KVH Industries
Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 0-28082KVH Industries, Inc.(Exact Name of Registrant as Specified in its Charter)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)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par value per share The NASDAQ Stock Market LLC (NASDAQ Global Market)Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o Accelerated filer xNon-accelerated filer o Smaller reporting company o(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xAs of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $115,050,774 based on the closing sale price of $7.70per share as reported on the NASDAQ Global Select Market. Shares of common stock held byTable of Contentsexecutive officers and directors of the registrant and their affiliates have been excluded from this calculation because such persons may be deemed affiliates.As of March 8, 2017, the registrant had 16,902,494 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Proxy Statement relating to its 2017 Annual Meeting of Stockholders are incorporated herein by reference in Part III. Table of ContentsINDEX TO FORM 10-K Page PART I Item 1.Business3Item 1A.Risk Factors15Item 1B.Unresolved Staff Comments30Item 2.Properties31Item 3.Legal Proceedings31Item 4.Mine Safety Disclosures31 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities32Item 6.Selected Financial Data33Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations35Item 7A.Quantitative and Qualitative Disclosure About Market Risk52Item 8.Financial Statements and Supplementary Data53Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure53Item 9A.Controls and Procedures54Item 9B.Other Information55 PART III Item 10.Directors, Executive Officers and Corporate Governance56Item 11.Executive Compensation56Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters56Item 13.Certain Relationships and Related Transactions and Director Independence56Item 14.Principal Accountant Fees and Services56 PART IV Item 15.Exhibits and Financial Statement Schedules57Item 16.Form 10-K Summary Signatures602Table of ContentsPART IITEM 1.BusinessCautionary Statement Regarding Forward-Looking InformationIn addition to historical facts, this annual report contains forward-looking statements. Forward-looking statements are merely our current predictionsof future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could causeactual events to vary from our predictions include those discussed in this annual report under the headings “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations,” and “Item 1A. Risk Factors.” We assume no obligation to update our forward-looking statements to reflectnew information or developments. We urge readers to review carefully the risk factors described in this annual report and in the other documents that we filewith the Securities and Exchange Commission. You can read these documents at www.sec.gov.Additional Information AvailableOur principal Internet address is www.kvh.com. Our website provides a hyperlink to a third-party website through which our annual, quarterly, andcurrent reports, as well as amendments to those reports, are available free of charge. We believe these reports are made available as soon as reasonablypracticable after we electronically file them with, or furnish them to, the SEC. We do not provide any information regarding our SEC filings directly to thethird-party website, and we do not check its accuracy or completeness.IntroductionWe are a leading manufacturer of solutions that provide global high-speed Internet, television, and voice services via satellite to mobile users at seaand on land. We are also a leading provider of commercially licensed entertainment, including news, sports, music, and movies, to commercial and leisurecustomers in the maritime, hotel, and retail markets. In addition, we develop and distribute training films and e-Learning computer-based training courses tocommercial maritime customers. We are also a premier manufacturer of high-performance navigational sensors and integrated inertial systems for defense andcommercial inertial navigation applications. Our reporting segments are as follows:•the mobile connectivity segment and•the inertial navigation segmentThrough these segments, we manufacture and sell our solutions in a number of major geographic areas, including internationally. We generaterevenues from various international locations, primarily consisting of Canada, Europe (both inside and outside the European Union), Africa, Asia/Pacific, andthe Middle East.We are headquartered in Middletown, Rhode Island, with active operations in Denmark, Hong Kong, the State of Illinois, Japan, Norway, Singapore,and the United Kingdom.Our Business SegmentsSegment Primary Products Major Brands 2016 Net Sales (1)Mobile connectivity Satellite television, phone andinternet solutions and mediaand content delivery solutions TracVision®TracPhone®CommBox TMVideotel®Mini-VSAT Broadband SMIP-MobileCast TMKVH OneCare TM $141,507Inertial navigation Digital compass and fiberoptic gyro-based navigationand guidance systems TACNAV® 34,615 Total $176,122(1) Amounts in thousands 3Table of ContentsMobile Connectivity SegmentThe mobile connectivity segment primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and servicesthat provide access to the Internet and voice services while on the move. Product sales within the mobile connectivity segment accounted forapproximately 23%, 23% and 25% of our consolidated net sales for 2016, 2015 and 2014, respectively. Sales of mini-VSAT Broadband airtime serviceaccounted for approximately 37%, 35%, and 35% of our consolidated net sales for 2016, 2015, 2014, respectively. Sales of content and training sales withinthe mobile connectivity segment accounted for approximately 20%, 21% and 14% of our consolidated net sales for 2016, 2015 and 2014, respectively.In the global maritime market, we believe that there is significant demand for mobile access to television, entertainment, voice services, the Internet,and near real-time operational services such as safety training, navigation chart updates, weather services, and voyage optimization. For both maritime andonshore customers that want to access live television while on the move, we offer a comprehensive family of mobile satellite antenna products marketedunder the TracVision brand. For access to the Internet and voice services while on the move, which we refer to collectively as our airtime services, we offer afamily of mobile satellite antenna products and services marketed under the brands TracPhone and mini-VSAT Broadband. The network infrastructure that wehave developed to support our airtime services also supports the delivery of other value-added services over our IP-MobileCast content delivery service forboth entertainment and operational needs.Our mobile satellite antenna products are typically installed on mobile platforms and use sophisticated robotics, stabilization and control software,sensing technologies, transceiver integration, and advanced antenna designs to automatically search for, identify and point directly at the selected televisionand communications satellite while the vehicle or vessel is in motion. Our antennas use gyros and inclinometers to measure the pitch, roll and yaw of anantenna platform in relation to the earth. Microprocessors and our proprietary stabilization and control software use that data to compute the antennamovement necessary for the antenna’s motors to point the antenna properly and maintain contact with the satellite. If an obstruction temporarily blocks thesatellite signal, our products continue to track the satellite’s location according to the movement of the antenna platform in order to carry out automatic,rapid reacquisition of the signal when a direct line of sight to the satellite is restored.Our Certified Support Network offers our TracVision and TracPhone customers an international network of skilled technical dealers and supportcenters in many locations where our customers are likely to travel. We have selected distributors based on their technical expertise, professionalism, andcommitment to quality, and regularly provide them with extensive training in the sale, installation and support of our products.MaritimeIn the marine market, we offer a range of mobile satellite TV and communications products.Satellite TV. Our TracVision TV-series satellite TV antennas, are designed with the full spectrum of vessel sizes in mind, ranging from recreationalvessels as small as 20 to 25 feet to large commercial vessels. The TV-series incorporate an Internet Protocol (IP)-enabled control unit to allow access to systeminformation from any Wi-Fi device. Our family of marine TracVision products includes the 32-cm diameter TracVision TV1, 37-cm diameter TracVision TV3,45-cm diameter TracVision TV5, and the 60-cm diameter TracVision TV6, each of which employs a high-efficiency circular parabolic antenna. In April 2015,we also introduced the 81-cm TracVision TV8. These products are compatible with Ku-band HDTV programming as well as high-powered regional satelliteTV services around the globe, based on available signal strength and antenna size requirements.Our TracVision HD-series satellite TV antennas are designed to offer a high definition TV experience comparable to that enjoyed by a homeDIRECTV HDTV subscriber. Our TracVision HD7 uses a 61-cm diameter satellite TV antenna to receive signals from two DIRECTV Ka-band satellites andone DIRECTV Ku-band satellite simultaneously. It includes an IP-enabled antenna control unit as well as optional antenna control via a free TracVisionapplication for use on an Apple iPhone or iPad. We believe the TracVision HD7 was the first marine antenna to offer this combination of capabilities. OurTracVision HD11 offers a worldwide satellite TV capability through the use of a 1-meter diameter antenna and a global low noise block designed for use withthe majority of direct-to-home satellite TV services. As a result, it is able to receive all Ku-band and DIRECTV Ka-band satellite television signals withoutchanging out hardware elements. The Ku-band also works with modern satellite television services currently available in the world. The Ka-band will receiveDIRECTV HDTV. Like the TracVision HD7, it features a customer application for the Apple iPhone or iPad to provide easy control of the system.4Table of ContentsSatellite Phone and Internet. Our mini-VSAT Broadband network offers an end-to-end solution for offshore connectivity. This unified C/Ku-bandBroadband service enables us to offer commercial, leisure, and government customers an integrated hardware and service solution for mobilecommunications and seamless region-to-region roaming. We design and manufacture the onboard TracPhone V-IP terminals, own hub equipment installed inleased earth stations, lease the satellite capacity, manage the network through third-party service providers, and provide 24/7/365 after-sale support. Becausewe manufacture the onboard hardware, we can integrate the full rack of discrete below decks equipment typically used on traditional VSAT systems into asingle, streamlined unit that is significantly easier to deploy than competing VSAT solutions. Our mini-VSAT Broadband network utilizes ArcLight spreadspectrum modem technology developed by ViaSat. This spread spectrum approach reduces the broadcast power requirements and the pointing accuracynecessary to track the C- and Ku-band satellites that carry the service. The resulting efficiencies allowed us to develop and bring to market our TracPhone V-IP terminals. Our 60-cm diameter TracPhone V7-IP Ku-band antenna is 85% smaller by volume and 75% lighter than alternative 1-meter diameter VSATantennas. Our 37-cm diameter TracPhone V3-IP Ku-band antenna is practical for use on smaller vessels as well as land vehicles. We believe that theTracPhone V3 is the smallest maritime VSAT system currently available. Our dual-mode TracPhone V11-IP antenna seamlessly tracks both C- and Ku-bandsatellites, making it the only 1-meter diameter maritime VSAT antenna to deliver seamless global coverage outside the far polar regions.We are actively engaged in sales efforts for the TracPhone V-IP Series and mini-VSAT Broadband service to government agencies for maritime,military, and emergency responder use. In September 2010, the U.S. Coast Guard awarded us a 10-year contract valued at up to $42 million to supplyTracPhone V7 systems and mini-VSAT Broadband airtime to as many as 216 U.S. Coast Guard cutters. As of December 31, 2016, we have supplied TracPhoneV7 and V7-IP systems for 113 U.S. Coast Guard vessels. We also continue to expand our ability to support the commercial maritime market. In March 2011,we signed a contract to provide TracPhone V7 and mini-VSAT Broadband service to Netherlands-based Vroon B.V. and its fleet of more than 125 commercialvessels and, as of December 31, 2016, 125 systems have shipped. In December 2016, Vroon extended its contract for KVH’s maritime satellitecommunications solution, choosing the mini-VSAT Broadband network for connectivity services onboard an additional 15 Vroon vessels, all of whichshipped in 2016. The multi-year contract includes KVH’s IP-MobileCast service and preventive maintenance checks as part of the KVH OneCare program. Additionally, BW, a leading global maritime company, recently agreed to switch from an unlimited airtime plan to KVH’s open rate plans for severalliquefied natural and petroleum gas (LNG and LPG) vessels that have TracPhone V11-IP systems onboard, and Seaspan, a leading independent owner,operator, and manager of containerships, opted for KVH’s open rate plans for global connectivity for 35 vessels that have TracPhone V11-IP systemsinstalled.We also offer CommBox, a ship-to-shore network management product that comprises shipboard hardware, a KVH-hosted or privately owned shore-based hub, and a suite of software applications. CommBox offers a range of tools designed to increase communication efficiency, reduce costs, and managenetwork operations. Key functions include web and data compression and optimization to increase network capacity; remote PC management for customer ITdepartments; integrated e-mail, firewalls, and security; least-cost routing; and bandwidth management on multiple communication carriers. We offer theCommBox functionality as an option for all TracPhone V-IP Series products through software accompanying the integrated Commbox modem. We receivesubscription fees related to the selected software applications and monthly system maintenance fees. Because we offer CommBox as an integrated solution,we do not generate meaningful revenue from sales of standalone CommBox hardware.We also offer Iridium OpenPort hardware and service to be used in conjunction with our mini-VSAT service. Iridium OpenPort service provides datarates up to 128Kbps and covers the entire world, including the polar regions. We offer the Iridium hardware and service along with our own mini-VSATsolution with the integrated CommBox functionality, which will switch over to the Iridium service if the mini-VSAT service is not available. Our customersmight choose to add the Iridium service to expand the geographic coverage of the system or as a backup service.In addition to our TracPhone VSAT products and mini-VSAT Broadband service, we also offer a family of Inmarsat-compatible TracPhone productsthat provide in-motion access to global satellite communications. These products rely on services offered by Inmarsat, a satellite service provider thatsupports links for phone, fax, and data communications as fast as 432 Kbps. The TracPhone FB150, FB250, and FB500 antennas use the InmarsatFleetBroadband service to offer voice as well as high-speed Internet service. The TracPhone FB150, FB250, FB500 and FleetOne products are manufacturedby Thrane & Thrane A/S of Denmark (acquired by Cobham) and distributed on an OEM basis by us in North America under our TracPhone brand anddistributed in other markets on a non-exclusive basis.Unlike mini-VSAT Broadband, where we control and sell the airtime, we purchase Inmarsat and Iridium airtime from a distributor and resell it to ourcustomers.5Table of ContentsLand MobileWe design, manufacture, and sell a range of TracVision satellite TV antenna systems for use on a broad array of vehicles, including recreationalvehicles, buses, conversion vans, and automobiles.In the RV and bus markets, we offer TracVision satellite TV products, intended for both stationary and in-motion use. Our TracVision R1 deliversDIRECTV or DISH network service through a small 32-cm diameter dome. Our TracVision A9, introduced in January 2015 as a replacement for theDIRECTV-only TracVision A7, uses hybrid phased-array antenna technology to provide in-motion reception of satellite TV programming in the continentalUnited States using either the DIRECTV or DISH Network services. The TracVision A9 stands approximately five inches high and mounts either to avehicle’s roof rack or directly to the vehicle’s roof, making it practical for use aboard minivans, SUVs and other passenger vehicles. The TracVision A9includes a mobile satellite television antenna and an IP-enabled TV hub for easy system configuration and control via Wi-Fi devices, such as an AppleiPhone or iPad. The TracVision A9 is also suitable for tall motor coaches and buses. Automotive customers subscribe to DIRECTV’s TOTAL CHOICEMOBILE satellite TV programming package, which is specifically promoted for automotive applications, or to DISH Network programming.Airtime ServicesIn addition to our mobile satellite antenna hardware and software, we offer airtime plans that enable customers to obtain Internet and voice services.We offer a variety of rate plans that typically require an initial commitment of one or more years with a one-year auto-renewal feature. In October 2015, weintroduced mini-VSAT Broadband 2.0, our second generation mini-VSAT service. The key features of the mini-VSAT Broadband 2.0 service are usage-basedairtime plans, a new network management portal and a new comprehensive global customer support program. Our new airtime plans are a series of usage-based plans, designed around each vessel's monthly data requirements for operational and crew needs, that deliver data at higher speeds. Our new networkmanagement portal, myKVH, is a secure portal that