the global economy. The areas of our business most at risk to be negatively impacted by the prolonged continuation of this crisis include our mobile connectivity product sales, and related airtime, as commercial customers may delay acquiring VSAT systems due to the global reduction in maritime shipping, and our media business due to the severe restrictions on global travel. Likewise our inertial navigation product sales may be negatively impacted as domestic and foreign customers find it necessary to conserve cash in their own businesses in the face of a prolonged duration of the crisis. In response to these significant uncertainties, we have taken multiple steps to mitigate the impact of the pandemic on our business, including a comprehensive reduction in salaries and wages and the elimination of most discretionary expenditures including capital expenditures, and we continue to consider further actions which may include furloughing some level of our global workforce.

As of March 31, 2020, our cash and cash equivalents and marketable securities (“cash position”) approximated $41.0 million, and we had no outstanding short term or long term debt, other than normal levels of accounts payable and accrued expenses. While there can be no assurances that our strong cash position will sustain us through the duration of the pandemic, we believe that our cash position along with the mitigation actions we have taken or are contemplating position us reasonably well to withstand the impact of this global health crisis. We are continuing to monitor global developments and are prepared to implement further actions to ensure the sufficiency of our cash position should we consider it necessary.

Critical Accounting Policies and Significant Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, sales and expenses, and related disclosure at the date of our financial statements. Our significant accounting policies are summarized in Note 1 to the consolidated interim financial statements in our annual report on Form 10-K for the year ended December 31, ~~2018.~~2019.

As described in our annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, our most critical accounting policies and estimates upon which our consolidated financial statements were prepared were those relating to revenue recognition, valuation of accounts receivable, valuation of inventory, ~~valuations and purchase price allocations related to business combinations,~~ 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 our net deferred tax assets and related valuation ~~allowance.~~allowance, and the valuation of right-of-use assets and lease liabilities. We have reviewed our policies and estimates and determined that these remain our most critical accounting policies and estimates for the three months ended March 31, ~~2019. We have updated our leasing policies in conjunction with our adoption of ASC 842 as of January 1, 2019, as further described in Note 19 to the accompanying financial statements.~~2020.

Readers should refer to our annual report on Form 10-K for the year ended December 31, ~~2018~~2019 under “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies and Significant Estimates” for descriptions of these policies and estimates, as well as the notes to the consolidated interim financial statements included elsewhere within this report.

Results of Operations

The following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales:


	Three Months Ended					Three Months Ended
	March 31,					March 31,
	2019		2018			2020		2019
Sales:					Sales:
Product	32.2	%	34.9	%	Product	35.8	%	36.3	%
Service	67.8		65.1		Service	64.2		63.7
Net sales	100.0		100.0		Net sales	100.0		100.0
Cost and expenses:					Cost and expenses:
Costs of product sales	19.6		22.3		Costs of product sales	26.4		22.8
Costs of service sales	41.8		34.5		Costs of service sales	41.6		42.3
Research and development	9.7		9.8		Research and development	11.7		10.6
Sales, marketing and support	23.3		22.3		Sales, marketing and support	23.8		22.3
General and administrative	20.2		19.1		General and administrative	17.5		19.1
Total costs and expenses	114.6		108.0		Total costs and expenses	121.0		117.1
Loss from operations	(14.6	)	(8.0	)	Loss from operations	(21.0)		(17.1)
Interest income	0.4		0.4		Interest income	0.9		0.5
Interest expense	1.0		1.0		Interest expense	—		1.1
Other expense, net	(0.3	)	(0.7	)
Other income (expense), net					Other income (expense), net	4.1		(0.3)
Loss before income tax	(15.5	)	(9.3	)	Loss before income tax	(16.0)		(18.0)
Income tax expense	0.1		0.4
Income tax expense (benefit)					Income tax expense (benefit)	1.0		(0.1)
Net loss	(15.6	)%	(9.7	)%	Net loss	(17.0)	%	(17.9)	%

Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019

Net Sales

As discussed further under the heading "Segment Discussion"below, product sales decreased ~~$1.1~~$0.1 million, or 8%1%, to ~~$12.9~~$13.1 million for the three months ended March 31, ~~2019~~2020 from ~~$14.0~~$13.2 million for the three months ended March 31, ~~2018,~~2019, primarily due to a decrease in mobile connectivity product sales of $0.8 million, ~~and a decrease~~partially offset by an increase in inertial navigation product sales of ~~$0.3~~$0.7 million. Service sales for the ~~three months endedMarch 31, 2019~~ ~~increased $1.0 million, or~~ 4%~~, to~~ ~~$27.1 million~~ ~~from~~ ~~$26.1 million~~ ~~for~~ three months ended March 31, ~~2018~~2020 increased $0.3 million, or 1%, to $23.5 million from $23.2 million for three months ended March 31, 2019 due to an increase in mobile connectivity service sales of ~~$0.6~~$0.8 million, ~~and an increase~~partially offset by a decrease in inertial navigation service sales of ~~$0.4~~$0.5 million.

Costs of Sales

Costs of sales consists of costs of product sales and costs of service sales. Costs of sales increased ~~$1.8~~$1.2 million, or 8%5%, in the three months ended March 31, ~~2019~~2020 to ~~$24.5~~$24.8 million from ~~$22.7~~$23.7 million in the three months ended March 31, ~~2018.~~2019. The increase in costs of sales was driven by an increase of ~~$2.9~~$1.4 million, or ~~21%~~16%, in costs of ~~service~~product sales, partially offset by a ~~$1.1~~$0.2 million, or ~~12%~~1%, decrease in costs of ~~product~~service sales. As a percentage of net sales, costs of sales were ~~61%~~68% for the three months ended March 31, ~~2019~~2020 and ~~57%~~65% for the three months ended March 31, ~~2018.~~2019.

Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For the three months ended March 31, ~~2019,~~2020, costs of product sales ~~decreased $1.1~~increased $1.4 million, or ~~12%~~16%, to ~~$7.8~~$9.6 million from ~~$8.9~~$8.3 million in the three months ended March 31, ~~2018.~~2019. As a percentage of product sales, costs of product sales were ~~60%~~74% and ~~64%~~63% for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Mobile connectivity costs of product sales decreased by $0.5 million, or 10%, primarily due to a $0.4 million decrease in our marine mobile connectivity costs of product sales and a $0.1 million decrease in our land mobile connectivity costs of product sales.remained flat period over period. Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales was ~~66%~~77% and 69% for ~~each of~~ the three months ended March 31, 2020 and 2019, ~~and 2018.~~respectively. Inertial navigation costs of product sales ~~decreased~~increased by ~~$0.6~~$1.4 million, or ~~16%~~44%, primarily due to a $1.0 million decrease in ~~FOG costs~~absorption of ~~product sales.~~factory overhead due to a decrease in the volume of production and an increase in scrap and other manufacturing period costs. Inertial navigation costs of product sales as a percentage of inertial navigation product sales was ~~53%~~70% and ~~61%~~53% for the three months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~The decrease was primarily driven by a change in product mix of our different FOG products.~~

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 ended March 31, ~~2019,~~2020, costs of service sales ~~increased~~decreased by ~~$2.9~~$0.2 million, or ~~21%~~1%, to ~~$16.7~~$15.2 million from ~~$13.8~~$15.4 million for the three months ended March 31, ~~2018.~~2019. As a percentage of service sales, costs of service sales were ~~62%~~65% and ~~53%~~66% for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Mobile connectivity costs of service sales increased by ~~$2.5~~$0.1 million, or ~~19%~~1%, primarily due to a ~~$2.7~~$0.1 million increase in mini-VSAT airtime costs of service sales, including increased HTS network capacity costs, legacy network revenue share minimums and AgilePlans depreciation costs, which was partially offset by a $0.3 million decrease in content ~~and learning~~ costs of service sales. Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales was ~~61%~~64% and ~~53%~~66% for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Inertial navigation costs of service sales ~~increased~~decreased by ~~$0.4~~$0.3 million, or ~~57%~~24%, primarily due to ~~an increase~~a decrease in contract engineering services revenues. Inertial navigation costs of service sales as a percentage of inertial navigation service sales was ~~65%~~73% and ~~58%~~65% for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

We expect that our costs of sales will generally increase in correlation with our expected growth in our mobile connectivity and inertial navigation net sales. To the extent that customers continue to subscribe to our AgilePlans program, we expect a corresponding decrease in product sales and increase in depreciation expense for AgilePlans equipment.

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 ~~was $3.9 million~~ for ~~both~~ the three months ended March 31, ~~2019~~2020 increased by $0.4 million, or 11%, to $4.3 million from $3.9 million for the three months ended March 31, 2019. The primary reason for the increase in research and ~~2018. Engineering~~development expense was a $0.3 million increase in salaries and employee benefits and a $0.2 million decrease in funded engineering expenses ~~funded by customers~~ (which are reflected in costs of service sales rather than research and development expense) ~~increased by $0.3 million, which was offset by a $0.3 million increase in consulting fees.~~. As a percentage of net sales, research and development expense for the three months ended March 31, 2020 and 2019 was 12% and ~~2018 was 10%.~~11%, respectively.

~~We expect that research and development expense will grow year-over-year as we continue to invest in developing new technologies and applications for our products.~~

Sales, marketing, and support expense consists primarily of salaries and related expenses for sales and marketing personnel, commissions for both in-house and third-party representatives, costs related to the co-development of certain content, other sales and marketing support costs such as advertising, literature and promotional materials, product service personnel and support costs, warranty-related costs and bad debt expense. Sales, marketing and support expense also includes the operating expenses of our sales office subsidiaries in Denmark, Singapore, Brazil, and Japan. Sales, marketing and support expense for the three months ended March 31, ~~2019~~2020 increased by ~~$0.4~~$0.6 million, or 4%7%, to ~~$9.3~~$8.7 million from ~~$8.9~~$8.1 million for the three months ended March 31, ~~2018.~~2019. The increase primarily resulted from a ~~$0.7~~$0.3 million increase in salaries and employee benefits and ~~employment taxes due to an increase in headcount, which was partially offset by~~ a $0.3 million ~~decrease~~increase in ~~warranty~~bad debt expense. As a percentage of net sales, sales, marketing and support expense for the three months ended March 31, 2020 and 2019 ~~and 2018~~ was ~~23%~~24% and 22%, respectively.

We expect that our sales, marketing, and support expense will increase year-over-year primarily driven by increased personnel, marketing and technology investments to support product sales and launches.

General and administrative expense consists of costs attributable to management, finance and accounting, information technology, human resources, certain outside professional services, and other administrative costs. General and administrative expense for the three months ended March 31, ~~2019 increased~~2020 decreased by ~~$0.4~~$0.6 million, or 5%8%, to ~~$8.1~~$6.4 million from ~~$7.7~~$7.0 million for the three months ended March 31, ~~2018.~~2019. The ~~increase~~decrease resulted primarily from a ~~$0.5 million increase in salaries, benefits, and employment taxes, which was partially offset by a $0.1~~$0.3 million decrease in ~~professional fees.~~ salaries and employee benefits and a $0.3 million decrease in computer expenses. As a percentage of net sales, general and administrative expense for the three months ended March 31, 2020 and 2019 ~~and 2018~~ was ~~20%~~17% and 19%, respectively.

