The following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements and related notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed under the heading "Item 1A. Risk Factors" and elsewhere in this annual report.
We design, develop, manufacture and market mobile connectivity products and services for maritime and land mobile markets, and inertial navigation products for defense and commercial markets. Our reporting segments are:
•the mobile connectivity segment and •the inertial navigation segment Through these segments, we manufacture and sell our solutions in a number of major geographic areas, including internationally. We generate a majority of our revenues from various international locations, primarily consisting of
Singapore, Canada, Europe, countries in Africa, other Asia/Pacificcountries, the Middle East, and India.
Management transition and restructuring
March 7, 2022, we announced that our President and Chief Executive Officer, Martin Kits van Heyningen, was retiring from his executive and Board roles after more than 40 years of service. The Board of Directors has engaged an executive search firm to identify a new Chief Executive Officer. Brent C. Bruun, our Chief Operating Officer, has been appointed as our interim President and Chief Executive Officer. We expect to incur one-time and ongoing costs associated with the management transition, including the cost of the executive search firm, professional fees, salary continuation for Mr. Kits van Heyningenof up to approximately $0.5 millionfor advisory services and a one-time separation payment to Mr. Kits van Heyningenof $0.2 million(inclusive of amounts he may have otherwise earned under our 2021 executive bonus plan), as well as expenses associated with continued vesting of his equity awards.
30 -------------------------------------------------------------------------------- Table of Contents reduced our workforce by approximately 10% and expect to reduce expenses from these actions. There will be one-time costs to be incurred in the first quarter of fiscal year 2022, with the benefit to earnings expected to begin in the second quarter of fiscal year 2022.
Mobile connectivity segment
Our mobile connectivity segment offers satellite communications products and services. Our mobile connectivity products enable customers to receive voice and Internet services and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. We sell our mobile connectivity products through an extensive international network of dealers and distributors. We also sell and lease products to service providers and directly to end users. Our mobile connectivity service sales include sales of satellite voice and Internet airtime services, engineering services provided under development contracts, sales from product repairs, and extended warranty sales. This segment's sales also include the distribution of entertainment, including news, sports, music, and movies, to commercial and leisure customers in the maritime, hotel, and retail markets through
KVH Media Group. We typically recognize revenue from media content sales ratably over the period of the service contract. We provide, for monthly fixed fees and usage-based fees, satellite connectivity services for broadband Internet, data and VoIP service to our mini-VSAT Broadband customers. We also earn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose to activate their subscriptions with us. Within the mobile connectivity segment, our marine leisure business is highly seasonal, and seasonality can also impact our commercial marine business. Historically, we have generated the majority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourth quarters of each year, compared to the first two quarters. Temporary suspensions of our airtime services typically increase in the third and fourth quarters of each year as boats are placed out of service during the winter months.
Depreciation charges –
The COVID-19 pandemic impacted various aspects of our operations in 2020, and we monitored the impact of this global crisis carefully. We particularly monitored the operations of
KVH Media Group, which depends heavily on travel and travel-related industries. The revenues and cash flows of KVH Media Groupwere significantly impacted by the global reduction in travel commencing with the start of the pandemic, as the global travel and related industries dropped to historically depressed levels. In response to the impact of the pandemic, particularly with respect to our KVH Media Groupbusiness, during our 2020 annual budgeting and long-term planning process, we conducted detailed discussions with many of our largest customers in the KVH Media Groupto validate our assumptions, which indicated further expected delays in recovery, and certain areas of the KVH Media Groupbusiness that might not recover completely or at all. Accordingly, we updated our long-term revenue and cash flow forecast to reflect these most recent observations. Based on our other long-lived asset impairment analysis and annual goodwill impairment test, we recognized an intangible asset impairment charge of $1.8 millionand a goodwill impairment charge of $8.7 millionfor the year ended December 31, 2020related to KVH Media Group. Our annual impairment analysis in the fourth quarter of 2021 did not identify any further impairment. Please see Note 1(k) to our accompanying audited consolidated financial statements for additional 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 autonomous platforms, precision mapping, dynamic surveying, 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. 31 -------------------------------------------------------------------------------- Table of Contents PPP Loan Forgiveness In September 2021, the U.S. Small Business Administrationapproved our application for the forgiveness of the $6.9 millionloan (the PPP Loan) we received in May 2020pursuant to the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (as modified by the Paycheck Protection Flexibility Act of 2020, the CARES Act). As a result, we recognized $7.0 millionof other income during the three months ended September 30, 2021.