enables a ship operator to manage network usage by vessel or by individual crew members by allocatingoperational and crew data caps while receiving customized usage alerts. For customers that want the certainty of a fixed monthly price, we continue to offerfixed rate plans that vary depending on data speeds and include protocol restrictions, such as limiting streaming of video content. User speeds are alsorestricted but not stopped when users reach established data use thresholds. In addition, we offer multiple metered plans that are either billed monthly basedon the data consumed without any application or protocol blocking or based on a monthly minimum data quota with the option to add more data for anincremental charge. The TracPhone V3-IP requires a metered plan while the TracPhone V7-IP and V11-IP can support any plan.The high bandwidth offered by the Ku-band satellites also permits faster data rates than those supported by Inmarsat’s L-band satellites. TracPhoneV7-IP and V11-IP customers may select service packages with Internet data connections offering shore-to-ship satellite data rates as fast as 4 megabits persecond, or Mbps, and ship-to-shore satellite data rates as fast as 1 Mbps. The TracPhone V3-IP, due to its smaller dish diameter, offers shore-to-ship satellitedata rates as fast as 2 Mbps and ship-to-shore data rates as fast as 128 kilobits per second, or Kbps. In addition, subscriptions include Voice over InternetProtocol (VoIP) telephone services designed for use over satellite connections. The TracPhone V7-IP and V11-IP can support two or more simultaneous callswhile the TracPhone V3-IP can support one call at a time.Our mini-VSAT Broadband network currently uses a combination of 23 Ku-band and three global C-band transponders on 18 satellites to providecoverage throughout the northern hemisphere and all of the major continents in the southern hemisphere. We currently offer our Ku-band mini-VSATBroadband service in the Americas, Europe, the Middle East, Africa, Asia-Pacific, and Australian and New Zealand waters. It is our long-term plan to continueto invest in and enhance our mini-VSAT Broadband network. In March 2015, we expanded our capacity in the Asia-Pacific and Pacific Northwest regions anddoubled our mini-VSAT broadband network capacity in eastern Canada and U.S. coastal regions. In December 2015, we more than doubled our broadbandcapacity in the North Atlantic Ocean region and added a new beam across Europe, the Middle East and Africa, effectively adding 30% more capacity. Underthe terms of our revenue sharing arrangement with ViaSat, these types of expansions position us to earn revenue not only from the maritime and land-baseduse of the mini-VSAT Broadband service but also from aeronautical applications that roam throughout our network.In June 2015, we implemented a global private multiprotocol label switching (MPLS) network connecting all of our teleports and satellite beams. Webelieve that transitioning from the public Internet to a private MPLS network provides increased security, enhanced quality of service and increased networkreliability and uptime for our customers.6Table of ContentsContent and Training ServicesAs part of our mobile communications segment, we offer a variety of value-added services to our maritime customers as well as news content to ourhotel customers and radio content to a small number of retail customers. The vast majority of these value-added services are subscription-based.In May 2013, we acquired Headland Media Limited (now known as KVH Media Group), a media and entertainment service company based in theUnited Kingdom that distributes commercially licensed entertainment, including news, sports, music, and movies, to commercial and leisure customers in themaritime, hotel, and retail markets. Sales from KVH Media Group are included in our mobile broadband service sales. Our "news from home" digitalnewspaper service includes more than 100 daily newspapers in more than 20 languages that at the end of 2016 was delivered to more than 10,400 commercialships, hotels, and cruise ships. The digital content can be printed onboard or viewed on a tablet, smartphone, or laptop. For movie content, we are anapproved distributor of licensed content for certain major Hollywood, Bollywood, and independent studios. For television content, we are an approveddistributor for certain major TV studios worldwide.In July 2014, we acquired Videotel Marine Asia Limited and Super Dragon Limited (together referred to as Videotel), a leading provider of high-quality training films and e-Learning services for the commercial maritime industry. Servicing close to 12,000 fielded training systems at the end of 2016,Videotel offers video, animation, e-Learning computer-based training and interactive distance learning services. Certification and refresher courses aremandated by international regulations and, at the end of 2016, more than 13 million training hours of Videotel content had been delivered to over 340,000registered crew members. Sales from Videotel are included in our mobile broadband service sales.In late 2014, we launched a new content delivery service called IP-MobileCast. Content and data files are transmitted using multicast technologyacross our global satellite network to every vessel or mobile vehicle that has an active, compatible TracPhone V series or V-IP series terminal. The content iseither stored on the terminal itself or on a KVH-supplied media server, which is required for digital rights managed content such as movies and Videotelcontent. This delivery mechanism reduces the amount of bandwidth required to transmit large files to a large population of customers. Before multicasting,large data files were generally transmitted across satellite networks “on demand” or unicast, which consumes significant bandwidth. Moreover, copyright lawrequires permission from the rights holder for exhibitions of copyrighted film and television. Historically, studios have granted KVH Media Grouppermission to license non-theatrical exhibitions aboard ships. While traditionally we have licensed this content to commercial maritime customers throughthe distribution of DVDs, we have now automated the transmission of this type of entertainment via IP-MobileCast.Customers that subscribe to one of our entertainment packages generally receive a variety of movie and television content that is cached locallyonboard with unlimited onboard viewing for a year. We transmit over 400 local "news from home" segments in a variety of languages on a monthly basis, upto 20 movies a month plus daily sports and news clips and special programming such as the highlights of sporting events.We also offer a variety of operational services through IP-MobileCast. Subscribers to the Videotel training and e-Learning content can also receivenew content over the IP-MobileCast network through TRAININGlink, whereby customers receive new content more frequently than once a year. As part ofour CHARTlink service, we transmit electronic chart updates for ECDIS solution providers Transas and Jeppesen. For our FORECASTlink service, wetransmit global forecasts and high-resolution weather data provided by AWT. Our charting and weather forecasting services provide critical content forvoyage optimization.In addition, we offer professional services for our VSAT products that include network design, installation of onboard TracPhone terminals and customconfiguration of the CommBox based on customer requirements. These services are performed by our employees as well as a dealer network of certifiedengineers.Inertial Navigation SegmentWe offer a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address the rigorous requirements of military and commercialcustomers. Our systems provide reliable, easy-to-use and continuously available navigation and pointing data. Our guidance and stabilization productsinclude our 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. Sales of FOG-based guidance and navigation systems withinthe inertial navigation segment accounted for approximately 10%, 10%, and 12% of our consolidated net sales for 2016, 2015, and 2014, respectively. Salesof tactical guidance and navigation systems within the inertial navigation segment accounted for approximately 8%, 8%, and 11% of our consolidated netsales for 2016, 2015, and 2014, respectively.7Table of ContentsGuidance and StabilizationOur high-performance digital signal processing (DSP)-based FOG products use an all-fiber design that has no moving parts, resulting in an affordablecombination of precision, accuracy, and durability. Our FOG products support a broad range of military applications, including stabilization of remoteweapons stations, antennas, radar, optical devices, or turrets; image stabilization and synchronization for shoulder-or tripod-mounted weapon simulators;precision tactical navigation systems for military vehicles, and guidance for weapons and unmanned autonomous vehicles. Our FOG products are also used innumerous 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 TG-6000 IMU is a guidance system that provides precise measurement of motion and acceleration in three dimensions. It uses a three-axisconfiguration of our FOGs integrated with three accelerometers. We believe that this configuration provides outstanding performance, high reliability, lowmaintenance and easy system integration. The TG-6000 IMU is a component in the U.S. Navy’s MK54 lightweight torpedo and is suitable for use in otherapplications that involve flight control, orientation, instrumentation, and navigation, such as unmanned aerial vehicles. The CG-5100, our first commercial-grade IMU, is suitable for a wide range of applications such as 3D augmented reality, mobile mapping, platform navigation, and GPS augmentation forunmanned vehicle programs, precise mapping, and imagery.Our CNS-5000 continuous navigation system is a self-contained navigation system that combines our FOG-based inertial measurement technologywith GPS technology from NovAtel. This navigation solution provides precise position and orientation of a host platform on a continuous basis, even duringperiods where GPS signals are blocked by natural or man-made obstructions or conditions. The CNS-5000 is designed for demanding commercialapplications, such as dynamic surveying, mobile mapping, precision agriculture, container terminal management, and autonomous vehicle navigation, wherethe ability to determine the precise position and orientation of a piece of equipment or a mobile platform is critical. The CNS-5000 is a commercial-off-the-shelf (COTS) product consisting of a FOG-based inertial measurement unit tightly integrated with GPS within a single enclosure. This design reduces theoperational complexities for customers whose products cross international boundaries.Our open-loop DSP-1750, DSP-3000, and DSP-4000 FOGs provide precision measurement of the rate and angle of a platform’s turning motion forsignificantly less cost than competing closed-loop gyros. These DSP-based products deliver performance superior to analog signal processing devices, whichexperience greater temperature-sensitive drift and rotation errors. Applications for these products include inertial measurement units, integrated navigationsystems, attitude/heading/reference systems, and stabilization of antenna, radar, and optical equipment.The DSP-1750, which we believe to be the world’s smallest high-performance FOG, uses our E·CoreTM ThinFiber technology. This thin fiber, which iscreated at our Tinley Park, Illinois manufacturing facility, is only 170 microns in diameter, enabling longer lengths of fiber to be wound into smallerhousings. Since the length of the fiber used in a FOG directly relates to gyro accuracy and performance, this technology enables us to produce smaller andmore accurate gyros. The small size and weight of the DSP-1750 make it well suited for applications with size and weight restrictions, such as night visionand thermal imaging systems, aircraft-mounted gimbaled cameras for law enforcement and homeland security, and shipboard optical systems.Our DSP-1760 single-axis and multi-axis FOGs offer improved performance and ease of integration relative to the DSP-1750. Many customers usingour DSP-1750 single-axis and dual-axis FOGs also had requirements for packaged DSP-1750s. To address this demand, we introduced the DSP-1760 productline, consisting of packaged one, two, or three axes of FOGs, each with two different interface connector options.The DSP-3000 and DSP-3100 are each slightly larger than a deck of playing cards and offers a variety of interface options to support a range ofapplications. High-performance 2-axis and 3-axis configurations can be realized by integrating multiple DSP-3000 and DSP-3100 units. Currently, the DSP-3000 and DSP-3100 are used in an array of pointing and stabilization applications, including the U.S. Army’s Common Remotely Operated Weapon Station(CROWS) to provide the image and gun stabilization necessary to ensure that the weapon remains aimed at its target. We estimate that more than 20companies have developed or are developing stabilized remote weapons stations that we believe will require similar FOG stabilization capabilities. Thelarger, militarized dual axis DSP-4000 is designed for use in high-shock and highly dynamic environments, such as gun turret stabilization.8Table of ContentsOur 1750 IMU is an advanced 6-degrees-of-freedom sensor designed to integrate easily into the most demanding stabilization, pointing, andnavigation applications. It offers enhanced performance at a lower cost than competing systems. The 1750 IMU marries the E·Core ThinFiber technology ofour DSP-1750 FOGs with very low noise, solid state MEMS accelerometers to create a commercial-off-the-shelf IMU. In September 2014, we introduced ournew 1775 IMU and 1725 IMU products to complement the 1750 IMU and provide customers with a range of choices for advanced 6-degrees-of-freedomsensors. The family of IMUs offers exceptional precision in a very small form factor, making them suitable for applications where space is limited, such asmanned and unmanned commercial and defense platforms, optical equipment stabilization systems, pipeline inspection equipment, and autonomous vehiclecontrol and navigation systems.In January 2016, we introduced the GEO-FOG 3D and GEO-FOG 3D Dual inertial navigation systems that offers roll, pitch and heading accuracies of0.05 degrees for demanding applications in unmanned, autonomous and manned aerial platforms. These systems combine our 1750 IMU technology withcentimeter-level precise GNSS receivers, a 3-axis magnetometer and a barometric pressure sensor.Tactical NavigationOur TACNAV® tactical navigation product line employs digital compass sensors and KVH FOGs to offer vehicle-based navigation and pointingsystems with a range of capabilities, including GPS backup and enhancement, vehicle position, hull azimuth and navigation displays. Because our digitalcompass products measure the earth’s magnetic field rather than detect satellite signals from the GPS, they are not susceptible to GPS jamming devices.TACNAV systems vary in size and complexity to suit a wide range of vehicles. Our TACNAV Light is a low-cost, digital compass-based battlefieldnavigation system specifically designed for non-turreted vehicles, such as high mobility multi-wheeled vehicles (HMMWVs) and trucks. Our TACNAV TLS,a digital compass-based tactical navigation and targeting system, offers a FOG upgrade for enhanced accuracy designed for turreted vehicles, includingreconnaissance vehicles, armored personnel carriers, and light armored vehicles. Our TACNAV II Fiber Optic Gyro Navigation system offers a compactdesign, continuous output of heading and pointing data, and a flexible architecture that allows it to function as either a stand-alone navigation module or asthe central component of an expanded, multifunctional navigation system. In June 2014, we introduced our new TACNAV 3D product, which is FOG-basedand provides full three-dimensional navigation. The TACNAV 3D is fitted with an Iridium transceiver to transmit and receive vehicle position, waypoint, andtarget location to or from a command center or other vehicle. The system also allows messages to be received from battlefield management systems.Our navigation systems function as standalone tools and also aggregate, integrate, and communicate critical information from a variety of on-boardsystems. TACNAV can receive data from systems such as the vehicle’s odometer, military and commercial GPS devices, laser rangefinders, turret angleindicators and laser warning systems. TACNAV can also output this data to an on-board computer for retransmission through the vehicle’s communicationssystems to a digital battlefield management application.Our TACNAV digital compass products have been sold for use aboard U.S. Army, Marine Corps, and Navy vehicles as well as to many foreigncountries, including Australia, the United Kingdom, Canada, Germany, Italy, New Zealand, Saudi Arabia, Spain, Sweden, Taiwan, Malaysia, and Switzerland.We believe that we are among the leading manufacturers of such systems. Our standard TACNAV products can be customized to our customers’specifications. At customer request, we offer training and other services on a time-and-materials basis.Value-Added ServicesOur value-added services for the inertial navigation market include engineering and program management services, product repairs, and engineeringservices provided under development contracts.9Table of ContentsSales, Marketing and SupportOur sales, marketing and support efforts target markets that are substantial and complex, and require in many cases networks of intermediaries, such asdealers, resellers, manufacturers' representatives and distributors, to reach our ultimate customers. These sales channels vary and evolve from time to time, butcurrently include targeted efforts to reach the commercial and leisure maritime markets; the recreational vehicle (RV), high-end automotive and bus markets;and the commercial, industrial, and government markets. As our business evolves, we may pursue additional sales channels, including direct sales, in variousmarkets. We believe our brands are well known and well respected by customers within their respective niches. These brands include:•TracVision - satellite