~~We expect general and administrative expenses to increase year-over-year, primarily driven by increased personnel costs.~~

Interest and Other ~~Expense,~~Income (Expense), Net

Interest income represents interest earned on our cash and cash equivalents, as well as from investments. Interest income increased slightly to $0.3 million for the three months ended March 31, 2020 from $0.2 million for the three months ended March 31, ~~2019 from~~2019. Interest expense decreased to less than $0.1 million for the three months ended March 31, ~~2018. Interest expense was~~2020 from $0.4 million for ~~each of~~ the three months ended March 31, 2019 ~~and 2018.~~as a result of our repayment of all of our debt obligations during 2019. Other income, net increased to $1.5 million from other expense, net ~~decreased by $0.2~~of $0.1 million for the three months ended March 31, 2020 and 2019 primarily due to ~~a decrease~~an increase in foreign exchange ~~losses~~gains from our UK operations.

Income Tax Expense (Benefit)

Income tax expense for the three months ended March 31, 2020 was $0.4 million and related to taxes on income earned in foreign jurisdictions. Income tax benefit for the three months ended March 31, 2019 was less than $0.1 million and related to taxes on income earned in foreign jurisdictions. The losses we incurred in the U.S. did not generate any income tax benefit during ~~the~~either quarter due to a full valuation allowance on our related deferred tax assets. ~~Income tax expense~~

Discontinued Operations

During the second quarter of 2019, we sold our Videotel business for ~~the three months ended March 31, 2018 was $0.2~~$89.4 million ~~and related to taxes~~in cash, on ~~income earned in foreign jurisdictions. The losses we incurred in the U.S. and Brazil did not generate any income tax benefit during the quarter due~~a cash-free, debt-free basis, subject to a ~~full valuation allowance on~~working capital adjustment. We determined that the sale met the requirements for reporting as discontinued operations in accordance with ASC 205-20. Accordingly, we have classified the results of the Videotel business as discontinued operations for all periods presented. In December 2019, we finalized the working capital adjustment, which reduced the proceeds from the sale of Videotel to $88.4 million. Please see Notes 1 and 20 of our ~~related deferred tax assets.~~consolidated interim financial statements for further information. Results for discontinued operations are as follows:


	Three Months Ended
	March 31,
	2020		2019
	(in thousands)
Sales from discontinued operations	$	—	$	3,937
Income from discontinued operations, net of tax	$	—	$	243

Segment Discussion - Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019

Our net sales by segment for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


					Change
	For the three months ended March 31,						2020 vs. 2019
	2020		2019		$		%
	(dollars in thousands)
Mobile connectivity sales
Product	$	6,592	$	7,403	$	(811)	(11)	%
Service	22,304		21,511		793		4	%
Net sales	$	28,896	$	28,914	$	(18)	—	%

Inertial navigation sales
Product	$	6,502	$	5,812	$	690	12	%
Service	1,170		1,650		(480)		(29)	%
Net sales	$	7,672	$	7,462	$	210	3	%

Change
For the three months ended March 31, 2019 vs. 2018
2019 2018 $ %
(dollars in thousands)
Mobile connectivity sales
   Product $ 7,062
$ 7,920
$ (858 ) (11 )%
   Service 25,448
24,829
619
2 %
     Net sales $ 32,510
$ 32,749
$ (239 ) (1 )%

Inertial navigation sales
   Product $ 5,812
$ 6,072
$ (260 ) (4 )%
   Service 1,650
1,280
370
29 %
     Net sales $ 7,462
$ 7,352
$ 110
1 %

Operating ~~earnings~~income (loss) by segment for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


					Change
	For the three months ended March 31,						2020 vs. 2019
	2020		2019		$		%
	(dollars in thousands)
Mobile connectivity	$	(2,299)	$	(1,444)	$	(855)	(59)	%
Inertial navigation	(821)		443		(1,264)		(285)	%
	$	(3,120)	$	(1,001)	(2,119)		(212)	%
Unallocated	(4,528)		(5,233)		705		13	%
Loss from operations	$	(7,648)	$	(6,234)	$	(1,414)	(23)	%

Change
For the three months ended March 31, 2019 vs. 2018
2019 2018 $ %
(dollars in thousands)
Mobile connectivity $ (1,039 ) $ 1,072
$ (2,111 ) (197 )%
Inertial navigation 443
334
109
33 %
(596 ) $ 1,406
(2,002 ) (142 )%
Unallocated (5,233 ) (4,586 ) (647 ) (14 )%
Loss from operations $ (5,829 ) $ (3,180 ) $ (2,649 ) (83 )%

Mobile Connectivity Segment

Net sales in the mobile connectivity segment ~~decreased by $0.2 million, or 1%,~~ for the three months ended March 31, 2020 and 2019 ~~as compared to the three months ended March 31, 2018.~~were flat at $28.9 million. Mobile connectivity product sales decreased by $0.8 million, or 11%, to ~~$7.1~~$6.6 million for the three months ended March 31, ~~2019~~2020 from ~~$7.9~~$7.4 million for the three months ended March 31, ~~2018.~~2019. The decrease was due to a ~~$0.8~~$0.7 million, or ~~11%~~9%, decrease in marine mobile connectivity product sales, which was driven by a decrease in TracVision product sales. In addition, there was a $0.2 million decrease in land mobile product sales. The decrease in ~~marine~~TracVision and land mobile ~~connectivity~~ product sales was ~~primarily~~ due to a ~~$0.4 million decrease~~decline in TracVision product sales and a $0.4 million decrease in TracPhone product sales and marine accessories, which is partially due to the impact of our AgilePlans subscription service and an increase in mobile connectivity product sales transferred over time in accordance with ASC 606.leisure sales.

Mobile connectivity service sales increased by ~~$0.6~~$0.8 million, or 2%4%, to ~~$25.4~~$22.3 million for the three months ended March 31, ~~2019~~2020 from ~~$24.8~~$21.5 million for the three months ended March 31, ~~2018.~~2019. The increase was primarily due to a ~~$1.8~~$0.9 million increase in our mini-VSAT service sales compared to the three months ended March 31, ~~2018,~~2019, which resulted in part from a ~~14%~~10% increase in subscribers, ~~partially~~primarily as a result of the introduction of AgilePlans and our HTS network. Partially offsetting this increase was a $1.2 million decrease in content and training service sales, which resulted primarily from a decrease in subscribers and changes in foreign currency exchange rates.AgilePlans.