The following table shows, for the periods indicated, our sales by segment for our continuing operations:
Year Ended December 31, 2021 2020 (in thousands) Mobile connectivity
$ 133,911 $ 119,453Inertial navigation 37,856 39,280 Net sales $ 171,767 $ 158,733
Product sales in the mobile connectivity segment represented 17% and 18% of our consolidated net sales for 2021 and 2020, respectively. our consolidated net sales for 2021 and 2020, respectively.
Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems represented 16% of our consolidated net sales for 2021 and 2020.
No other product category represented 10% or more of consolidated net sales. No individual customer represented 10% or more of our consolidated net sales for 2021 or 2020.
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
Singapore, Canada, Europe, countries in Africa, other Asia/Pacificcountries, the Middle East, and India. Our international net sales totaled 60% and 64% of our consolidated net sales for 2021 and 2020, respectively. Sales to Singaporecustomers represented 11% of our consolidated net sales for 2021. No other individual foreign country represented 10% or more of our consolidated net sales for 2021. No individual foreign country represented 10% or more of our consolidated net sales for 2020. See Note 12 to our accompanying audited 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. Year Ended December 31, 20212020
(in thousands) Research and development expenses presented in the income statement
Research and development costs funded by customers included in cost of sales of services
Total expenses from the consolidated statements of income for research and development activities
The following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales:
Year Ended December 31, 2021 2020 Sales: Product 38.9 % 40.7 % Service 61.1 59.3 Net sales 100.0 100.0 Costs and expenses: Costs of product sales 27.3 26.2 Costs of service sales 37.9 37.5 Research and development 10.3 10.0 Sales, marketing and support 18.2 18.8 General and administrative 16.8 15.4 Goodwill impairment charge - 5.5 Intangible asset impairment charge - 1.1 Total costs and expenses 110.5 114.5 Loss from operations (10.5) (14.5) Interest income 0.5 0.6 Interest expense - - Other income, net 4.2 0.1 Loss before income taxes (benefit) expense (5.8) (13.8) Income tax (benefit) expense (0.1) 0.1 Net loss (5.7) % (13.9) %
As discussed further under the heading "Segment Discussion" below, product sales increased
$2.3 million, or 3%, to $66.9 millionin 2021 from $64.6 millionin 2020, due to an increase in mobile connectivity product sales of $2.1 millionand an increase in inertial navigation product sales of $0.1 million. Service sales for 2021 increased $10.8 million, or 11%, to $104.9 millionfrom $94.1 millionin 2020 primarily due to an increase in mobile connectivity service sales of $12.3 million, partially offset by a decrease in inertial navigation service sales of $1.5 million.