television systems for vessels and vehicles•TracPhone - two-way satellite communications systems•mini-VSAT Broadband - hardware, software, content and content delivery for mobile satellite communications network•IP-MobileCast - content delivery service•NEWSlink - maritime news delivery service through a variety of means•SPORTSlink - sporting content delivered through a variety of means•TVlink - television programming delivered through a variety of means•MOVIElink - movie distribution through a variety of means•Videotel - maritime eLearning content and related services•CommBox - network management hardware and software for maritime communications•TACNAV - tactical navigation systems for military vehicles•KVH OneCare - services and support for the mini-VSAT Broadband solutionWe sell our mobile connectivity products directly and through an international network of independent retailers, chain stores and distributors, as wellas to manufacturers of vessels and vehicles.We sell news, sports, and entertainment media content directly through our KVH Media Group, headquartered in Leeds, England, and our training ande-Learning content directly though our Videotel group, which is located in London, England, and Hong Kong.Our European headquarters, which is located in Denmark, coordinates our sales, marketing, and support efforts for our mobile connectivity products inEurope, the Middle East, and Africa. Asian and Australia/New Zealand sales are managed through our offices located in Singapore. All international officesare managed under the oversight of our Chief Operating Officer. See Note 13 of the notes to our consolidated financial statements for information regardingour segments.We sell our inertial navigation products directly to U.S. and foreign governments and government contractors, as well as through an internationalnetwork of authorized independent sales representatives. This network also sells our FOG products to commercial and industrial customers.BacklogBacklog is not a meaningful indicator for predicting revenue in future periods. Commercial resellers for our mobile connectivity products and legacyproducts do not carry extensive inventories and rely on us to ship products quickly. Generally, due to the rapid delivery of our commercial products, ourbacklog for those products is not significant.Our backlog for all products and services was $8.9 million, $19.8 million, and $27.3 million on December 31, 2016, 2015, and 2014, respectively. Asof December 31, 2016, $8.4 million of our backlog was scheduled for fulfillment in 2017 and $0.5 million was scheduled for fulfillment in 2018 through2025. The decrease in backlog of $10.9 million from December 31, 2015 to December 31, 2016 was primarily the result of the fulfillment of variousTACNAV and FOG product orders. The decrease in backlog of $7.5 million from December 31, 2014 to December 31, 2015 was primarily the result ofshipments made in the fourth quarter of 2015 related to a $19.0 million TACNAV product and services contract, announced in October 2014, with aninternational military customer for our FOG-based tactical navigation system.Backlog consists of orders evidenced by written agreements and specified delivery dates for customers who are acceptable credit risks. We do notinclude satellite connectivity or media content service sales in our backlog even though many of our satellite connectivity and media content customershave signed annual or multi-year service contracts providing for a fixed monthly fee. Military orders included in backlog are generally subject tocancellation for the convenience of the customer. When orders are canceled, we generally recover actual costs incurred through the date of cancellation andthe costs10Table of Contentsresulting from termination. As of December 31, 2016, our backlog included approximately $1.1 million in orders that are subject to cancellation forconvenience by the customer. Individual orders for inertial navigation products are often large and may require procurement of specialized long-leadcomponents and allocation of manufacturing resources. The complexity of planning and executing larger orders generally requires customers to order well inadvance of the required delivery date, resulting in backlog.Intellectual PropertyOur ability to compete effectively depends to a significant extent on our ability to protect our proprietary information. We rely primarily on patent,copyright and trade secret laws, confidentiality procedures, and licensing arrangements to protect our intellectual property rights. We own 23 U.S. andforeign patents and have 6 additional patent applications that are currently pending. We also register our trademarks in the United States and other keymarkets where we do business. Our patents will expire at various dates between April 2017 and December 2036. We enter into confidentiality agreementswith our consultants, key employees, and sales representatives and maintain controls over access to and distribution of our technology, software, and otherproprietary information. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technologyto compete with us.We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by thirdparties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patentapplications pending, many of which are confidential when filed, with regard to similar technologies.From time to time, we have faced claims by third parties that our products or technologies infringe their patents or other intellectual property rights,and we may face similar claims in the future. Any claim of infringement could cause us to incur substantial costs defending against or settling the claim, evenif the claim is invalid, and could distract the attention of our management. If any of our products is found to violate third-party proprietary rights, we may berequired to pay substantial damages. In addition, we may be required to re-engineer our products or seek to obtain licenses from third parties to continue tooffer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would preventus from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition,and results of operations.ManufacturingManufacturing operations for our mobile satellite communications and navigation products consist of light manufacture, final assembly and testing.Manufacturing operations for our FOG products are more complex. We produce specialized optical fiber, FOG components and sensing coils and combinethem with components purchased from outside vendors for assembly into finished goods. We own optical fiber drawing towers with which we produce thespecialized optical fiber that we use in all of our FOG products. Excluding the CommBox product, which we manufacture in Norway, we manufacture,warehouse and distribute our mobile satellite communications products at our facilities in Middletown, Rhode Island. We manufacture our navigation andFOG products in our facility located in Tinley Park, Illinois.We contract with third parties for fabrication and assembly of printed circuit boards, injection-molded plastic parts, machined metal components,connectors and housings. We believe there are a number of acceptable vendors for the components we purchase. We regularly evaluate both domestic andforeign suppliers for quality, dependability and cost effectiveness. In some instances, we utilize sole-source suppliers to develop strategic relationships toenhance the quality of materials and save costs. Our manufacturing processes are controlled by an ISO 9001:2008-certified quality standards program.For subscribers of the Videotel maritime safety video and computer-based training modules, we provide computer hardware preloaded with thecontent, (VOD kiosk), which is updated annually by DVD. We use two contract manufacturers in the United Kingdom to supply the VOD kiosks, whicheliminates the dependence on one vendor.Raw Materials, Components and Services We purchase raw materials and most of the components used in our various manufacturing processes. In addition, we purchase certain services,predominantly networking and mobile broadband services, to support the delivery of our mobile communications solutions.The materials, molds and dies, subassemblies and components purchased from other manufacturers, and other materials and supplies used in ourmanufacturing processes have generally been available from a variety of sources. From time to time the11Table of Contentscost and availability of materials and services is affected by the demands of other industries, among other factors. Whenever practical, we establish multiplesources for the purchase of raw materials, components and services to achieve competitive pricing, ensure flexibility, and protect against supply disruption.When possible, we employ a company-wide procurement strategy designed to reduce the purchase price of materials, purchased components and services.For reasons of quality assurance, scarcity or cost effectiveness, certain components and raw materials used in the manufacturing of our products, as wellas certain services utilized in the delivery of our solutions, are available only from a limited number of suppliers or from a sole source supplier. We haveworked closely with our suppliers to develop contingency plans to assure continuity of supply while maintaining high quality and reliability, and in somecases, we have established long-term supply contracts with our suppliers. Due to the nature of certain raw materials, purchased components and services, wemay not be able to quickly establish additional or replacement sources for certain components, materials or services. In the event that we are unable to obtainsufficient quantities of raw materials or components or unable to obtain sufficient access to the services needed to deliver our solutions on commerciallyreasonable terms or in a timely manner, our ability to manufacture and deliver our products and services on a timely and cost-competitive basis may becompromised, which may have a material adverse effect on our business, financial condition and results of operations. To date, we have not experienced anymaterial adverse effect on our financial condition or results of operations due to supplier limitations.CompetitionWe encounter significant competition in all of our markets, and we expect this competition to intensify in the future. Many of our primary competitorsare well-established companies and some have substantially greater financial, managerial, technical, marketing, operational, and other resources than we do.In the marine market for satellite TV equipment, we compete primarily with Intellian, Cobham SATCOM, Orbit Communication Systems, RayMarine(Intellian made), KNS, and Sea King (King Controls).In the marine market for voice, fax, data, and Internet communications equipment, we compete primarily with Intellian, Cobham SATCOM, OrbitCommunication Systems, Jotron AS, KNS Inc., Inmarsat, AddValue, and Iridium Satellite LLC.In the marine market for voice, fax, data, and Internet services, we compete primarily with Inmarsat, Globalstar LP, and Iridium Satellite LLC. We alsoface competition from providers of marine satellite data services and maritime VSAT solutions, including Inmarsat, Marlink, MTN/SeaMobile (acquired byGlobal Eagle Entertainment), Speedcast, and Harris CapRock (acquired by Speedcast).In the market for land mobile satellite TV equipment, we compete primarily with King Controls and Winegard Company.In the markets for media content, we compete primarily with Swank Motion Pictures and PressReader.In the markets for safety and e-Learning content, we compete primarily with Seagull AS.In the markets for mobile satellite connectivity technology, the principal competitive factors are product size, features, design, performance,reliability, and price. In the markets for airtime services, the principal competitive factors are geographic coverage, data speed, value-added services, andprice. In the markets for media content, the principal competitive factors are license rights, distribution, and price.In the inertial navigation markets, we compete primarily with Honeywell International Inc., Northrop Grumman Corporation, Goodrich Aerospace, IAI,Fizoptica, SAGEM, and Systron Donner Inertial. We believe the principal competitive factors in these markets are performance, size, reliability, durability,and price.Although we believe that we compete favorably with respect to these factors, there can be no assurance that we will continue to do so. We encountersubstantial competition in most of our product lines, although no single competitor competes with us across all product lines.12Table of ContentsResearch and DevelopmentFocused investments in research and development are critical to our future growth and competitive position in the marketplace. Our research anddevelopment efforts are directly related to timely development of new and enhanced products and services that are central to our core business strategy. Theindustries in which we compete are subject to rapid technological developments, evolving industry standards, changes in customer requirements, and newproduct and service introductions and enhancements. As a result, our success depends in part upon our ability, on a cost-effective and timely basis, tocontinue to enhance our existing products and to develop and introduce new products and services that improve performance and meet customers’operational and cost requirements. Our current research and development efforts include projects to achieve additional cost reductions in our products andthe development of new products and services for our existing marine and land mobile communications markets, and navigation, guidance, and stabilizationapplication markets. For example:•We released the DSP-1760 Unhoused Multi-Axis FOG, which provides more flexibility for our customers to build navigation and stabilizationsystems•We developed, but did not release, technologies, products and services to support future high throughput satellite (HTS) initiatives that will providehigher speed Internet services to our customers•We released the TACNAV Moving Map Display to provide more capability to our TACNAV customers who use our dead reckoning systems tooperate in GPS denied environmentsOur research and development activities consist of projects funded by us and projects funded with the assistance of customer-funded contract research.Our customer-funded research efforts are made up of contracts with defense and OEM customers, whose performance specifications are unique to their productapplications. Defense and OEM research often results in new product offerings. We strive to be the first company to bring a new product to market, and we useour own funds to accelerate new product development efforts.Our research and development costs were approximately $16.0 million, $14.0 million, and $14.1 million for 2016, 2015, and 2014, respectively, andrepresented 9%, 8%, and 8% of consolidated net sales for 2016, 2015, and 2014, respectively.Government RegulationOur manufacturing operations are subject to various laws governing the protection of the environment and our employees. These laws and regulationsare subject to change, and any such change may require us to improve our technologies, incur expenditures, or both, in order to comply with such laws andregulations.We are subject to compliance with the U.S. Export Administration Regulations. Some of our products have military or strategic applications and areon the Munitions List of the U.S. International Traffic in Arms Regulations. These products require an individual validated license to be exported to certainjurisdictions. The length of time involved in the licensing process varies and can result in delays of the shipping of the products. Sales of our products toeither the U.S. government or its prime contractors are subject to the U.S. Federal Acquisition Regulations.We are also subject to the laws and regulations of the U.S. and foreign jurisdictions in which we offer and sell our satellite communication productsand services, including those of the European Union, Brazil, Norway, Singapore, and Japan. These laws and regulations, as well as the interpretation andapplication of these laws and regulations, are subject to change and any such change may affect our ability to offer and sell existing and planned satellitecommunications products and services.EmployeesOn December 31, 2016, we employed 635 full-time employees. We also employ part-time employees as well as temporary or contract personnel, whennecessary, to provide short-term and/or specialized support for production and other functional projects.We believe our future success will depend upon the continued service of our key technical and senior management personnel and upon our continuedability to attract and retain highly qualified technical and managerial personnel. None of our employees is represented by a labor union. We have neverexperienced a work stoppage and consider our relationship with our employees to be good.13Table of ContentsWorking Capital and SeasonalityWe hold significant inventory to support our customers and provide prompt delivery of finished goods. As a consequence, we expend substantialworking capital in advance of receipt of customer orders. Because of the large size of certain orders, we often incur significant receivables upon orderfulfillment.Our marine leisure business within the mobile connectivity segment is highly seasonal, and seasonality can also impact our commercial marinebusiness. Historically, we have generated the majority of our marine leisure product revenues during the first and second quarters of each year, and theserevenues typically decline in the third and fourth quarters of each year, compared to the first two quarters. Temporary suspensions of our airtime servicestypically increase in the third and fourth quarters of each year as boats are placed out of service during the winter months.14Table of ContentsITEM 1A.Risk FactorsAn 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 ourbusiness, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.Our revenues and results of operations have been and may continue to be adversely impacted by worldwide economic turmoil, political events,macroeconomic conditions, credit tightening and associated declines in consumer and enterprise spending.Worldwide economic conditions have