We expect that our mini-VSAT service sales will continue to grow, primarily through the continued expansion of our mini-VSAT Broadband customer base and the availability of our AgilePlans subscription service model. We expect that mini-VSAT product sales will decline to the extent that customers select the AgilePlans subscription service model.

Our operating loss for the mobile connectivity segment increased by ~~$2.1~~$0.9 million, or ~~197%~~59%, for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019. This increase was primarily the result of a decrease in product sales less associated costs of $0.8 million, a $0.6 million increase in salaries and employee benefits and a $0.3 million increase in bad debt expense, which were partially offset by an increase in service sales less associated costs of ~~$1.9 million, a decrease in product sales less associated costs of $0.3~~$0.7 million and ~~a $0.4 million increase in salaries, benefits, and employment taxes, which were partially offset by a $0.3~~$0.2 million decrease in ~~warranty expense.~~external commissions.

Inertial Navigation Segment

Net sales in the inertial navigation segment increased by ~~$0.1~~$0.2 million, or 1%3%, for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019. Inertial navigation product sales ~~decreased $0.3~~increased $0.7 million, or 4%12%, to $6.5 million for the three months ended March 31, 2020 from $5.8 million for the three months ended March 31, ~~2019 from $6.1~~2019. This increase was due to a $0.4 million increase in TACNAV sales and a $0.3 million increase in sales of our FOG and OEM products.

Inertial navigation service sales decreased $0.5 million, or 29%, to $1.2 million for the three months ended March 31, ~~2018, due to decreased sales of our FOG products. TACNAV sales remained flat year over year.~~

~~Inertial navigation service sales increased $0.4 million, or 29%, to~~2020 from $1.7 million for the three months ended March 31, ~~2019 from $1.3 million for~~2019. The decrease was due to the ~~three months ended March 31, 2018. The increase resulted from a $0.5 million increase in contracted engineering services for~~timing of performance under an engineering and services development contract from a major U.S. defense contractor, which began in the fourth quarter of 2018 and will continue through ~~the third quarter of 2021. This was partially offset by a $0.1 million decrease in inertial navigation repair revenue.~~December 2020.

Our operating ~~earnings~~loss for the inertial navigation segment increased ~~$0.1~~$1.3 million, or ~~33%~~285%, for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019. This increase is primarily due to a decrease in ~~cost~~sales less associated costs of ~~product sales.~~$0.9 million, a $0.2 million increase in external commissions and a $0.1 million increase in salaries and employee benefits.

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 ~~increase~~decreased by ~~$0.6~~$0.7 million, or ~~14%~~13%, for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019. The ~~increase~~decrease in the operating loss was primarily the result of ~~an increase~~a $0.5 million decrease in salaries and ~~associated compensation.~~employee benefits and a $0.3 million decrease in computer expenses.

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 the rapid delivery of our commercial products, our backlog for those products is not significant. ~~However, as of March 31, 2019, we had over 190 TracPhone V7-HTS units in backlog to be shipped through 2020.~~

Our backlog for all products and services was ~~$18.2~~$22.6 million and ~~$14.5~~$19.5 million as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. As of March 31, ~~2019, $13.9~~2020, $16.9 million of our backlog was scheduled for fulfillment in ~~2019, $1.9 million was scheduled for fulfillment in~~ 2020, ~~and $2.4~~$5.4 million was scheduled for fulfillment in 2021, and $0.3 million was scheduled for fulfillment in 2022 through 2028.

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 of March 31, ~~2019,~~2020, our backlog included ~~$6.0~~$2.6 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.

Liquidity and Capital Resources

Our primary liquidity needs are to fund general business requirements, including working capital requirements and capital ~~expenditures, interest payments, and debt repayments.~~expenditures. In recent years, we have funded our operations primarily from cash flows from operations, bank financing, an equity private placement, ~~and~~ the proceeds received from exercises of stock ~~options.~~options and in 2019 by selling our Videotel training business. We believe that we have sufficient cash to satisfy obligations that will come due over the next twelve months.

As of March 31, ~~2019,~~2020, we had ~~$14.3~~$41.0 million in cash, cash equivalents, and marketable securities, of which ~~$4.6~~$3.0 million in cash and cash equivalents was held in local currencies by our foreign subsidiaries. Our foreign subsidiaries held no marketable securities as of March 31, ~~2019.~~2020. As of March 31, ~~2019,~~2020, we had ~~$11.8~~$63.6 million in working capital.

Net cash used in operations was $2.9 million for the three months ended March 31, 2020 compared to net cash used in operations of $1.1 million for the three months ended March 31, ~~2019 compared to net~~2019. The $1.9 million increase in cash used in operations ~~of $1.2 million for the three months ended March 31, 2018. The $0.1 million decrease in cash used~~ is primarily due to a ~~$2.4~~$2.9 million decrease in non-cash items, a $2.5 million increase in cash ~~inflow related~~outflows relating to ~~contract liabilities~~prepaid expenses, other current assets and ~~long-term contract liabilities,~~other non-current assets and a ~~$1.1~~$1.8 million ~~decrease~~increase in cash outflows relating to accounts payable and accrued ~~expenses,~~expenses. Partially offsetting these changes were a ~~$1.0~~$2.6 million increase inof cash inflows relating to accounts receivable, a $1.6 million increase of cash inflows relating to deferred revenues and a ~~$0.5~~$1.0 million ~~increase in non-cash items. Partially offsetting these changes were a $2.5 million increase in~~decrease of cash outflows relating to ~~inventories, a $2.3~~inventories.