Costs of sales
Costs of sales consists of costs of product sales and costs of service sales. Costs of sales increased in 2021 to
$112.0 millionfrom $101.1 millionin 2020. The increase in costs of sales was driven by a $5.6 millionincrease in costs of service sales and a $5.2 millionincrease in costs of product sales. As a percentage of net sales, costs of sales was 65% and 64% for 2021 and 2020, respectively. 33 -------------------------------------------------------------------------------- Table of Contents Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For 2021, costs of product sales increased by $5.2 million, or 13%, to $46.8 millionfrom $41.6 millionin 2020. As a percentage of product sales, costs of product sales were 70% and 64% for 2021 and 2020, respectively. Mobile connectivity costs of product sales increased by $2.4 million, or 11%, due to a $2.3 millionincrease in our marine mobile connectivity cost of product sales and a $0.2 millionincrease in our land mobile connectivity costs of product sales. Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 80% and 77% for 2021 and 2020, respectively. Inertial navigation costs of product sales increased by $2.8 million, or 14%, primarily due to a $1.9 millionincrease in FOG and OEM costs of product sales and a $1.6 millionincrease in expensed material and other manufacturing period costs, offset slightly by a $0.7 milliondecrease in our TACNAV costs of product sales. Inertial navigation costs of product sales as a percentage of inertial navigation product sales was 62% and 55% for 2021 and 2020, respectively, which increased primarily due to product mix with a decrease in high margin TACNAV product sales. 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 2021, costs of service sales increased by $5.6 million, or 9%, to $65.2 millionfrom $59.5 millionin 2020. As a percentage of service sales, costs of service sales were 62% and 63% for 2021 and 2020, respectively. Mobile connectivity costs of service sales increased by $7.8 million, or 14%, primarily due to a $8.0 millionincrease in mini-VSAT airtime costs of service sales. Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales were 62% for both 2021 and 2020. Inertial navigation costs of service sales decreased by $2.1 million, or 67%, primarily due to a decrease in contract engineering services sales. Inertial navigation costs of service sales as a percentage of inertial navigation service sales was 103% and 124% for 2021 and 2020, respectively. The decrease in costs of inertial navigation service sales was primarily due to a decrease in costs relating to an engineering and services development contract from a major U.S.defense contractor.
Research and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internally funded product development and product sustaining engineering activities. Research and development expense for 2021 increased by
$2.0 million, or 12%, to $17.8 millionfrom $15.8 millionin 2020. The primary reason for the increase in research and development expense was a $2.1 milliondecrease in funded engineering expenses (and a corresponding reallocation of the expense of the underlying engineering work from costs of service sales (where funded engineering expenses are reflected) to research and development expense (where unfunded engineering expenses are reflected)) and a $0.2 millionincrease in consulting fees. As a percentage of net sales, research and development expense was 10% in both 2021 and 2020. We expect that in 2022 our research and development expense will decrease year-over-year due to the restructuring announced in March 2022as we scale back our long-term research initiatives and focus on development initiatives related to our core 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 increased by $1.4 million, or 5%, to $31.2 millionin 2021 from $29.8 millionin 2020. The increase in sales, marketing and support expense resulted primarily from a $1.6 millionincrease in salaries and associated compensation, a $0.3 millionincrease in external commission expenses, a $0.2 millionincrease in bad debt expenses and a $0.2 millionincrease in professional fees, partially offset by a $0.8 milliondecrease in warranty expenses and a $0.2 milliondecrease in travel expenses. As a percentage of net sales, sales, marketing and support expense was 18% and 19% in 2021 and 2020, respectively.
We expect that in 2022, our sales, marketing and support expenses will decrease year over year due to the
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 2021 increased by
$4.3 million, or 18%, to $28.8 millionfrom $24.4 millionfor 2020. The increase in general and administrative expense resulted primarily from a $3.5 millionincrease in professional fees, primarily arising from a stockholder's nomination of a competing slate of directors at our annual meeting of stockholders, and a $1.0 millionincrease in 34 -------------------------------------------------------------------------------- Table of Contents salaries and associated compensation. As a percentage of net sales, general and administrative expense was 17% and 15% for 2021 and 2020, respectively.
We expect that in 2022, our general and administrative expenses will decrease year over year due to the
Interest and other income, net
Interest income represents interest earned on our cash and cash equivalents, as well as from investments and our sale-type lease receivables. Interest income decreased by
$0.1 millionto $0.9 millionfrom $1.0 millionfor 2020, primarily due to lower interest related to our marketable securities. Interest expense for 2021 increased to $0.1 millionfrom less than $0.1 millionfor 2020. Other income, net for 2021 increased to $7.2 millionfrom other income, net of $0.2 millionfor 2020 primarily due to the forgiveness of the PPP Loan.