experienced significant turmoil over the last several years, including slow economic activity, tight creditmarkets, inflation and deflation concerns, low consumer confidence, limited capital spending, adverse business conditions, war and refugee crises in theMiddle East and Europe, terrorist attacks, the United Kingdom vote to leave the European Union, the 2016 US elections, and liquidity concerns. Theseconditions make it difficult for businesses, governments and consumers to accurately forecast and plan future activities. Many governments are experiencingsignificant deficits that have caused and may continue to cause them to curtail spending significantly and/or reallocate funds away from defense programs.There can be no assurances that government programs to improve economic conditions will be effective. As a result of these and other factors, customers andgovernment entities could continue to slow or suspend spending on our products and services. We may also incur increased credit losses and need to furtherincrease our allowance for doubtful accounts, which would have a negative impact on our earnings and financial condition.We cannot predict the timing, duration, or ultimate impact of the turmoil in our markets. We expect our business to continue to be adversely impactedby this turmoil to varying degrees and for varying amounts of time, in all our geographic markets.Decline in oil prices may continue to adversely affect our revenues and profitability.Oil prices have undergone a significant and sustained decline since the peak in 2014. West Texas Intermediate oil prices dropped from a high of$107.26 per barrel on June 20, 2014, to a low of $26.21 per barrel on February 11, 2016. Customers of our mobile satellite business include offshore supportvessel companies that participate in or depend on the offshore oil industry. The declines in worldwide oil prices have had a significant impact on thefinancial performance of companies in this sector of the economy, and as a result demand for new products and services has declined severely during andsince 2015 as they have sought to reduce expenditures. In addition, we have experienced a higher customer churn rate primarily attributed to customers thatoperate in this sector, where the sale, decommissioning, or laying up of vessels has led to a higher rate of airtime plan terminations and suspensions. Thesetrends could continue to limit or reduce demand for our satellite antenna products and airtime services from companies in this sector, which could continue toadversely affect our revenues and profitability.Our financial performance is impacted by U.S. government contracts, which are subject to uncertain levels of funding and termination.We have historically sold a substantial portion of our TACNAV and FOG products and services to the U.S. government and its contractors. We areunable to predict the impact on our business of the recent change in Presidential administration. A reduction in sales to the U.S. government or its contractors,whether due to lack of funding, for convenience or otherwise, or the occurrence of delays, could negatively impact our results of operations and financialcondition.The funding of U.S. government programs is subject to congressional appropriations. Congress generally appropriates funds on a fiscal year basis eventhough a program may extend over several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committedonly as Congress makes further appropriations. Changes in the White House and the composition of Congress may disrupt or delay appropriations forupcoming periods. If appropriations for any program in which we participate become unavailable, or are reduced or delayed, our contract or subcontractunder such program may be terminated or adjusted by the government, which could have a negative impact on our future sales under such contract orsubcontract. When a formal appropriation bill has not been signed into law before the end of the U.S. government's fiscal year, which has become morefrequent in recent years, Congress may pass a continuing resolution that authorizes agencies of the U.S. government to continue to operate, generally at thesame funding levels from the prior year, but that typically does not authorize new spending initiatives, during this period. Appropriations can also beimpacted by other budgetary considerations, such as failure to increase the statutory debt ceiling of the U.S. government. During such periods (or15Table of Contentsuntil the regular appropriation bills are passed), delays can occur in procurement of products and services due to lack of funding, and these delays can affectour results of operations during the period of delay.Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. government. For example, future federalsequestration measures could continue to adversely affect federal spending across the U.S. government, including the Department of Defense, and we expectthat these measures will continue to limit or reduce defense spending.In addition, U.S. government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at thegovernment's convenience or for default based on performance. Government customers can also decline to exercise previously disclosed contract options. Ifone of our contracts is terminated for convenience, we would generally be entitled to payments for our allowable costs and would receive some allowance forprofit on the work performed. If one of our contracts is terminated for default, we would generally be entitled to payments for our work that has been acceptedby the government. A termination arising out of our default could expose us to liability and adversely affect our ability to obtain future contracts and orders.Furthermore, on contracts for which we are a subcontractor and not the prime contractor, the U.S. government could terminate the prime contract forconvenience or otherwise, irrespective of our performance as a subcontractor.We must generate a certain level of sales of the TracPhone V-IP series products and our mini-VSAT Broadband service in order to maintain orimprove our service gross margins.As a result of our mini-VSAT Broadband network infrastructure, our cost of service sales includes certain fixed costs that do not generally vary with thevolume of service sales, and we have almost no ability to reduce these fixed costs in the short term. These fixed costs have increased significantly each yearas we have further expanded our network to accommodate additional subscriber demand and/or coverage areas, and we expect that this trend will continue in2017 and beyond. Sales of our TracPhone V-IP series products declined from 2015 to 2016. If sales of our TracPhone V-IP series products and the mini-VSATBroadband service do not generate the level of revenue that we expect or if those revenues continue to decline, our service gross margins may decline. As ourmarket share has increased, we have also experienced a general increase in customer termination and suspension rates, compounded by accelerated declinesin sales for vessels servicing the oil supply market with some bulk carriers, and lower unit sales of our mobile connectivity hardware, both in the UnitedStates and Europe. The failure to improve our mini-VSAT Broadband service gross margins and unit sales would have a material adverse effect on our overallprofitability.Competition may limit our ability to sell our mobile connectivity products and services and inertial navigation products.The mobile connectivity markets and defense navigation, and inertial navigation markets in which we participate are very competitive, and we expectthis competition to persist and intensify in the future. We may not be able to compete successfully against current and future competitors, which could impairour ability to sell our products. For example, improvements in the performance of lower-cost gyros by competitors could potentially jeopardize sales of ourFOGs and FOG-based systems. As our market share in the mobile satellite communication market has grown, competition has intensified significantly, mostnotably from companies that seek to compete primarily on price. These companies may continue to implement price reductions and discounts for bothproducts and services, which have required us to reduce our prices or offer discounts in order to maintain or increase our market share. Some of our VSATcompetitors have also leveraged partnerships amongst themselves in order to capture larger combined market share. We anticipate that this trend ofsubstantial competition will continue.In the marine market for satellite TV equipment, we compete primarily with Intellian, Cobham SATCOM, Orbit Communication Systems, RayMarine(Intellian made), KNS, and Sea King (King Controls).In the marine market for voice, fax, data, and Internet communication equipment, we compete primarily with Intellian, Cobham SATCOM, OrbitCommunication Systems, Jotron AS, KNS Inc., Inmarsat, AddValue, and Iridium Satellite LLC.In the marine market for voice, fax, data, and Internet services, we compete primarily with Inmarsat, Globalstar LP, and Iridium Satellite LLC. We alsoface competition from providers of marine satellite data services and maritime VSAT solutions, including Inmarsat (and its Fleet Xpress service), Marlink,MTN/SeaMobile (acquired by Global Eagle Entertainment), SpeedCast, and Harris CapRock (acquired by SpeedCast).In the market for land mobile satellite TV equipment, we compete primarily with King Controls and Winegard Company.16Table of ContentsIn the markets for media content, the KVH Media Group competes primarily with Swank Motion Pictures and NewspaperDirect, and Videotel competeswith Seagull AS.In the inertial navigation markets, we compete primarily with Honeywell International Inc., Northrop Grumman Corporation, Goodrich Aerospace, IAI,Fizoptica, SAGEM, and Systron Donner Inertial.Among the factors that may affect our ability to compete in our markets are the following:•many of our primary competitors are well-established companies that generally have substantially greater financial, managerial, technical,marketing, personnel and other resources than we do, which help them to compete more effectively in the market for mobile broadbandsolutions for larger fleets of vessels;•many of our prime competitors have well-established and/or growing partner programs, which pose a threat of multiplying their marketinfluence;•product and service improvements, new product and service developments or price reductions by competitors may weaken customer acceptanceof, and reduce demand for, our products and services;•new technology or market trends may disrupt or displace a need for our products and services;•our competitors may have access to a broader array of media content than we do, which may cause customers to prefer competitors’ mediaofferings; and•our competitors may have lower production costs than we do, which may enable them to compete more aggressively in offering discounts andother promotions.The emergence of a competing small maritime VSAT antenna and complementary service or other similar service could reduce the competitiveadvantage we believe we currently enjoy with our smaller TracPhone V-IP series antennas and Ku-band mini-VSAT Broadband service, or with ourC/Ku-band mini-VSAT Broadband service and our TracPhone V11-IP antenna.Our TracPhone V3-IP and V7-IP systems offer customers a range of benefits due to their integrated design, hardware costs that are lower than existingmaritime Ku-band VSAT systems, and spread spectrum technology. We currently compete against companies that offer established maritime Ku-band VSATservice using, in some cases, antennas 1-meter in diameter or larger. While we are unaware of any company offering a 37-cm VSAT solution comparable toour TracPhone V3-IP, we are encountering regional competition from companies offering 60-cm VSAT systems and services, which are comparable in size toour TracPhone V7-IP. Likewise, our TracPhone V11-IP, at 1.1-meter in diameter, is approximately 85% smaller and lighter than competing C-band maritimeVSAT systems, which use antennas in excess of 2.4-meters in diameter to provide similar global services. We are unaware of any competitor currently offeringa similar size solution for global C-band coverage, but any introduction of such a product could adversely impact our success. In addition, other companiescould replicate some of the distinguishing features of our TracPhone V-IP series products, which could potentially reduce the appeal of our solution, increaseprice competition, and adversely affect sales. For example, in early 2016, Inmarsat launched its Fleet Xpress service, a global Ka-band mobile VSAT servicethat Inmarsat claims is faster and has a lower price per megabit than existing Ku-band services. This service may adversely impact sales of our mini-VSATBroadband service and related equipment. Moreover, consumers may choose other services such as FleetBroadband or Iridium OpenPort for their servicecoverage at potentially lower hardware costs despite higher service costs and slower data rates.If we are unable to improve our existing mobile connectivity and inertial navigation products and services and develop new, innovative products andservices, our sales and market share may decline.The markets for mobile connectivity products and services and inertial navigation products and services are each characterized by rapid technologicalchange, frequent new product innovations, changes in customer requirements and expectations, and evolving industry standards. For example, Inmarsat isnow selling its latest-generation Fleet Xpress satellite communications products and services. If we fail to make innovations in our existing products andservices and reduce the costs of our products and services in a timely way, our market share may decline. For example, the introductions of our newTracVision TV-series antennas in 2014 occurred later than we had anticipated, which we believe led certain customers to purchase competing products.Products or services using new technologies, or emerging industry standards, could render our products and services obsolete. If our competitors successfullyintroduce new or enhanced products or services that eliminate technological advantages our products or services may have in a market or otherwiseoutperform our products or services, or are perceived by consumers as doing so, we may be unable to compete successfully in the markets affected by thesechanges. For competitive reasons, in 2015, we increased warranty coverage for certain of our mobile connectivity products to include an additional year oflabor coverage and other benefits, which could increase our costs and impair our profitability.17Table of ContentsThe purchasing and delivery schedules and priorities of the U.S. military and foreign governments are often unpredictable.We sell our FOG systems and tactical navigation products and services to U.S. and foreign military and government customers, either directly or as asubcontractor to other contractors. These customers often use a competitive bidding process and have unique purchasing and delivery requirements, whichoften makes the timing of sales to these customers unpredictable. Factors that affect their purchasing and delivery decisions include:•increasing budgetary pressures, which may reduce or delay funding for military programs;•changes in modernization plans for military equipment;•changes in tactical navigation requirements;•global conflicts impacting troop deployment, including troop withdrawals;•priorities for current battlefield operations;•new military and operational doctrines that affect military equipment needs;•sales cycles that are long and difficult to predict;•shifting response time and/or delays in the approval process associated with the export licenses we must obtain prior to the internationalshipment of certain of our military products;•delays in military procurement schedules; and•delays in the testing and acceptance of our products, including delays resulting from changes in customer specifications.These factors periodically cause substantial fluctuations in sales of our TACNAV and FOG products and services from period to period. For example,FOG products decreased $1.2 million, or 6% and TACNAV service sales decreased $1.6 million or 6%, from 2015 to 2016. Similarly, sales of our TACNAVproducts decreased $3.6 million, or 20%, from 2014 to 2015 and sales of our FOG products decreased $1.6 million, or 7%, from 2014 to 2015. In October2014, we received a $19.0 million TACNAV product and services contract with an international military customer which include program management andengineering services expected to be delivered through 2017 and hardware shipments that were completed in the third quarter of 2016, as well as out-yearsupport services to be provided as part of this order. These large orders contribute to the unpredictability of our revenues from period to period. Governmentcustomers may change defense spending priorities at any time.Sales of our FOG systems and TACNAV products generally consist of a few large orders, and the delay or cancellation of a single order couldsubstantially reduce our net sales. KVH products sold to customers in the defense industry are purchased through orders that can generally range in size from several hundred thousanddollars to more than thirty million dollars. For example, we received orders for TACNAV products and services of $1.3 million, $1.4 million, $1.5 million,$4.3 million, $19.0 million, and $5.2 million in November 2015, September 2015, May 2015, November 2014, October 2014, May 2014, respectively.Orders of this size are often unpredictable and difficult to replicate. As a result, the delay or cancellation of a single order could materially reduce our netsales and results of operations. We periodically experience repeated and unanticipated delays in defense orders, which make our revenues and operatingresults less predictable. Because our inertial navigation products typically have relatively higher product gross margins than our mobile connectivityproducts, the loss of an order for inertial navigation products could have a disproportionately adverse effect on our results of operations.Only a few customers account for a substantial portion of our defense navigation and inertial navigation revenues, and the loss