Net cash provided by investing activities was $4.1 million ~~increase in~~for the three months ended March 31, 2020 compared to net ~~loss and a $0.1 million decrease in cash inflows related to prepaid expenses and other assets. There was no cash flow impact associated with the adoption of ASC 842.~~

~~Net~~ cash used in investing activities ~~was~~of $3.1 million for the three months ended March 31, ~~2019 compared to net cash provided by investing activities of $1.8~~2019. The $7.2 million ~~for the three months ended March 31, 2018. The $4.9 million decrease~~increase was principally ~~the result of~~due to a ~~$5.0~~$7.4 million ~~decrease in~~cash inflow from net investments in available-for-sale marketable securities, partially offset by a ~~$0.1~~$0.2 million ~~decrease~~increase in capital expenditures.

Net cash used in financing activities was $0.4 million for the three months ended March 31, 2020 compared to net cash provided by financing activities ~~was~~of $0.1 million for the three months ended March 31, ~~2019 compared to net cash provided by financing activities of $1.5 million~~2019. The key driver for the ~~three months ended March 31, 2018. The $1.4 million decrease in net cash provided by financing activities is primarily attributable to a $4.5 million decrease in sale~~increase was the repurchase of ~~treasury stock. This amount was partially offset by a $2.8 million decrease in repayment~~common stock of ~~long term-debt and a $0.3 million increase in proceeds from the exercise of stock options.~~$0.4 million.

Borrowing Arrangements

~~Principal~~Term Note and Line of Credit ~~Facility~~

~~As of March 31, 2019, there was $21.9 million in aggregate principal amount outstanding under our principal credit facility. On~~Effective October 30, 2018, we entered into an amended and restated ~~the 2014 credit agreement by entering into (i) a~~ three-year senior credit facility agreement ~~or the~~(the 2018 ~~credit agreement,~~Credit Agreement) with Bank of America, N.A., as ~~administrative agent,~~Administrative Agent, and the lenders named from time to time as parties thereto ~~or the~~(the 2018 ~~lenders,~~Lenders), for an aggregate amount of up to $42.5 million, including a term loan ~~or the 2018 term loan,~~(2018 Term Loan) of $22.5 million and a reducing revolving credit facility ~~or the~~(the 2018 ~~revolver,~~Revolver) of up to $20.0 million initially and reducing to $15.0 million on December 31, 2019, each to be used for general corporate purposes, including the refinancing of indebtedness under our then-outstanding ~~indebtedness under~~senior credit facility agreement.

On May 13, 2019, we entered into a consent with Bank of America, N.A., as Administrative Agent, authorizing the ~~2014 credit agreement, (ii) a security agreement with respect~~Purchase Agreement and Bridge Loan, as discussed in Note 1 to our ~~grant of a security interest in substantially all of our assets in order to secure our obligations under~~consolidated interim financial statements. On June 27, 2019, we used the ~~2018 credit agreement and, (iii) pledge agreements with respect to our grant of a security interest in 65%~~proceeds of the ~~capital stock~~sale of ~~each~~Videotel to repay in full the then-outstanding balance of KVH Industries A/S and KVH Industries U.K. Limited that we hold in order to secure our obligations under the 2018 credit agreement. On the closing date, we repaid $17.2 million on the 2014 term loan and refinanced its remaining balance. On the closing date, we also borrowed $5.0$21.4 million under the 2018 ~~revolver.~~

~~We are required~~Term Loan and to ~~make principal repayments on~~repay $13.0 million of the then-outstanding balance under the 2018 ~~term loan in~~Revolver. Under the ~~amount of $562,500 at the end of each~~terms of the ~~first four three-month periods following~~consent, the ~~closing (ending with~~2018 Revolver will remain at $20.0 million through the period ending September 30, 2019); thereafter, the principal repayment amount increases to $703,125 for the succeeding four three-month periods (ending with the period ending September 30, 2020) and further increases to $843,750 for each succeeding three-month period (ending with the period ending June 30, 2021) until the maturityterm of the ~~loan on October 30, 2021. The first principal payment on the~~ 2018 term loan was due on December 31, 2018. As of March 31, 2019, due to the timing of the payment schedule, no payment occurred during the three months ended March 31, 2019 and there are five quarters of principal repayments outstanding in the current portion of long-term debt.Credit Agreement. On October 30, 2021, ~~the entire remaining principal balance of the 2018 term loan and~~ the entire principal balance of any outstanding loans under the 2018 ~~revolver are~~Revolver will be due and payable, together with all accrued and unpaid interest, fees and any other amounts due and payable under the 2018 ~~credit agreement. The 2018 credit agreement contains provisions requiring the mandatory prepayment~~Credit Agreement. As of March 31, 2020, no amounts were outstanding under the 2018 ~~term loan and the 2018 revolver under specified circumstances, including (i) 100%~~Revolver.

Borrowings of ~~the net cash proceeds from certain dispositions~~up to the extent not reinvested in our business within a stated period, (ii) 50% of the net cash proceeds from stated equity issuances and (iii) 100% of the net cash proceeds from certain receipts above certain threshold amounts outside the ordinary course of business. The prepayments are first applied to the 2018 term loan, in inverse order of maturity, and then to the 2018 revolver.

~~Loans~~$20.0 million under the 2018 credit agreement bear interest at varying rates determined in accordance with the 2018 credit agreement. Each Eurodollar Rate Loan, as defined in the 2018 credit agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at a rate per annum equal to the LIBOR Daily Floating Rate or Eurodollar Rate, each as defined in the 2018 credit agreement, as we elect, plus the Applicable Margin, as defined in the 2018 credit agreement, and each Base Rate Loan, as defined in the 2018 credit agreement, bears interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the 2018 credit agreement, plus the Applicable Margin. The Applicable Margin ranges from 1.50% to 2.375% on Eurodollar Rate Loans and from 0.50% to 1.375% on Base Rate Loans, each depending on our Consolidated Leverage Ratio, as defined in the 2018 credit agreement. The highest Applicable Margin applies initially until the Compliance Certificate, as defined in the 2018 credit agreement, is delivered for the quarter ending June 30, 2019 and subsequently when the Consolidated Leverage Ratio exceeds 2.50:1.00. Upon certain defaults, including failure to make payments when due, interest becomes payable at a higher default rate.