Income tax expense (benefits)
Income tax benefit for 2021 was
$0.1 millionand related to losses generated in foreign jurisdictions. There was no associated tax benefit related to losses incurred in the U.S.due to a full valuation allowance on our related deferred tax assets. Income tax expense for 2020 was $0.2 milliondue to taxes related to income earned in foreign jurisdictions and no associated tax benefit related to losses incurred in the U.S.due to a full valuation allowance on our related deferred tax assets. The effective tax rate for 2021 was 1.1%. The primary driver of the difference between our effective tax rate as compared to the United Statesfederal statutory rate was the change in the valuation reserve against the U.S.deferred tax assets, research tax credits, state taxes and the non-taxability of the forgiveness of the PPP Loan. The effective income tax rate of (0.8)% for 2020 differs from the U.S.federal statutory rate due to the impact of recording the valuation reserve against the U.S.deferred tax assets, which was partially offset by income taxed at lower foreign tax rates.
Sector Discussion – Fiscal Years Ended
Our net sales by segment for 2021 and 2020 were as follows:
Change For the year ended December 31, 2021 vs. 2020 2021 2020 $ % (dollars in thousands) Mobile connectivity sales Product
$ 30,012 $ 27,863 $ 2,1498 % Service 103,899 91,590 12,309 13 % Net sales $ 133,911 $ 119,453 $ 14,45812 % Inertial navigation sales Product $ 36,858 $ 36,756$ 102 - % Service 998 2,524 (1,526) (60) % Net sales $ 37,856 $ 39,280 $ (1,424)(4) % 35
-------------------------------------------------------------------------------- Table of Contents Operating income (loss) by segment for 2021 and 2020 were as follows: Change For the year ended December 31, 2021 vs. 2020 2021 2020 $ % (dollars in thousands) Mobile connectivity (1)
$ 2,749 $ (10,071) $ 12,820127 % Inertial navigation 1,649 4,799 (3,150) (66) % $ 4,398 $ (5,272) $ 9,670183 % Unallocated (22,344) (17,665) (4,679) (26) % Loss from operations $ (17,946) $ (22,937) $ 4,99122 % (1) Mobile connectivity loss from operations for 2020 includes a $10.5 milliongoodwill and intangible asset impairment charge. See Note 1(k) and Note 9 to our accompanying audited consolidated financial statements for more information. Mobile Connectivity Segment Net sales in the mobile connectivity segment increased by $14.5 million, or 12%, in 2021 as compared to 2020. Mobile connectivity product sales increased by $2.1 million, or 8%, to $30.0 millionin 2021 from $27.9 millionin 2020. The increase was primarily the result of a $1.1 millionincrease in TracVision product sales and $0.9 millionincrease in mini-VSAT product sales. The increases in TracVision and mini-VSAT product sales was primarily due to an increase in unit sales volume. Mobile connectivity service sales increased by $12.3 million, or 13%, to $103.9 millionin 2021 from $91.6 millionin 2020. The increase was primarily due to a $11.5 millionincrease in mini-VSAT service sales, driven by a 12% increase in subscribers, primarily as a result of AgilePlans. In addition, there was an increase of $0.3 millionin our content service sales and a $0.3 millionincrease in service activation sales. The 12% increase in subscribers is measured as of noon on December 31, prior to the shutdown of the legacy Arclight network. Consistent with our previously disclosed plans, we shut down our legacy Arclight network at midnight on December 31, 2021. Virtually all costs associated with that network have ceased, and while we will have additional costs on our HTS network to service the customers who have migrated from the legacy network, we expect to see a margin improvement in our mini-VSAT services. We are continuing with the migration/transition of legacy network customers who did not migrate by December 31, 2021. As of December 31, 2021, the monthly recurring revenue associated with those customers was approximately $0.3 million. During January and February of 2022, we re-signed a total of $0.1 millionof recurring monthly revenue from former legacy customers. We expect to continue re-signing former legacy network customers throughout 2022, particularly in the spring as seasonal leisure customers commission their vessels for the summer. However, we do not expect that we will succeed in re-signing all of them. For the full year, we