of any of thesecustomers could substantially reduce our net sales.We derive a significant portion of our inertial navigation revenues from a small number of customers, many of whom are contractors for the U.S.government. In October 2014, we received a $19.0 million TACNAV product and services contract from an international military customer which includesprogram management and engineering services expected to be delivered through 2017 and hardware shipments that occurred in 2015 and 2016, as well asout-year support services to be provided as part of this order. The loss of business from any of these customers or delays in orders could substantially reduceour net sales and results of operations and could seriously harm our business. Since we are often awarded a contract as a subcontractor to a major defensesupplier that is engaged in a competitive bidding process as prime contractor for a major weapons procurement program, our revenues depend significantlyon the success of the prime contractors with which we align ourselves.18Table of ContentsCommercial sales of our inertial navigation products are unpredictable.Fluctuating commercial sales of our inertial navigation products are making it more difficult to predict our future revenues. We have been marketingour inertial navigation products, particularly our FOG products and systems, to original equipment manufacturers for incorporation into commercial products,such as navigation and positioning systems for various applications, including precision mapping, dynamic surveying, self-driving and other autonomousvehicles, train location control and track geometry measurement systems, industrial robotics, and optical stabilization. Because we sell these products tooriginal equipment manufacturers rather than end-users, we have less information about market trends and other developments affecting the buying patternsof end-users and, as a result, may be unable to forecast demand for these products accurately. Sales of FOGs for commercial applications increased from 2015to 2016; however, sales can significantly increase or decrease quarter-to-quarter due to our customer mix. Moreover, sales of these products for commercialapplications depend on the success of our customers’ products, and any decline in sales of our customers’ products would reduce demand for our products.Our results of operations could be adversely affected by unseasonably cold weather, prolonged winter conditions, disasters or similar events.Our marine leisure business is highly seasonal, and seasonality can also impact our commercial marine business. Historically, we have generated themajority of our marine leisure product revenues during the first and second quarters of each year, and these revenues typically decline in the third and fourthquarters of each year, compared to the first two quarters. Temporary suspensions of our airtime services typically increase in the third and fourth quarters ofeach year as boats are placed out of service during winter months. Our marine leisure business is also significantly affected by the weather. Unseasonably coolweather, prolonged winter conditions, hurricanes, unusual amounts of rain, and natural and other disasters may decrease boating, which could reduce ourrevenues. Specifically, we may encounter a decrease in new airtime activations as well as an increase in the number of cancellations or temporary suspensionsof our airtime service.We could derive an increasing portion of our revenues from commercial leases of mobile connectivity equipment, rather than sales, which couldincrease our credit and collection risk.We are actively seeking to increase revenues from the commercial markets for our mini-VSAT Broadband service, particularly shipping companies andother companies that deploy a fleet of vessels. In marketing this service, we offer leasing arrangements for the TracPhone antennas to both commercial andleisure customers. If commercial leases become increasingly popular with our customers, we could face increased risks of default under those leases. Defaultscould increase our costs of collection (including costs of retrieving or abandoning leased equipment) and reduce the amount we collect from customers,which could harm our results of operations. Moreover, fleet sales are likely to be less common than, and perhaps substantially larger than, our typical orders,which could lead to increased variability in our quarterly revenues and gross margin realization.Our ability to compete in the maritime airtime services market may be impaired if we are unable to provide sufficient service capacity to meetcustomer demand.We currently offer our mini-VSAT Broadband service in the Americas, Europe, the Middle East, Africa, Asia-Pacific, and Australian and New Zealandwaters. In the future, we may need to expand capacity in existing coverage areas to support our subscriber base. If we are unable to reach agreement withthird-party satellite providers to support our mini-VSAT Broadband service and its technology or if transponder capacity is unavailable to meet growingdemand in a given region, our ability to provide airtime services will be at risk and could reduce the attractiveness of our products and services.Changes in foreign currency exchange rates may negatively affect our financial condition and results of operations.Because of the scope of our foreign sales and foreign operations, we face significant exposure to movements in exchange rates for foreign currencies,particularly the pounds sterling and the euro. During recent periods, the U.S. dollar has strengthened against relevant foreign currencies, which decreases ourrevenues reported in U.S. dollars and decreases the reported value of our assets in foreign countries. However, if the U.S. dollar weakens, our revenuesreported in U.S. dollars, as well as the reported value of our assets in foreign countries, would be commensurately higher.We also have intragroup receivables and liabilities, such as loans, that can generate significant foreign currency effects. Changes in exchange rates,particularly the U.S. dollar against the pounds sterling, could lead to the recognition of unrealized foreign exchange losses.19Table of ContentsMoreover, certain of our products and services are sold internationally in U.S. dollars; as the U.S. dollar strengthens, the relative cost of these productsand services to customers located in foreign countries increases, which adversely affects export sales. In addition, most of our financial obligations, includingpayments under our outstanding debt obligations, must be satisfied in U.S. dollars. Our exposures to changes in foreign currency exchange rates may changeover time as our business practices evolve and could result in increased costs or reduced revenue and could adversely affect our cash flow. Changes in therelative values of currencies occur regularly and may have a significant impact on our operating results. We cannot predict with any certainty changes inforeign currency exchange rates or the degree to which we can cost-effectively mitigate this exposure.Brexit and political uncertainty in the United Kingdom and Europe could adversely affect our revenue and results of operations and disrupt ouroperations.We have significant operations in the United Kingdom, including the major portion of our KVH Media Group and Videotel operations. The June 2016referendum supporting the exit of the United Kingdom from the European Union, or Brexit, is causing significant political uncertainty in both the UnitedKingdom and the European Union. For example, the United Kingdom has recently experienced a transition of leadership in its principal political parties;Scotland may seek to remain in the European Union, either by seeking to block Brexit or by obtaining its independence from the United Kingdom; and othermembers of the European Union may also seek to depart from the European Union. The impact of Brexit and the resulting turmoil on the political andeconomic future of the United Kingdom and the European Union is uncertain, and we may be adversely affected in ways we do not currently anticipate.Brexit may result in a significant change in the British regulatory environment, which would likely increase our compliance costs. Customers and otherbusinesses may curtail expenditures, including for purchases of our products and services. We may find it more difficult to conduct business in the UnitedKingdom and the European Union, as Brexit may result in increased restrictions on the movement of capital, goods and personnel. Depending on theoutcome of negotiations between the United Kingdom and the European Union regarding the terms of Brexit, we may decide to relocate or otherwise alter ourEuropean operations to respond to the new business, legal, regulatory, tax and trade environments that may result. Brexit may materially and adversely affectour relationships with customers, suppliers and employees and could result in decreased revenue, increased expenses, higher tariffs and taxes, and lowerearnings and cash flow.Tight credit availability, environmental concerns and ongoing low levels of consumer confidence are adversely affecting sales of our mobile satelliteTV products.Factors such as tight credit, environmental protection laws and ongoing low levels of consumer confidence can materially and adversely affect sales oflarger vehicles and vessels for which our mobile satellite TV products are designed. Many customers finance their purchases of these vehicles and vessels,and tight credit availability can reduce demand for both these vehicles and vessels and our mobile satellite TV products. Moreover, in the current creditmarkets, financing for these purchases has sometimes been unavailable or more difficult to obtain. The increased cost of operating these vehicles and vesselscan adversely affect demand for our mobile satellite TV products. Recent declines in oil prices may not result in any material increase in demand.Our business has substantial indebtedness, which could restrict our business opportunities.We currently have, and will likely continue to have, a substantial amount of indebtedness. Our indebtedness could, among other things, make it moredifficult for us to satisfy our financial obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwisecreate liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and expose us to interest ratefluctuations. As of December 31, 2016, we had total debt outstanding of $58.1 million, which included $53.6 million in aggregate principal amount ofindebtedness outstanding under our term note that matures in 2019. As of December 31, 2016, there were no borrowings outstanding under the revolver andthe full balance of $15 million was available for borrowing.We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations andpotentially from other debt or equity offerings. Accordingly, our ability to meet our obligations depends on our future performance and capital raisingactivities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capitalresources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidityproblems and might be required to dispose of material assets or operations, restructure or refinance our debt, which we may be unable to do on favorableterms, and forego attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of thesealternatives.20Table of ContentsThe agreements governing our indebtedness subject us to various restrictions that may limit our ability to pursue business opportunities.The agreements governing our indebtedness subject us to various restrictions on our ability to engage in certain activities, including, among otherthings, our ability to:•acquire other businesses or make investments;•raise additional capital;•incur additional debt or create liens on our assets;•pay dividends or make distributions;•prepay indebtedness; and•merge, dissolve, liquidate, consolidate, or dispose of all or substantially all of our assets.These restrictions may limit or restrict our cash flow and our ability to pursue business opportunities or strategies that we would otherwise consider tobe in our best interests.Our secured credit facility contains certain financial and other restrictive covenants that we may not satisfy, and that, if not satisfied, could result in theacceleration of the amounts due under our secured credit facility and the limitation of our ability to borrow additional funds in the future.The agreements governing our secured credit facility subject us to various financial and other restrictive covenants with which we must comply on anongoing or periodic basis. These include covenants pertaining to a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverageratio, covenants requiring the mandatory prepayment of amounts outstanding under the term loan and the revolver under specified circumstances, including(i) 100% of the net cash proceeds from certain dispositions to the extent not reinvested in our business within a stated period, (ii) 50% of the net cashproceeds from stated equity issuances, and (iii) 100% of the net cash proceeds from certain receipts of more than $250,000 outside the ordinary course ofbusiness, and limits on capital expenditures. If we violate any of these covenants, we may suffer a material adverse effect. Most notably, our outstanding debtunder our secured credit facility could become immediately due and payable, our lenders could proceed against any collateral securing such indebtedness,and our ability to borrow additional funds in the future could be limited or terminated. Alternatively, we could be forced to refinance or renegotiate the termsand conditions of our secured credit facility, including the interest rates, financial and restrictive covenants and security requirements of the secured creditfacility, on terms that may be significantly less favorable to us.In March 2017, we entered into an amendment to our secured credit facility. This amendment included (i) an increase to the Maximum ConsolidatedLeverage Ratio from 1.25:1.00 to 1.50:1.00 (ii) an increase to the lowest rate applicable to borrowing under the Credit Agreement from 1.50% to 1.75%(iii) an amendment to the amortization schedule for the term loan to reduce the amount of required quarterly principal repayments to $575,000 and (iv) anamendment to the definition of Consolidated Fixed Charges Coverage Ratio to exclude any capital expenditures related to growth or revenue generatinginitiatives from the calculation. As a condition to the Amendment, we made a principal repayment of $6.0 million on the Term Loan.A default under agreements governing our indebtedness could result in a default and acceleration of indebtedness under other agreements.Certain agreements governing our indebtedness contain cross-default provisions whereby a default under one agreement could result in a default andacceleration of our repayment obligations under other agreements. If a cross-default were to occur, we may not be able to pay our debts or borrow sufficientfunds to refinance them. Even if new financing were available, it may not be available on favorable terms. If some or all of our indebtedness is in default forany reason, our business, financial condition, and results of operations could be materially and adversely affected.Our mobile satellite products currently depend on satellite services and facilities provided by third parties, and a disruption in those services couldadversely affect sales.Our satellite antenna products include the equipment necessary to utilize satellite services; we do not own the satellites that directly provide two-waysatellite communications. We currently offer satellite television products compatible with the DIRECTV and DISH Network services in the United States, theBell TV service in Canada, the Sky Mexico service and various other regional satellite TV services in other parts of the world.21Table of ContentsSES, Eutelsat, Sky Perfect-JSAT, Telesat, EchoStar, Intelsat and Star One currently provide the satellite capacity to support the mini-VSAT Broadbandservice and our TracPhone V-IP series products. Intelsat also currently provides our C-Band satellite coverage. In addition, we have agreements with variousteleports and Internet service providers around the globe to support the mini-VSAT Broadband service. We rely on Inmarsat for satellite communicationsservices for our FleetBroadband- and FleetOne-compatible TracPhone products.If customers become dissatisfied with the programming, pricing, service, availability or other aspects of any of these satellite services, or if any one ormore of these services becomes unavailable for any reason, we could suffer a substantial decline in sales of our satellite products. There may be no alternativeservice provider available in a particular geographic area, and our modem or other technology may not be compatible with the technology of any alternativeservice provider that may be available. In addition, the unexpected failure of a satellite could disrupt the availability of programming and services, whichcould reduce the demand for, or customer satisfaction with, our products.We rely upon spread spectrum communications technology developed by ViaSat and transmitted by third-party satellite providers to permit two-waybroadband Internet via our TracPhone V-IP series antennas, and any disruption in the availability of this technology could adversely affect sales.Our mini-VSAT Broadband service relies on spread spectrum technology developed by ViaSat, Inc., for use with satellite capacity controlled by SES,Eutelsat, Sky Perfect-JSAT, Telesat, Echostar, Intelsat and Star One. Our TracPhone two-way broadband satellite terminals combine our stabilized antennatechnology with ViaSat’s ArcLight spread spectrum mobile broadband technology, along with ViaSat’s ArcLight spread spectrum modem. The ArcLighttechnology is also integrated within the satellite hubs that support this service. Sales of the TracPhone V-IP series products and our mini-VSAT Broadbandservice could be disrupted if we fail to receive approval from regulatory authorities to provide our spread spectrum service in the waters of various countrieswhere our customers operate or if there are issues with the availability of the ArcLight maritime modems. Moreover, over the course of our ten-year agreementwith ViaSat, which expires in 2018, satellite communications technology may continue to evolve, which could reduce the relative attractiveness of thetechnology we currently offer, and our technology may cease to be compatible with changes in satellite service offerings. If we decided to or had to transitionto any new technology, we may encounter technological challenges, increased expenses, customer dissatisfaction, inventory obsolescence, interruptions insupply, disruptions in current relationships or arrangements and unforeseen obstacles, any of which could have a material adverse effect on our mobilesatellite business, revenues and profitability.We have single dedicated manufacturing facilities for each of our mobile connectivity and inertial navigation product categories, and any significantdisruption to a facility could impair our ability to deliver our products.Excluding the products manufactured by Videotel and KVH Media Group, which we manufacture in the United Kingdom, we currently manufacture allof our mobile connectivity products at our manufacturing facility in Middletown, Rhode Island, and the majority of our inertial navigation products at ourfacility in Tinley Park, Illinois. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use of eitherproduction facility. For example, our production facilities use some specialized equipment that may take time to replace if they are damaged or becomeunusable for any reason. In that event, shipments would be delayed, which could result in customer or dealer dissatisfaction, loss of sales and damage to ourreputation. Finally, we have only a limited capability to increase our manufacturing capacity in the short term. If short-term demand for our products exceedsour manufacturing capacity, our inability to fulfill orders in a timely manner could also lead to customer or dealer dissatisfaction, loss of sales and damage toour reputation.We depend on sole or limited source suppliers, and any disruption in supply could impair our ability to deliver our products on time or at expected cost.We obtain many key components for our products from third-party suppliers, and in some cases we use a single or a limited number of suppliers. Anyinterruption in supply could impair our ability to deliver our products until we identify and qualify a new source of supply, which could take several weeks,months or longer and could increase our costs significantly. Suppliers might change or discontinue key components, which could require us to modify ourproduct designs. For example, in the past, we have experienced changes in the chemicals used to coat our optical fiber, which changed its characteristics andthereby necessitated design modifications. Department of Defense regulations requiring government contractors to implement processes to avoid counterfeitparts may require us to find new sources of materials or components if the current supplier cannot meet the requirements. In general, we do not have writtenlong-term supply agreements with our suppliers but instead purchase components through purchase orders, which expose us to potential price increases andtermination of supply without notice or recourse. It is generally not our practice to carry significant inventories of product components, and this couldmagnify the impact of the loss of a supplier. If we are required to use a new source of materials or components, it could also result in unexpectedmanufacturing difficulties and could affect product performance and reliability. In addition, from time to22Table of Contentstime, lead times for certain components can increase significantly due to imbalances in overall market supply and demand. This, in turn, could limit ourability to satisfy the demand for certain of our products on a timely basis and could result in some customer orders being rescheduled or canceled.We may continue to increase the use of international suppliers to source components for our manufacturing operations, which could disrupt ourbusiness.Although we have historically manufactured and sourced raw materials for the majority of our products domestically, in order for us to compete withlower priced competing products while also improving our profitability, in some instances we have found it desirable to source raw materials andmanufactured components and assemblies from Europe, Asia, and South America. Reliance on foreign manufacturing and/or raw material supply haslengthened our supply chain and increased the risk that a disruption in that supply chain could have a material adverse effect on our operations and financialperformance.Adverse economic conditions could result in financial difficulties or bankruptcy for any of our suppliers, which could adversely affect our business andresults of operations.The current state of worldwide economic conditions and tight credit could present challenges to our suppliers, which could result in disruptions to ourbusiness, increase our costs, delay shipment of our products or delivery of services, and impair our ability to generate and recognize revenue. To address theirown business challenges, our suppliers may increase prices, reduce the availability of credit, require deposits or advance payments or take other actions thatmay impose a burden on us.They may also reduce production capacity, slow or delay delivery of products, face challenges meeting our specifications or otherwise fail to meet ourrequirements. In some cases, our suppliers may face bankruptcy. We may be required to identify, qualify, and engage new suppliers, which would require timeand the attention of management. Any of these events could impair our ability to deliver our products and services to customers in a timely and cost-effectivemanner, cause us to breach our contractual commitments or result in the loss of customers.Our media and entertainment business relies on licensing arrangements with content providers, and the loss of or changes in those arrangements couldadversely affect our business.We distribute premium news, sports, movies, and music content for commercial and leisure customers in the maritime, hotel, and retail markets. We donot generate this content but instead license the content from third parties on a non-exclusive basis. We do not have long-term license agreements with anycontent provider. Accordingly, any content provider could terminate our existing arrangements with little or no advance notice or could adversely modifythe terms of the arrangement, including initiating potential price increases. Further, the licenses we obtain are limited in scope, and any violation of the termsof a license could expose us to liability for copyright infringement. We pay license fees that are based in part on the revenue we generate from sublicenses,and our licensors generally have the right to audit our records to determine whether we have paid all necessary license fees. Failure to pay required licensefees could result in any combination of termination of our license rights, penalties, or damages. The loss of content could adversely affect the attractivenessof our media and entertainment offerings, which could in turn adversely affect our revenues. Any increase in the cost of content could reduce the profitabilityof these offerings.Any failure to maintain and expand our third-party distribution relationships may limit our ability to penetrate markets for mobile connectivityproducts and services.We market and sell our mobile connectivity products and services through an international network of independent retailers, chain stores anddistributors, as well as to manufacturers of marine vessels, recreational vehicles and buses. If we are unable to maintain or improve our distributionrelationships, it could significantly limit our sales. Some of our distribution relationships are new, and our new distributors may not be successful inmarketing and selling our products and services. In addition, our distribution partners do not have exclusive relationships with us and may sell products ofother companies, including competing products, and are generally not required to purchase minimum quantities of our products.23Table of ContentsOur international business operations expose us to a number of difficulties in coordinating our activities abroad and in dealing with multiple regulatoryenvironments.Historically, sales to customers outside the United States have accounted for a significant portion of our net sales, and our acquisitions of Videotel inJuly 2014 and KVH Media Group in May 2013 increased our sales in new foreign markets. We derived 63%, 67% and 58% of our revenues in the years endedDecember 31, 2016, 2015, and 2014, respectively, from sales to customers outside the United States. Sales to customers in Canada represented 11% and 10%of net sales for the years ended December 31, 2016 and 2015, respectively. No other individual foreign country represented 10% or more of the Company’sconsolidated net sales for 2014. We have foreign sales offices in Denmark, the United Kingdom, Singapore, Hong Kong, Japan, Norway, Cyprus and thePhilippines, as well as a subsidiary in Brazil that manages local sales. However, aside from these international sales offices, substantially all of our personneland operations, particularly for our mobile connectivity equipment business and our inertial navigation business, are located in the United States. Our limitedoperations in foreign countries may impair our ability to compete successfully in international markets and to meet the service and support needs of ourcustomers in countries where we have little to no infrastructure. We are subject to a number of risks associated with our international business activities,which may increase our costs and require significant management attention. Our acquisitions of Videotel and KVH Media Group have augmented these risks.These risks include:•technical challenges we may face in adapting our mobile connectivity products to function with different satellite services and technology inuse in various regions around the world;•satisfaction of international regulatory requirements and delays and costs associated with procurement of any necessary licenses or permits;•the potential unavailability of content licenses covering international waters and foreign locations;•restrictions on the sale of certain inertial navigation products to foreign military and government customers;•increased costs of providing customer support in multiple languages;•increased costs of managing operations that are international in scope;•potentially adverse tax consequences, including restrictions on the repatriation of earnings;•protectionist laws and business practices that favor local competitors, which could slow our growth in international markets;•potentially longer sales cycles, which could slow our revenue growth from international sales;•potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable; and•economic and political instability in some international markets.We could incur additional legal compliance costs associated with our international operations and could become subject to legal penalties if we do notcomply with certain regulations.As a result of our expanding international operations, we are subject to a number of legal requirements, including the U.S. Foreign Corrupt PracticesAct, the U.K. Bribery Act and the customs, export, trade sanctions and anti-boycott laws of the United States, including those administered by the U.S.Customs and Border Protection, the Bureau of Industry and Security, the Department of Commerce, the Department of State, and the Office of Foreign AssetsControl of the Treasury Department, as well as those of other nations in which we do business. Compliance with these laws and regulations is complex andinvolves significant costs. These risks are heightened for acquired businesses that have historically been managed outside the United States, where these lawsand regulations may not have applied to the same extent. Our assessment of compliance with these laws and regulations by businesses that we have acquiredmay not have uncovered instances of non-compliance, and we may face liability for such non-compliance. In addition, our training and compliance programsand our other internal control policies may be insufficient to protect us from acts committed by our employees, agents or third-party contractors. Anyviolation of these requirements by us or our employees, agents or third-party contractors may subject us to significant criminal and civil liability.Exports of certain inertial navigation products are subject to the U.S. Export Administration Regulations and the International Traffic in ArmsRegulations and require a license from the U.S. Department of State prior to shipment.We must comply with the United States Export Administration Regulations and the International Traffic in Arms Regulations, or ITAR. Certain of ourproducts have military or strategic applications and are on the munitions list of the ITAR and require an individual validated license in order to be exportedto certain jurisdictions. Any changes in export regulations or reclassifications of our products may further restrict the export of our products, and we maycease to be able to procure export licenses for our products under existing regulations. The length of time required by the licensing process can vary,potentially delaying the shipment of products and the recognition of the corresponding revenue. Any restriction on the export of a product line or anyamount of our products could cause a significant reduction in net sales.24Table of ContentsAcquisitions may disrupt our operations or adversely affect our results.We evaluate strategic acquisition opportunities to acquire other businesses as they arise, such as our acquisitions of Videotel in July 2014 and KVHMedia Group in May 2013. The expenses we incur evaluating and pursuing these and other such acquisitions could have a material adverse effect on ourresults of operations. For example, during 2014, we incurred significant expenses related to the acquisition of Videotel. If we acquire a business, we may beunable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize the strategic, financial,operational and other benefits we anticipate from any acquisition, and any acquisition may increase our overall operating expenses. Competition foracquisition opportunities could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets. Further, ourapproach to acquisitions may involve a number of special financial and business risks, such as:•entry into new and unfamiliar lines of business or markets, which may present challenges or risks that we did not anticipate;•entry into new or unfamiliar geographic regions, including exposure to additional tax and regulatory regimes;•increased expenses associated with the amortization of acquired intangible assets;•increased exposure to fluctuations in foreign currency exchange rates;•charges related to any potential acquisition from which we may withdraw;•diversion of our management’s time, attention, and resources;•loss of key acquired personnel;•increased costs to improve or coordinate managerial, operational, financial, and administrative systems, including compliance with theSarbanes-Oxley Act of 2002;•dilutive issuances of equity securities;•the assumption of legal liabilities; and•losses arising from impairment charges associated with goodwill or intangible assets.For example, we incurred additional expenses to implement internal control over financial reporting appropriate for a public company at Videotel andKVH Media Group, which previously operated as private companies not subject to U.S. generally accepted accounting principles.If we cannot effectively manage changes in our rate of growth, our business may suffer.We have previously expanded our operations to pursue existing and potential market opportunities, and we are continuing to expand our internationaloperations. For example, we expanded our service offerings through the acquisitions of Videotel in 2014 and KVH Media Group in 2013. This growth placeda strain on our personnel, management, financial and other resources and increased our operating expenses. If any portion of our business grows more rapidlythan we anticipate and we fail to manage that growth properly, we may incur unnecessary expenses, and the efficiency of our operations may decline. If weare unable to adjust our operating expenses on a timely basis in response to changes in revenue cycles, our results of operations may be harmed. To managechanges in our rate of growth effectively, we must, among other things:•match our manufacturing facilities and capacity to demand for our products and services in a timely manner;•secure appropriate satellite capacity to match changes in demand for airtime services in a timely manner;•successfully attract, train, motivate and manage appropriate numbers of employees for manufacturing, sales, marketing and customer supportactivities;•effectively manage our inventory and working capital;•maintain the efficiencies within our operating, administrative, financial and accounting systems; and•ensure that our procedures and internal controls are revised and updated to remain appropriate for the size and scale of our business operations.We may be unable to hire and retain the skilled personnel we need to expand our operations.To meet our growth objectives, we must attract and retain highly skilled technical, operational, managerial and sales and marketing personnel. If wefail to attract and retain the necessary personnel, we may be unable to achieve our business objectives and may lose our competitive position, which couldlead to a significant decline in net sales. We face significant competition for these skilled professionals from other companies, research and academicinstitutions, government entities and other organizations.25Table of ContentsOur success depends on the services of our executive officers.Our future success depends to a significant degree on the skills and efforts of Martin Kits van Heyningen, our co-founder, President, Chief ExecutiveOfficer, and Chairman of the Board. If we lost the services of Mr. Kits van Heyningen, our business and operating results could be seriously harmed. We alsodepend on the ability of our other executive officers to work effectively as a team. The loss of one or more of our executive officers could impair our ability tomanage our business effectively.Our business may suffer if we cannot protect our proprietary technology.Our ability to compete depends significantly upon our patents, copyrights, source code, and other proprietary technology. The steps we have taken toprotect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could expire or bechallenged, invalidated or circumvented, and the rights we have under our patents could provide no competitive advantages. Existing trade secret, copyright,and trademark laws offer only limited protection. Customers or others with access to our proprietary or licensed media content could copy that contentwithout permission or otherwise violate the terms of our customer agreements, which would adversely affect our revenues and could impair our relationshipswith content providers. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the UnitedStates, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technologywithout violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology could seriouslyharm our competitive position, which could lead to a substantial reduction in net sales.If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distractthe attention of management, and there can be no assurance that we would prevail.Also, we have delivered certain technical data and information to the U.S. government under procurement contracts, and it may have unlimited rightsto use that technical data and information. There can be no assurance that the U.S. government will not authorize others to use that data and information tocompete with us.Claims by others that we infringe their intellectual property rights could harm our business and financial condition.Our industries are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, orother intellectual property rights of others.We do not generally conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by thirdparties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patentapplications pending, many of which are confidential when filed, with regard to similar technologies.From time to time we have faced claims by third parties that our products or technology infringe their patents or other intellectual property rights, andwe may face similar claims in the future. For example, we were sued for patent infringement in 2015, and we settled this claim in January 2016 with apayment of cash to Advanced Media Network. Any claim of infringement could cause us to incur substantial costs defending against or settling the claim,even if the claim is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights, wemay be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue tooffer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would preventus from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial conditionand results of operations.26Table of ContentsCybersecurity breaches could disrupt our operations, expose us to liability, damage our reputation, and require us to incur significant costs orotherwise adversely affect our financial results.We are highly dependent on information technology networks and systems, including the Internet, to securely process, transmit and store electronicinformation, including personal information of our customers. We also retain sensitive data, including intellectual property, proprietary business information,personally identifiable information, credit card information, and usage data of our employees and customers on our computer networks. Although we takecertain protective measures and endeavor to modify them as we believe circumstances warrant, invasive technologies and techniques continue to evolverapidly, and our computer systems, software and networks are vulnerable to disruption, shutdown, unauthorized access, misuse, erasure, alteration, employeeerror, phishing, computer viruses or other malicious code, and other events that could have a security impact. Any security breach may compromiseinformation stored on our networks and may result in significant data losses or theft of our, our customers', our business partners' or our employees' sensitiveinformation. Public reports suggest that cybersecurity incidents are happening more often and with increasingly severe consequences. We may be required toexpend substantial additional resources to augment our efforts to address potential cybersecurity risks, which could adversely affect our results of operations.If any of these events were to occur, they could disrupt our operations, distract our management, cause us to lose existing customers and fail to attractnew customers, as well as subject us to regulatory actions, litigation, fines, damage to our reputation or competitive position, or orders or decrees requiring usto modify our business practices, any of which could have a material adverse effect on our financial position, results of operations or cash flows.In addition, the interpretation and application of consumer and data protection laws in the United States, Europe and elsewhere are often uncertain,contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, this couldresult in government-imposed fines or orders requiring that we change our data practices, which could have an adverse effect on our business. Complyingwith these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.Our media business may expose us to claims regarding our media content.Our media business produces training films and e-Learning computer-based training courses, including programs on safety, maintenance, security andregulatory compliance, and also provides commercially licensed maritime charting and navigation information. Our efforts to ensure the accuracy andreliability of the content we provide could be inadequate, and we could face claims of liability based on this content. Contractual and other measures we taketo limit our liability may be inadequate to protect us from these claims. Although we have certain rights of indemnification from third parties for certainportions of the content we provide to customers, it may be time-consuming and expensive to enforce our rights, and the third parties may lack the resources tofulfill their obligations to us. Further, our insurance coverage is subject to deductibles, exclusions and limitations of coverage, and there can be no assurancethat our insurance coverage would be available to satisfy any claims against us. Any such claims may have a material adverse effect on our financialcondition and results of operations.We identified material weaknesses in our internal control over financial reporting as of December 31, 2014, and the occurrence of these or any othermaterial weaknesses could have a material adverse effect on our ability to report accurate financial information in a timely manner.As described in “Item 9A. Controls and Procedures” of our annual report on Form 10-K for the year ended December 31, 2014, our managementconcluded that we had material weaknesses in our internal control over financial reporting as of December 31, 2014 and therefore did not maintain effectiveinternal control over financial reporting or effective disclosure controls and procedures, both of which are requirements of the Securities Exchange Act of1934, as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is areasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Thematerial weaknesses related to inertial navigation contracts where revenue is recognized on a bill and hold basis, the accounting for income taxes and theaccounting for multiple-element lease transactions. Following the identification of the material weaknesses in March 2015, management implementedremediation plans and successfully tested the control remediation as of December 31, 2015. On that basis, management concluded that the materialweaknesses had been remediated as of December 31, 2015.27Table of ContentsThe remedial measures we took may not be adequate to prevent future misstatements or avoid other control deficiencies or material weaknesses. Theeffectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decisionmaking, 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 conditionsand the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance thatany system of or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in atimely manner to the appropriate levels of management. As a result, it is possible that our financial statements will not comply with generally acceptedaccounting principles, will contain a material misstatement or will not be available on a timely basis, any of which could cause investors to lose confidencein us and lead to, among other things, declines in our stock price, unanticipated legal, accounting and other expenses, delays in filing required financialdisclosures, breach of contractual commitments to lenders or others, enforcement actions by government authorities, fines, penalties, the delisting of ourcommon stock and liabilities arising from stockholder litigation.Fluctuations in our quarterly net sales and results of operations could depress the market price of our common stock.We have at times experienced significant fluctuations in our net sales and results of operations from one quarter to the next. Our future net sales andresults of operations could vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, youshould not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that our net sales or resultsof operations in a quarter will fall below the expectations of securities analysts or investors. If this occurs, the market price of our common stock could fallsignificantly. Our results of operations in any quarter can fluctuate for many reasons, including:•changes in demand for our mobile connectivity products and services and inertial navigation products and services;•the timing and size of individual orders from military customers, which may be delayed or cancelled for various reasons;•the mix of products and services we sell, including the mix of fixed rate and metered contracts for airtime services;•our ability to manufacture, test and deliver products in a timely and cost-effective manner, including the availability and timely delivery ofcomponents and subassemblies from our suppliers;•our success in winning competitions for orders;•the timing of new product introductions by us or our competitors;•expenses incurred in pursuing acquisitions;•expenses incurred in expanding, maintaining, or improving our mini-VSAT Broadband network;•market and competitive pricing pressures;•unanticipated charges or expenses, such as increases in warranty claims;•general economic climate; and•seasonality of pleasure boat and recreational vehicle usage.In late 2015, we introduced new rate plans for our airtime services, including various rate plans that offer higher data speeds with usage caps. Underthese rate plans, customers receive a base level of service for a fixed fee and pay additional fees for usage over the base level. Accordingly, the revenue wegenerate from a customer may vary with that customer's usage. We are unable to predict accurately the extent to which customers will transition to particularmetered rate plans or the degree to which usage, and therefore our revenue, may vary from quarter to quarter.A large portion of our expenses, including expenses for network infrastructure, facilities, equipment, and personnel, are relatively fixed. Accordingly,if our net sales decline or do not grow as much or as quickly as we anticipate, we might be unable to maintain or improve our operating margins. Any failureto achieve anticipated net sales could therefore significantly harm our operating results for a particular fiscal period.28Table of ContentsThe market price of our common stock may be volatile.Our stock price has historically been volatile. During the period from January 1, 2014 to December 31, 2016, the trading price of our common stockranged from $7.31 to $15.79. Many factors may cause the market price of our common stock to fluctuate, including:•variations in our quarterly results of operations;•the introduction of new products and services by us or our competitors;•changing needs of military customers;•changes in estimates of our performance or recommendations by securities analysts;•the hiring or departure of key personnel;•acquisitions or strategic alliances involving us or our competitors;•market conditions in our industries; and•the global macroeconomic and geopolitical environment.In addition, the stock market can experience extreme price and volume fluctuations. Major stock market indices experienced dramatic declines in2008, in the first quarter of 2009 and in January 2016. These fluctuations are often unrelated to the operating performance of particular companies. Thesebroad market fluctuations may adversely affect the market price of our common stock. When the market price of a company’s stock drops significantly,stockholders often institute securities litigation against that company. Any such litigation could cause us to incur significant expenses defending against theclaim, divert the time and attention of our management and result in significant damages.We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow.We are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we currently operate. The determination of ourworldwide provision for income taxes and current and deferred tax assets and liabilities requires significant judgment and estimation. In the ordinary courseof our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit byboth domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. The new Presidentialadministration and Congress have expressed an intent to revise the federal tax code, and we are currently unable to predict the impact of any revisions on ourtax position or tax obligations. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amountsrecorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in theperiod in which such determination is made. As of December 31, 2016, we had liabilities for uncertain tax positions of $0.8 million.Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases ofassets and liabilities, and for operating losses and tax credit carry forwards. A valuation allowance reduces deferred tax assets to estimated realizable value,which assumes that it is more likely than not that we will be able to generate sufficient future taxable income to realize the net carrying value. We review ourdeferred tax assets and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulativeresults in recent years. As a result of negative evidence, principally three years of cumulative pre-tax operating losses as of December 31, 2016, we concludedthat it was more likely than not that certain of our deferred tax assets were not realizable and therefore, recorded a full valuation allowance of $6.8 millionagainst these deferred tax assets as of December 31, 2016.If, during our quarterly reviews of our deferred tax assets, we determine that it is more likely than not that we will not be able to generate sufficientfuture taxable income to realize the net carrying value of our deferred tax assets, we will record a valuation allowance to reduce the tax assets to estimatedrealizable value. This could result in a material income tax charge.Changes in the competitive environment or supply chain issues may require inventory write-downs.From time to time, we have recorded significant inventory charges and/or inventory write-offs as a result of substantial declines in customer demand.Market or competitive changes could lead to future charges for excess or obsolete inventory, especially if we are unable to appropriately adjust the supply ofmaterial from our vendors.29Table of ContentsIf goodwill or other intangible assets that we have recorded in connection with our acquisitions of other businesses become impaired, we could have totake significant charges against earnings.As a result of our acquisitions, we have recorded, and may continue to record, a significant amount of goodwill and other intangible assets. Undercurrent accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assetshas been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in additional charges against earnings, whichcould materially reduce our reported results of operations in future periods.Compliance with conflict minerals disclosure rules may further increase our costs and adversely affect our results of operations.We are subject to the SEC's disclosure requirements for public companies that manufacture, or contract to manufacture, products for which certainminerals and their derivatives, namely tin, tantalum, tungsten and gold, known as “conflict minerals,” are necessary to the functionality or production ofthose products. These regulations require us to determine which of our products contain conflict minerals and, if so, to perform an extensive inquiry into oursupply chain in an effort to determine whether or not such conflict minerals originate from the Democratic Republic of Congo, or DRC, or an adjoiningcountry. The European Union is in the process of adopting its own conflict minerals disclosure requirements, which may apply to us and are likely to be moreextensive than those adopted by the SEC. We may incur increased costs to comply with these disclosure requirements, including costs related to determiningthe source of any of the relevant minerals used in our products, which would adversely affect our results of operations. Because our supply chain is complex,the country of origin inquiry and due diligence procedures that we implement may not enable us to ascertain the origins of any conflict minerals that we useor determine that these minerals did not originate from the DRC or an adjoining country, which may harm our reputation with customers, investors, non-governmental organizations or others and lead to a decline in our stock price. In the conflict minerals report that we filed in 2016, we concluded that theorigins of the relevant conflict minerals we used in 2015 were “DRC conflict undeterminable,” as a result of which we were not required to obtain anindependent private sector audit of our conflict minerals report. The temporary rules permitting issuers to report that the origins of the conflict minerals theyuse are “DRC conflict undeterminable” have expired; however, as a result of pending litigation, the requirement to obtain an independent private sector auditis subject to a temporary stay unless an issuer wishes to