~~Borrowings under the 2018 revolver~~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.~~Credit Agreement. As of March 31, 2020, we are not able to draw on these funds due to covenant restrictions.

The 2018 ~~credit agreement~~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.~~Credit Agreement. The Consolidated Leverage Ratio ~~initially~~ may not be greater than ~~3.00:1.00 and declines to 2.75:1.00 on September 30, 2019, to~~ 2.50:1.00 on December 31, 2019 and declines to 2.00:1.00 on December 31, 2020. The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00.

The 2018 ~~credit agreement~~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.

Our obligation to repay loans under the 2018 credit agreement could be accelerated upon an event of default under its terms, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to comply with our affirmative and negative covenants under the 2018 credit agreement, a change of control, certain defaults in payment relating to other indebtedness, the acceleration of payment of certain other indebtedness, certain events relating to our liquidation, dissolution, bankruptcy, insolvency or receivership, the entry of certain judgments against us, certain property loss events, and certain events relating to the impairment of collateral or the 2018 lenders’ security interest therein.

Mortgage Loan

~~As of March 31, 2019, we~~We previously had a ~~$4.0 million~~ mortgage loan (Mortgage Loan) related to ~~our~~its headquarters facility in Middletown, Rhode Island. ~~The loan term was ten years, with a principal amortization of 20 years. The interest rate was based~~On April 1, 2019, on the ~~BBA LIBOR Rate (as defined~~Mortgage Loan’s original termination date, we repaid in full the ~~loan agreement) plus 2.00 percentage points. The mortgage loan was secured by the underlying property and improvements. The monthly mortgage payment was approximately $15,000. Due~~outstanding balance of $2.6 million. As discussed in Note 17 to the ~~difference~~consolidated interim financial statements, in ~~the term of the loan and amortization of the principal, a balloon payment of $2.6 million was due on~~ April ~~1, 2019.~~

In 2010 we entered into two interest rate swap agreements that were intended to hedge our mortgage interest obligations over the term of the ~~mortgage loan~~Mortgage Loan by fixing the interest rates specified in the ~~mortgage loan~~Mortgage Loan to 5.91% for half of the principal amount outstanding as of April 1, 2010 and 6.07% for the remaining half. ~~In April 2019, we repaid in full the current balance~~Both interest rate swap agreements were also settled upon repayment of the ~~loan.~~Mortgage Loan

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 would plan to seek 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, and from time to time we have entered into secured lending arrangements to finance them. ~~During the first quarter of 2018, we entered into a five-year capital lease for three satellite hubs for the HTS network. The total cost of the five-year capital lease will be $3.1 million.~~

On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares of our common stock. The program was superseded on October 4, 2019. On October 4, 2019, our Board of Directors authorized a new share repurchase program pursuant to which we may purchase up to one million shares of our common stock. The repurchase program is expected to be funded by using our existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchase program, at management’s discretion, we may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. The repurchase program has a duration of one year. Under the 2018 Credit Agreement, we may not repurchase more than $5.0 million of shares before October 31, 2021 without appropriate consent. As of March 31, ~~2019, 341,000~~2020, we had repurchased 150,272 shares of our common stock in open market transactions at a cost of approximately $1.7 million. As of March 31, 2020, 849,728 shares of our common stock remain available for repurchase under the program. ~~We did not purchase any shares of our common stock in~~During the three months ended March 31, ~~2019.~~2020, the Company repurchased 35,256 shares of common stock in open market transactions at a cost of approximately $0.4 million.


~~ITEM 4.~~	~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of March 31, ~~2019,~~2020, the end of the period covered by this interim report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, ~~2019.~~2020.

Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated changes in our internal control over financial reporting that occurred during the first quarter of ~~2019.~~2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the first quarter of ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Important Considerations

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

PART II. OTHER INFORMATION


~~ITEM 1.~~	ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in litigation incidental to the conduct of our business. In the ordinary course of business, we are a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. We are not a party to any lawsuit or proceeding that, in our opinion, is likely to materially harm our business, results of operations, financial condition, or cash flows.

ITEM 1A. RISK FACTORS

This section augments and updates certain risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, or the Annual Report. The following risk factors supersede the corresponding risks described in the Annual Report and should be read together with the other risk factors disclosed in the Annual Report.

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

There have been no material changes, other than as described below, from the risk factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Please refer to that section for disclosures regarding what we believe are the more significant risks and uncertainties related to our business.

The recent COVID-19 pandemic may have a material adverse effect onour revenues, results of operations and financial condition.