expect airtime revenue growth but at a lower rate than we saw in 2021. Operating income (loss) for the mobile connectivity segment increased $12.8 millionin 2021 to an operating gain of $2.7 millionas compared to an operating loss of $10.1 millionfor 2020. This increase in operating income was primarily due to the impairment of goodwill and other intangible assets of $10.5 millionin 2020 in KVH Media Group(which was not repeated in 2021), combined with an increase in sales less associated costs of $4.3 million. This was partially offset by an increase in mobile connectivity operating expenses, excluding impairment, of $1.9 millionin 2021. The increase in operating expenses was primarily due to a $1.8 millionincrease in salaries and associated compensation, primarily due to reinstating salaries and associated compensation that were temporarily reduced in connection with our response to COVID-19. In addition, there was a $0.8 millionincrease in research and development expense, which was offset by a $0.8 milliondecrease in warranty expenses. 36 -------------------------------------------------------------------------------- Table of Contents Inertial Navigation Segment Net sales in the inertial navigation segment decreased $1.4 million, or 4%, in 2021 as compared to 2020. Inertial navigation product sales increased $0.1 million, or less than 1%, to $36.9 millionin 2021 from $36.8 millionin 2020. The primary driver of the increase was an increase of $3.0 million, or 12%, of sales of our FOG products, offset by a $2.9 million, or 27%, decrease in TACNAV product sales (for more information, see "Risk Factors - Risks related to government sales - Sales of our FOG systems and TACNAV products generally consist of a few large orders, and the delay or cancellation of a single order will substantially reduce our net sales. Only a few customers account for a substantial portion of our inertial navigation revenues, and the loss of any of these customers could substantially reduce our net sales."). Inertial navigation service sales decreased $1.5 million, or 60%, to $1.0 millionin 2021 from $2.5 millionin 2020. The primary reason for the decrease was a $1.7 million, or 82%, decrease in contracted engineering service revenues due to a decrease in services for a project for a major U.S.defense customer. Operating income for the inertial navigation segment decreased $3.2 millionin 2021 to an operating gain of $1.6 millionas compared to an operating gain of $4.8 millionfor 2020. This decrease was primarily due to the decrease in sales less associated costs of $2.1 million, a $0.9 milliondecrease in funded engineering expenses and a $0.3 millionincrease in external commissions. This was partially offset by a $0.3 milliondecrease in salaries and associated compensation.
Some company-level costs have not been allocated because they are not directly attributable to either segment. These costs consist primarily of general corporate functions, including management, legal, finance, information technology and costs associated with securities transactions.
Unallocated operating loss increased
$4.7 million, or 26%, in 2021 compared to 2020. The increase in unallocated operating loss was primarily the result of a $3.5 millionincrease in professional fees, primarily arising from a stockholder's nomination of a competing slate of directors at our annual meeting of stockholders, and a $1.2 millionincrease in salaries and associated compensation, primarily due to reinstating salaries and associated compensation that were temporarily reduced in connection with our response to COVID-19. In addition, there was a $0.3 millionincrease in computer expenses.
Critical accounting 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, revenues and expenses, and related disclosure at the date of our financial statements. Our significant accounting policies are summarized in Note 1 to our accompanying audited consolidated financial statements. Critical accounting estimates are those estimates made that involve a significant level of estimation uncertainty and have had or are reasonably likely to have an impact on our statement of operations. We believe that our accounting policies for goodwill, intangible assets, and other long-lived assets are the only estimates critical to an understanding and evaluation of our financial results for 2021, as discussed below.