The COVID-19 pandemic has spread to the United States and other countries in which we, our customers and our suppliers do business. Governments in affected regions have implemented and are continuing to implement extensive safety precautions, including quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures. Other organizations and individuals are taking additional steps to avoid or reduce infection, including limiting travel and implementing work-at-home policies. These measures have significantly disrupted normal business operations both in and outside of affected areas. Travel restrictions and safety precautions have also limited our field service engineers from servicing and installing our equipment. Although we are unable to predict the precise impact of the pandemic on our business, our mobile communications business in particular depends to a large extent on travel. The operations of our KVH Media Group have been particularly impacted due in part to the global reduction in travel resulting from the pandemic. We anticipate that, unless the outbreak is swiftly contained, governmental, individual, business and other organizational measures to limit the spread of the virus will adversely affect our revenues, results of operations and financial condition, perhaps materially. We continue to monitor our operations and government recommendations and have made modifications to our operations because of the pandemic. For example, we have generally asked our employees to alter or cancel travel plans involving affected areas. Major industry events have been cancelled, which has adversely affected our ability to meet with existing and potential new customers. This or any other outbreak and any additional preventative or protective actions that may be taken in response to this or any other global health threat or pandemic may result in additional business and/or operational disruption. Our customers’ businesses could be disrupted, and our revenues could be adversely affected. Additionally, global economic disruptions like the COVID-19 pandemic could negatively impact our supply chain and cause delays in the delivery of raw materials, components and other supplies that we need to conduct our operations. We may be unable to locate replacement materials, components or other supplies, and ongoing delays could reduce sales and adversely affect our revenues and results of operations. The extent to which the pandemic will impact our business will depend on many factors beyond our control, including the speed of contagion, the development and implementation of effective preventative measures and possible treatments, the scope of governmental and other restrictions on travel and other activity, and public reactions to these factors.


~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On ~~November 26, 2008,~~October 4, 2019, our Board of Directors authorized a share repurchase program pursuant to ~~repurchase~~which we may purchase up to one million shares of our common stock. As of March 31, ~~2019, 341,000~~2020, 849,728 shares of our common stock remain available for repurchase under the program. The repurchase program is expected to be funded by using our existing cash, cash equivalents, marketable securities, and future cash flows. Under the repurchase program, at management’s discretion, we may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. The repurchase program has ~~no expiration date.~~a duration of one year. Under the 2018 Credit Agreement, we may not repurchase more than $5.0 million of shares before October 31, 2021 without appropriate consent. There were no other repurchase programs outstanding during the three months ended March 31, ~~2019,~~2020, and no repurchase programs expired ~~during the~~that period.

~~We did not repurchase any shares of our common stock in open market transactions during the three months ended March 31, 2019.~~

During the three months ended March 31, ~~2019,~~2020, no vested restricted shares were surrendered to us in satisfaction of tax withholding obligations.

The following table provides information about our repurchases of common stock during the three months ended March 31, 2020.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-January 31	35,256	$	11.03	35,256	849,728
February 1-February 29	—	$	—	—	849,728
March 1-March 31	—	$	—	—	849,728
Total	35,256	$	11.03	35,256

ITEM 6. EXHIBITS

Exhibits:

Exhibit
No.

Description

Filed with
this Form 10-Q

Incorporated by Reference

Form

Filing Date

Exhibit No.

3.1

Amended and Restated Certificate of Incorporation, as amended

10-Q

August 6, 2010

3.1

3.2

Amended and Restated Bylaws

10-Q

November 1, 2017

3.2

4.1

Specimen certificate for the common stock

10-K

March 2, 2018

4.1

31.1

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

31.2

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

32.1

Section 1350 certification of principal executive officer and principal financial officer

101

The following financial information from KVH Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Loss (unaudited), (iv) the Consolidated Statement of Stockholders' Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) the Notes to Consolidated Interim Financial Statements (unaudited).

Exhibit
No.
Description
Filed with
this Form 10-Q
Incorporated by Reference
Form Filing Date Exhibit No.
3.1

Amended and Restated Certificate of Incorporation, as amended 10-Q August 6, 2010 3.1

3.2

Amended and Restated Bylaws 10-Q November 1, 2017 3.2

4.1

Specimen certificate for the common stock 10-K March 2, 2018 4.1

31.1

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

31.2

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

32.1

Section 1350 certification of principal executive officer and principal financial officer X

101
The following financial information from KVH Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Loss (unaudited), (iv) the Consolidated Statement of Stockholders' Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) the Notes to Consolidated Financial Statements (unaudited). X

SIGNATURE

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


Date: May 1, 2020

~~Date: May 2, 2019~~

KVH Industries, Inc.

By:			/s/ DONALD W. REILLY
			Donald W. Reilly
			(Duly Authorized Officer and Chief Financial Officer)

Exhibit Index

Exhibit

No.

Exhibit

No.

Description

Filed with

this Form 10-Q

Incorporated by Reference

Exhibit
No.

Description

Filed with
this Form 10-Q

Incorporated by Reference

Form

Filing Date

Exhibit No.

Form

Filing Date

Exhibit No.

3.1

Amended and Restated Certificate of Incorporation, as amended

10-Q

August 6, 2010

3.1

Amended and Restated Certificate of Incorporation, as amended

10-Q

August 6, 2010

3.1

3.2

Amended and Restated Bylaws

10-Q

November 1, 2017

3.2

Amended and Restated Bylaws

10-Q

November 1, 2017

3.2

4.1

Specimen certificate for the common stock

10-K

March 2, 2018

4.1

Specimen certificate for the common stock

10-K

March 2, 2018

4.1

31.1

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

31.1

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

31.2

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

31.2

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

32.1

Section 1350 certification of principal executive officer and principal financial officer

32.1

Section 1350 certification of principal executive officer and principal financial officer

101

The following financial information from KVH Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Loss (unaudited), (iv) the Consolidated Statement of Stockholders' Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) the Notes to Consolidated Financial Statements (unaudited).