We follow Accounting Standards Codification (ASC) Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test of
GoodwillImpairment. ASC 350 requires the completion of a goodwill impairment test at least annually based on either an optional qualitative assessment or a quantitative analysis comparing the estimated fair value of a reporting unit to its carrying value as of the test date. Any impairment charges would be based on the quantitative analysis. As a result of the 2020 annual impairment test, we recorded goodwill impairment charges of $8.7 millionand intangible asset impairment charges of $1.8 millionrelated to its KVH Media Groupreporting unit. Prior to 2020, we had not recorded or incurred goodwill impairment charges. 37 -------------------------------------------------------------------------------- Table of Contents For the October 1, 2020test, due to the uncertainty that the global pandemic presented during 2020, we determined that we should perform a quantitative analysis of goodwill impairment. We performed this full quantitative analysis in the fourth quarter of 2020 in conjunction with our annual budgeting and long-term planning cycle. The revenues and cash flows of KVH Media Grouphave been significantly impacted by the global reduction in travel since the start of the pandemic. With the assistance of our valuation specialists, we utilized an income approach and market approach to estimate the fair value of our reporting units, based on assumptions that we believed to be reasonable. As an additional corroborative test of the reasonableness of those assumptions, we completed a reconciliation of our market capitalization and overall enterprise value to the fair value of all of our reporting units as of October 1, 2020. We estimated that, as of October 1, 2020, the fair value of our mobile broadband reporting unit exceeded its carrying value by 18%; however, the carrying value of our KVH Media Groupreporting unit exceeded its fair value by $10.2 million, which signified that an impairment had occurred and identified a triggering event to review our other long-lived assets for impairment. In accordance with ASC 360-10, Property, Plant and Equipment - Impairment or Disposal of Long-Lived Assets (ASC 360), with regard to our long-lived assets, we performed an undiscounted cash flow analysis and concluded that the carrying value of the asset group was not recoverable. Accordingly, we then performed an analysis to estimate the fair value of the other long-lived assets and recognized impairment charge of $1.8 millionagainst the distribution rights intangible asset, the amount by which the carrying value of the asset group's other long-lived assets exceeded their estimated fair value, and a reduction in the associated deferred tax liability of $0.3 million. As a result, we recognized an impairment charge to KVH Media Group'sgoodwill in the amount of $8.7 million, the remaining amount by which the carrying value exceeded its fair value. For the October 1, 2021test, we performed a qualitative assessment of goodwill impairment (Step 0) and concluded that for our mobile broadband reporting unit, it was more likely than not that, for this reporting unit, the fair value exceeded the carrying value. For the KVH Media Groupreporting unit, we determined that it was necessary to perform the Step 1 quantitative analysis due to the ongoing global pandemic and its impacts. We utilized an income approach to estimate the fair value of the reporting unit. We believe that the assumptions used to estimate the fair value of our KVH Media Groupreporting unit were reasonable. We estimated that, as of October 1, 2021, the fair value of KVH Media Groupexceeded its carrying value by more than 20%. A negative trend of operating results or material changes to forecasted operating results could result in the requirement for additional interim goodwill impairment tests and the potential of future goodwill impairment charges, which could be material. Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. During 2021, there were no events or changes in circumstances that indicated any of the carrying amounts of our intangible assets or other long-lived assets may not be recoverable. See Note 9 to our accompanying audited consolidated financial statements for further discussion of goodwill and intangible assets.