101



Delaware			05-0420589
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification Number)
~~50 Enterprise Center, Middletown, RI 02842~~ ~~(Address of Principal Executive Offices) (Zip Code)~~
~~(401) 847-3327~~ ~~(Registrant’s Telephone Number, Including Area Code)~~



Large accelerated filer	o☐	Accelerated filer	ý☒
Non-accelerated filer	o☐	Smaller reporting company	ý☒
		Emerging growth company	o☐



~~Title of Each Class~~	~~Trading Symbol(s)~~	~~Name of Each Exchange on which Registered~~
~~Common Stock, par value $0.01 per share~~	~~KVHI~~	~~The NASDAQ Stock Market LLC~~ ~~(NASDAQ Global Select Market)~~



Date	Class	Outstanding shares
April ~~30, 2019~~27, 2020	Common Stock, par value $0.01 per share	~~17,879,814~~17,993,244



ý☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



o☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of March 31, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	3
	Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	4
	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	5
	Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	7
	Notes to Consolidated Interim Financial Statements (unaudited)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2627

ITEM 4.	CONTROLS AND PROCEDURES	3637
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	3738
ITEM 1A.	RISK FACTORS	38
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	3739
ITEM 6.	EXHIBITS	3840
SIGNATURE			3941
EXHIBIT INDEX			4042



	March 31, 2019			December 31, 2018
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	14,259		$	18,050
Marketable securities	25			25
Accounts receivable, net of allowance for doubtful accounts of $2,555 and $2,685 as of March 31, 2019 and December 31, 2018, respectively	28,832			29,663
Inventories	26,062			22,942
Prepaid expenses and other current assets	4,320			3,494
Current contract assets	3,678			3,566
Total current assets	77,176			77,740
Property and equipment, net	53,697			53,248
Intangible assets, net	9,807			10,518
Goodwill	32,845			32,213
Right of use asset operating lease	9,411			—
Other non-current assets	7,021			6,736
Non-current contract assets	7,342			6,971
Non-current deferred income tax asset	210			226
Total assets	$	197,509		$	187,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,270		$	17,726
Accrued compensation and employee-related expenses	4,249			5,167
Accrued other	10,131			10,964
Accrued product warranty costs	2,021			1,916
Current portion of long-term debt	10,585			9,928
Contract liabilities	12,211			9,193
Current operating lease liability	4,749			—
Liability for uncertain tax positions	1,141			1,116
Total current liabilities	65,357			56,010
Other long-term liabilities	1,752			1,920
Long-term operating lease liability	4,672			—
Long-term contract liabilities	9,634			9,070
Long-term debt, excluding current portion	18,749			19,437
Non-current deferred income tax liability	1,747			1,700
Total liabilities	$	101,911		$	88,137
Commitments and contingencies (Notes 2, 10, 12, and 19)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued	—			—
Common stock, $0.01 par value. Authorized 30,000,000 shares; 19,134,469 and 19,026,393 shares issued at March 31, 2019 and December 31, 2018, respectively; and 17,852,047 and 17,743,971 shares outstanding at March 31, 2019 and December 31, 2018, respectively	191			190
Additional paid-in capital	140,790			139,617
Accumulated deficit	(21,576		)	(15,397		)
Accumulated other comprehensive loss	(13,643		)	(14,731		)
	105,762			109,679
Less: treasury stock at cost, common stock, 1,282,422 and 1,282,422 shares as of March 31, 2019 and December 31, 2018, respectively	(10,164		)	(10,164		)
Total stockholders’ equity	95,598			99,515
Total liabilities and stockholders’ equity	$	197,509		$	187,652



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Money market mutual funds	$	25	$	—	$	—	$	25
Total marketable securities designated as available-for-sale	$	25	$	—	$	—	$	25



	Foreign Currency Translation			Unrealized (Loss) Gain on Available for Sale Marketable Securities		Interest Rate Swaps			Total Accumulated Other Comprehensive Loss
Balance, December 31, 2018	$	(14,720	)	$	—	$	(11	)	$	(14,731	)
Other comprehensive income before reclassifications	1,080			—		—			1,080
Amounts reclassified from AOCI to Other income, net	—			—		8			8
Net other comprehensive income, March 31, 2019	1,080			—		8			1,088
Balance, March 31, 2019	$	(13,640	)	$	—	$	(3	)	$	(13,643	)



	March 31, 2019		December 31, 2018
2018 term notes	$	21,938	$	21,938
Line of credit	5,000		5,000
Mortgage loan	2,551		2,597
Total long-term debt	29,489		29,535
Less debt issuance costs for 2018 term note(a)	155		170
Total long-term debt less debt issuance costs	$	29,334	$	29,365
Less amounts classified as current	10,585		9,928
Long-term debt, excluding current portion	$	18,749	$	19,437



	Three Months Ended March 31,
Expense Category	2019		2018
Cost of service sales	$	373	$	399
General and administrative expense	586		698
Total amortization expense	$	959	$	1,097



Remainder of 2019	$	2,069
2020	2,225
2021	2,225
2022	1,463
2023	544
Thereafter	1,281
Total future amortization expense	$	9,807



Interest Rate Derivatives	Notional (in thousands)		Asset (Liability)		Effective Date	Maturity Date	Index	Strike Rate
Interest rate swap	$	1,275	(1	)	April 1, 2010	April 1, 2019	1-month LIBOR	5.91	%
Interest rate swap	$	1,275	(2	)	April 1, 2010	April 1, 2019	1-month LIBOR	6.07	%



Remainder of 2019	$	3,883
2020	2,987
2021	1,275
2022	1,196
2023	386
2024 and thereafter	536
Total minimum lease payments	$	10,263

Less amount representing interest	$	(842	)
Present value of net minimum operating lease payments	$	9,421
Less current installments of obligation under current-operating lease liabilities	$	4,749
Obligations under long term - operating lease liabilities, excluding current installments	$	4,672

Weighted-average remaining lease term - operating leases (years)	3.00
Weighted-average discount rate - operating leases	5.50		%



					Change
	For the three months ended March 31,				2019 vs. 2018
	2019		2018		$			%
	(dollars in thousands)
Mobile connectivity sales
Product	$	7,062	$	7,920	$	(858	)	(11	)%
Service	25,448		24,829		619			2	%
Net sales	$	32,510	$	32,749	$	(239	)	(1	)%

Inertial navigation sales
Product	$	5,812	$	6,072	$	(260	)	(4	)%
Service	1,650		1,280		370			29	%
Net sales	$	7,462	$	7,352	$	110		1	%