Cash and capital resources
Our primary liquidity needs have been to fund general business requirements, including working capital requirements and capital expenditures. In recent years, we have funded our operations primarily from the sale of a business in 2019 as well as bank financings and proceeds received from exercises of stock options and the issuance of stock. In
May 2020, we received a $6.9 millionloan from Bank of America, N.A. (the Lender), under the PPP, which was established under the CARES Act. Pursuant to the terms of the CARES Act, in August 2021, we applied for forgiveness of the full amount of the PPP Loan. On September 24, 2021, we received notification from the bank that, on September 19, 2021, the U.S. Small Business Administration(the SBA) had determined that the PPP Loan forgiveness application was approved, and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA. We believe that our cash and cash equivalents as of December 31, 2021, our estimated cash flows from operations, and borrowings available under our credit agreement will be sufficient to fund our operations and anticipated capital expenditures through at least the next twelve months based on our current operating plans. However, as the need or opportunity arises, we may seek to raise additional capital through public or private sales of securities or through additional debt financing. There are no assurances that we will be able to obtain any additional funding or that such funding will be available on terms acceptable to us, or at all. 38 -------------------------------------------------------------------------------- Table of Contents We believe that our primary long-term capital requirements relate to AgilePlans revenue-generating assets, as well as servicing and repaying our satellite service capacity and equipment lease obligations. At December 31, 2021, we had outstanding non-cancellable satellite service capacity and other lease obligations with future minimum payments of $63.0 million. Our ability to make payments on our satellite service capacity and equipment lease obligations, as well as our ability to fund planned capital expenditures, will depend on our ability to generate cash in the future. Our ability to generate cash in the future will depend upon, among other things, the performance of our operating segments and general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As of December 31, 2021, we had $24.5 millionin cash, cash equivalents, and marketable securities, of which $2.7 millionin cash equivalents was held in local currencies by our foreign subsidiaries. Our foreign subsidiaries held no marketable securities as of December 31, 2021. As of December 31, 2021, we had $53.9 millionin working capital.
Operating activities provided
$2.9 millionof net cash in 2021 and used $3.1 millionof net cash in 2020, an increase in net cash provided by operating activities of $6.0 million. The $6.0 millionincrease in net cash provided by operating activities is primarily due to a $12.2 milliondecrease in net loss, a $4.4 milliondecrease in cash outflows related to accounts payable and accrued expenses, a $1.2 milliondecrease in cash outflows related to inventories, a $1.0 milliondecrease in cash outflows related to other non-current assets and non-current contract assets, a $0.6 millionincrease in cash inflows relating to accounts receivable, and a $0.5 milliondecrease in cash outflows relating to prepaid expenses, other current assets, and current contract assets. Partially offsetting these items were a $14.1 milliondecrease in non-cash items, which was primarily driven by the 2020 impairment charges to goodwill and intangible assets and the 2021 PPP loan forgiveness.
Net cash used in investing activities for 2021 was
$6.7 millionas compared to net cash used in investing activities of $9.3 millionfor 2020. The $2.6 milliondecrease in net cash used in investing activities was primarily the result of a $7.2 millionincrease in net cash inflows relating to the purchase and sale of marketable securities. Partially offsetting these items was a $4.7 millionincrease in capital expenditures.
Net cash provided by financing activities for 2021 was
$2.6 millionas compared to net cash provided by financing activities in 2020 of $7.1 million. The $4.5 milliondecrease in net cash provided by financing activities is primarily attributable to the $6.9 milliondecrease in cash inflows from long-term borrowings. This decrease in cash inflows was partially offset by a $1.7 millionincrease in cash inflows relating to proceeds from stock options exercises and the employee stock purchase plan, a $0.4 milliondecrease in cash outflows relating to the repurchase of common stock and a $0.3 milliondecrease in cash outflows for capital lease payments.
Terms of borrowing
Paycheck Protection Program Loan
May 2020, we received a $6.9 millionloan from the Lender under the PPP, which was established under the CARES Act and is administered by the SBA. The term of the PPP Loan was two years from the funding date, and the interest rate was 1.00%. Interest on the loan accrued from the funding date, but was deferred. In August 2021, we applied for forgiveness of the full amount of the PPP Loan. On September 24, 2021, we received notification from the Lender that, on September 19, 2021, the SBA had determined that the PPP Loan forgiveness application was approved, and the PPP Loan, including all accrued interest thereon, was paid in full by the SBA. The forgiveness of the PPP Loan is recognized in Other income, net in the accompanying consolidated statements of operations for the year ended December 31, 2021. 39 -------------------------------------------------------------------------------- Table of Contents Line of Credit Effective October 30, 2018, we entered into an amended and restated three-year senior secured credit facility agreement (the 2018 Credit Agreement) with Bank of America, N.A., as Administrative Agent, and the lenders named from time to time as parties thereto (the 2018 Lenders), which included a reducing revolving credit facility (the 2018 Revolver) of up to $20.0 millioninitially and reducing to $15.0 millionon December 31, 2019, to be used for general corporate purposes. Our obligations under the 2018 Credit Agreement are secured by substantially all of our assets and the pledge of equity interests in certain of our subsidiaries. As of December 31, 2021, no amounts were outstanding under the 2018 Revolver. Borrowings under the 2018 Revolver are subject to the satisfaction of various conditions precedent at the time of each borrowing, including the continued accuracy of our representations and warranties and the absence of any default under the 2018 Credit Agreement. As of December 31, 2021, we were only able to draw on $10.9 millionof the $15.0 millionfacility due to covenant restrictions. The 2018 Credit Agreement contained two financial covenants, a maximum Consolidated Leverage Ratio and a minimum Consolidated Fixed Charge Coverage Ratio, each as defined in the 2018 Credit Agreement. The Consolidated Leverage Ratio could not exceed 2.50:1.00 through December 31, 2020and may not exceed 2.00:1.00 after December 31, 2020. The Consolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00. On July 30, 2020, we amended the 2018 Credit Agreement to reflect the incurrence of the PPP loan. Under the amended facility, the principal and interest on the PPP loan were not included in the maximum Consolidated Leverage Ratio or the minimum Consolidated Fixed Charge Coverage Ratio calculations except as to any portion of the PPP Loan that is not ultimately forgiven. In September 2021, the PPP Loan was forgiven in full. On October 29, 2021, we amended the 2018 Credit Agreement to maintain the $15.0 million2018 Revolver, extend the maturity date of the 2018 Revolver to October 28, 2022, eliminate the Consolidated Fixed Charge Coverage Ratio financial covenant, add a minimum trailing four-quarter Consolidated Adjusted EBITDA financial covenant of $3.0 million, modify the definition of Consolidated Adjusted EBITDA, modify the interest rate margins and certain lender fees, and transition the interest rate provisions based on LIBOR to the Bloomberg Short Term Bank Yield Index. In addition, Bank of Americabecame the sole lender under the 2018 Credit Agreement. The 2018 Credit Agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment of taxes and other obligations, compliance with laws, performance of material contracts, creation of liens, incurrence of indebtedness, investments, dispositions, fundamental changes, restricted payments, changes in the nature of our business, transactions with affiliates, corporate and accounting changes, and sale and leaseback arrangements.
We intend to continue to invest in the mini-VSAT Broadband network on a global basis. As part of the future potential capacity expansion, we plan to acquire additional satellite capacity from satellite operators, expend funds to seek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel. From time to time we have entered into multi-year agreements to lease satellite capacity, and we have also purchased numerous satellite hubs to support the added capacity. These transactions can involve millions of dollars. On
October 4, 2019, our Board of Directors authorized a share repurchase program pursuant to which we were authorized to purchase up to one million shares of our common stock. The program expired on October 4, 2020. Under the repurchase program, at management's discretion, we were authorized to repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. In January 2020, we had repurchased 35,256 shares of common stock in open market transaction at a cost of approximately $0.4 million. The total amount we repurchased under the October 4, 2019repurchase program was 150,272 shares of common stock at an approximate cost of $1.7 million. There were no repurchase programs outstanding during 2021.
Off-balance sheet arrangements
December 31, 2021, except for certain satellite service capacity obligations that are not considered operating or financing leases under ASC 842, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of 40 -------------------------------------------------------------------------------- Table of Contents operations, liquidity, capital expenditures or capital resources. Please see Note 6 to our accompanying audited consolidated financial statements for additional information on our satellite service capacity obligations.
Recently published accounting pronouncements
See Note 1 of our accompanying audited consolidated financial statements for a description of recently issued accounting pronouncements including the dates of adoption and effects on our results of operations, financial position and disclosures.
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