report that its products are "DRC conflict-free." It is possible that the stay could be lifted, in whichcase we expect that the expenses of preparing our conflict minerals report and obtaining any necessary private sector audit will increase. We may also facedifficulties in satisfying customers who may require that our products be certified as DRC conflict-free, which could harm our relationships with thesecustomers and lead to a loss of revenue. These requirements could also have the effect of limiting the pool of suppliers from which we source these minerals,and we may be unable to obtain conflict-free minerals at competitive prices, which could increase our costs and adversely affect our manufacturingoperations and our profitability.Our charter and by-laws and Delaware law may deter takeovers.Our certificate of incorporation, by-laws and Delaware law contain provisions that could have an anti-takeover effect and discourage, delay or preventa change in control or an acquisition that many stockholders may find attractive. These provisions may also discourage proxy contests and make it moredifficult for our stockholders to take some corporate actions, including the election of directors. These provisions relate to:•the ability of our Board of Directors to issue preferred stock, and determine its terms, without a stockholder vote;•the classification of our Board of Directors, which effectively prevents stockholders from electing a majority of the directors at any one annualmeeting of stockholders;•the limitation that directors may be removed only for cause by the affirmative vote of the holders of two-thirds of our shares of capital stockentitled to vote;•the prohibition against stockholder actions by written consent;•the inability of stockholders to call a special meeting of stockholders; and•advance notice requirements for stockholder proposals and director nominations.ITEM 1B.Unresolved Staff CommentsNone.30Table of ContentsITEM 2.PropertiesThe following table provides information about our principal facilities as of December 31, 2016.Location Type Principal Uses ApproximateSquareFootage Ownership LeaseExpirationMiddletown, RhodeIsland Office Corporate headquarters, research anddevelopment, sales and service, marketing andadministration 75,000 Owned —Middletown, RhodeIsland Plant andwarehouse Manufacturing and warehousing (mobileconnectivity products) 75,300 Owned —Tinley Park, Illinois Plant andwarehouse Manufacturing, warehousing, research anddevelopment (inertial navigation products) 101,000 Owned —Horten, Norway Office Research and development, sales, marketing andsupport 4,400 Leased December 2018Singapore Office Asian headquarters and sales office 2,000 Leased April 2017Kokkedal, Denmark Office andwarehouse European headquarters, sales, marketing andsupport 11,000 Leased 3 month noticeLeeds, UK Office Audio/video production, sales and support 2,700 Leased April 2018Liverpool, UK Office Maritime sales, news production, marketing andsupport 4,692 Leased June 2023London, UK Office Sales, production, dispatch, and general office 7,309 Leased August 2019Leeds, UK Media Lab Audio/video production, Media distribution,sales and administration 6,236 Leased January 2020Manila, Philippines Office News production, inside sales, support 7,400 Leased September 2021New Delhi, India Office News production 1,800 Leased November 2025ITEM 3.Legal ProceedingsFrom 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.ITEM 4.Mine Safety DisclosuresNot applicable.31Table of ContentsPART IIITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information. Our common stock trades on the NASDAQ Global Select Market under the symbol “KVHI.” The following table provides, for theperiods indicated, the high and low sale prices for our common stock as reported on the NASDAQ Global Select Market. High LowYear Ended December 31, 2016: First quarter$9.88 $8.00Second quarter10.20 7.51Third quarter9.24 7.31Fourth quarter12.75 7.50Year Ended December 31, 2015: First quarter$15.18 $11.62Second quarter15.79 11.14Third quarter13.99 9.22Fourth quarter10.64 8.83Stockholders. As of March 8, 2017, we had 73 holders of record of our common stock. This number does not include stockholders for whom shareswere held in a nominee or “street” name.Dividends. We have never declared or paid cash dividends on our capital stock, and we have no plan to pay any cash dividends in the foreseeablefuture. We currently intend to retain any future earnings to finance our operations and future growth. In addition, the terms of our senior credit agreement,which we entered into in July 2014, place restrictions on our ability to pay cash dividends on our common stock.Issuer Purchases of Equity Securities. On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares ofour common stock. The repurchase program is funded using our existing cash, cash equivalents, marketable securities, and future cash flows. Under therepurchase program, at management’s discretion, we may repurchase shares on the open market from time to time, in privately negotiated transactions orblock transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on availability of shares, price, marketconditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended, or terminated at any time withoutprior notice. The repurchase program has no expiration date. There were no other repurchase programs outstanding during the year ended December 31, 2016,and no repurchase programs expired during the period.We did not repurchase any shares of our common stock in open market transactions during the years ended December 31, 2016, 2015, and 2014.During the year ended December 31, 2016, 32,361 vested restricted shares were surrendered in satisfaction of tax withholding obligations at anaverage price of $9.63 per share. There were no shares repurchased in satisfaction of tax withholding obligations during the fourth quarter ended December31, 2016.32Table of ContentsSTOCK PERFORMANCE GRAPHThe following graph compares the performance of our cumulative stockholder return with that of the NASDAQ Composite Index, a broad equitymarket index, and the NASDAQ Telecommunications Index, a published industry index. The cumulative stockholder returns for shares of our common stockand for the market indices are calculated assuming $100 was invested on December 30, 2011. We paid no cash dividends during the periods shown. Theperformance of the market indices is shown on a total return (dividends reinvested) basis. Measurement points are the last trading days of the years endedDecember 2012, 2013, 2014, 2015, and 2016. 2011 2012 2013 2014 2015 2016KVH Industries, Inc. $100 $180 $167 $163 $121 $152NASDAQ Composite 100 116 160 182 192 207NASDAQ Telecommunications 100 102 127 138 127 146ITEM 6.Selected Financial DataWe have derived the following selected financial data from our audited consolidated financial statements. You should read this data in conjunctionwith “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements andSupplementary Data.” In May 2013, we acquired Headland Media Limited (now known as the KVH Media Group) for $24.2 million. In July 2014, we acquired Videotel for$47.4 million. See Note 1 to our consolidated financial statements for a summary of significant accounting policies and the effects on the year-to-yearcomparability of the selected financial data.33Table of Contents Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except per share data)Consolidated Statement of Operations Data: Sales: Product$73,075 $76,213 $81,143 $90,295 $90,677Service103,047 108,421 91,448 71,993 46,435Net sales176,122 184,634 172,591 162,288 137,112Costs and expenses: Costs of product sales46,334 47,404 48,843 51,518 51,775Costs of service sales52,966 54,816 50,301 45,058 30,363Research and development16,030 14,039 14,101 12,987 12,147Sales, marketing and support33,942 35,714 32,976 28,792 24,069General and administrative28,172 29,453 24,448 17,764 12,188Total costs and expenses177,444 181,426 170,669 156,119 130,542(Loss) income from operations(1,322) 3,208 1,922 6,169 6,570Interest income513 546 738 657 510Interest expense1,436 1,460 1,296 637 323Other income (expense), net275 372 (39) 494 86(Loss) income before income taxes(1,970) 2,666 1,325 6,683 6,843Income tax expense5,547 413 1,284 2,150 3,263Net (loss) income$(7,517) $2,253 $41 $4,533 $3,580Per share information: Net (loss) income per common share, basic$(0.47) $0.14 $0.00 $0.30 $0.24Net (loss) income per common share, diluted$(0.47) $0.14 $0.00 $0.30 $0.24Number of shares used in per share calculation: Basic15,834 15,625 15,420 15,144 14,777Diluted15,834 15,834 15,605 15,341 15,019 December 31, 2016 2015 2014 2013 2012 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents, and marketable securities$52,134 $45,338 $49,802 $55,744 $38,285Working capital69,189 71,534 65,200 78,933 65,242Total assets199,757 226,277 235,837 183,849 137,568Line of credit— — — 30,000 7,000Long-term debt, excluding current portion50,153 58,054 64,687 7,094 3,414Other long-term obligations326 1,391 1,459 204 140Total stockholders’ equity106,502 118,176 116,540 116,467 105,70434Table of ContentsITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements andrelated notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussedunder the heading “Item 1A. Risk Factors” and elsewhere in this annual report.OverviewWe design, develop, manufacture and market mobile connectivity products and services for the marine and land mobile markets, and inertialnavigation products for commercial and defense markets. In the fourth quarter of 2016, consistent with certain internal organizational changes implemented,we changed our reporting structure from two operating segments based on geographies selling navigation, guidance and stabilization and mobilecommunication products, to two operating segments based on product lines: mobile connectivity and inertial navigation. The change was driven by severalfactors including:•changes in our overall organizational structure, including the appointment of a Chief Operating Officer and a new Chief Financial Officer;•the completion of our planning process for 2017 and later years, as a result of which we changed how we will measure and assess our financialperformance; and•our process for measuring incentive compensation for key executives for 2016 and later years.Mobile Connectivity SegmentOur mobile connectivity segment offers satellite communications products and services. Our mobile connectivity products enable customers to receivevoice and Internet services and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. Our CommBoxoffers a range of tools designed to increase communication efficiency, reduce costs, and manage network operations. We sell and lease our mobileconnectivity 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 developmentcontracts, 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 wellas the distribution of training films and eLearning computer-based training courses to commercial customers in the maritime market through our Videotelbusiness. We typically recognize revenue from media content sales ratably over the period of the service contract. We provide, for monthly fixed and usagefees, satellite connectivity services for broadband Internet, data and Voice over Internet Protocol (VoIP) service to our TracPhone V-series customers. We alsoearn monthly usage fees for third-party satellite connectivity for voice, data and Internet services to our Inmarsat and Iridium customers who choose toactivate their subscriptions with us. Our service sales have grown as a percentage of total revenue from 53% of our net sales in 2014 to 59% in both 2015 and2016, a portion of which is attributable to our acquisition of the KVH Media Group business in May 2013 and Videotel in July 2014. The majority ofVideotel’s services are invoiced in pounds sterling, which increases our exposure to fluctuations in exchange rates.Inertial Navigation SegmentOur 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 andpointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. Our inertial navigation products are sold directlyto U.S. and foreign governments and government contractors, as well as through an international network of authorized independent sales representatives. Inaddition, our inertial navigation products are used in numerous commercial products, such as navigation and positioning systems for various applicationsincluding precision mapping, dynamic surveying, autonomous vehicles, train location control and track geometry measurement systems, industrial roboticsand optical stabilization.Our inertial navigation service sales include engineering services provided under development contracts, product repairs and extended warranty sales. In October 2014, we entered into a $19.0 million TACNAV product and services contract with an international military customer. This contract includesprogram management and engineering services expected to be delivered through 2018, hardware shipments that were fulfilled in 2015 and 2016, and out-year support services.35Table of ContentsThe following table provides, for the periods indicated, our sales by segment: Year Ended December 31, 2016 2015 2014 (in thousands)Mobile connectivity$141,507 $147,809 $129,819Inertial navigation34,615 36,825 42,772Net sales$176,122 $184,634 $172,591Product sales within the mobile connectivity segment accounted for approximately 23%, 23% and 25% of our consolidated net sales for 2016, 2015and 2014, respectively. Sales of mini-VSAT Broadband airtime service accounted for approximately 37%, 35%, and 35% of our consolidated net sales for2016, 2015, 2014, respectively. Sales of content and training sales within the mobile connectivity segment accounted for approximately 20%, 21% and 14%of our consolidated net sales for 2016, 2015 and 2014, respectively.Within our inertial navigation segment, net sales of FOG-based guidance and navigation systems accounted for approximately 10%, 10%, and 12% ofour consolidated net sales for 2016, 2015, and 2014, respectively, and sales of tactical guidance and navigation systems accounted forapproximately 8%, 8%, and 11% of our consolidated net sales for 2016, 2015, and 2014, respectively.No other single product class accounts for 10% or more of consolidated net sales. No individual customer accounted for 10% or more of ourconsolidated net sales for 2016, 2015 or 2014.We operate in a number of major geographic areas across the globe. We generate our international net sales, based upon customer location, primarilyfrom customers located in Canada, Europe, Africa, Asia/Pacific, the Middle East, and India. Our international net sales totaled 63%, 67% and 58% of ourconsolidated net sales for 2016, 2015 and 2014, respectively. Sales to customers located in Canada represented 11% and 10% of net sales for the years endedDecember 31, 2016 and 2015, respectively. No other individual foreign country represented 10% or more of the Company’s consolidated net sales for 2016or 2015, respectively. No individual foreign country represented 10% or more of the Company's consolidated net sales for 2014. See Note 13 to ourconsolidated 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 ourcustomers. These activities relate primarily to engineering studies, surveys, prototype development, program management, and standard productcustomization. In accordance with accounting principles generally accepted in the United States of America, we account for customer-funded research asservice revenue, and we account for the associated research and development costs as costs of service and product sales. As a result, customer-funded researchand development are not included in the research and development expense that we present in our statement of operations. The following table presents ourtotal annual research and development effort, representing the sum of research costs of service and product sales and the operating expense of research anddevelopment as described in our statement of operations. Our management believes this information is useful because it provides a better understanding ofour total expenditures on research and development activities. Year ended December 31, 2016 2015 2014 (in thousands)Research and development expense presented on the statement of operations$16,030 $14,039 $14,101Costs of customer-funded research and development included in costs of servicesales498 1,546 2,633Total consolidated statements of operations expenditures on research anddevelopment activities$16,528 $15,585 $16,73436Table of ContentsResults of OperationsThe following table provides, for the periods indicated, certain financial data expressed as a percentage of net sales: Year Ended December 31, 2016 2015 2014Sales: Product41.5 % 41.3% 47.0 %Service58.5 58.7 53.0Net sales100.0 100.0 100.0Costs and expenses: Costs of product sales26.3 25.7 28.3Costs of service sales30.1 29.6 29.1Research and development9.1 7.6 8.2Sales, marketing and support19.3 19.3 19.1General and administrative16.0 16.0 14.2Total costs and expenses100.8 98.2 98.9(Loss) income from operations(0.8) 1.8 1.1Interest income0.3 0.3 0.4Interest expense0.8 0.7 0.8Other income, net0.2 0.2 —Income before income taxes(1.1) 1.6 0.7Income tax expense3.1 0.2 0.7Net (loss) income(4.2)% 1.4% — %Years ended December 31, 2016 and 2015Net SalesAs discussed further under the heading "Segment Discussion" below, product sales decreased $3.1 million, or 4%, to $73.1 million in 2016 from $76.2million in 2015, due to a decrease in mobile connectivity product sales of $2.2 million and a decrease in inertial navigation product sales of $0.9 million.Service sales for 2016 decreased $5.4 million to $103.0 million from $108.4 million for 2015 due to a decrease in mobile connectivity service sales of $4.0million and a decrease in inertial navigation service sales of $1.4 million or 35%.Costs of SalesCosts of sales consists of costs of product sales and costs of service sales. Costs of sales decreased in 2016 to approximately $99.3 million from $102.2million in 2015. The reduction in costs of sales was driven by a decrease in overall sales. As a percentage of net sales, costs of sales was approximately 56%and 55% for 2016 and 2015, respectively. The slightly higher percentage of costs of sales compared to total net sales in 2016 was driven by a slight increasein the percentage of costs of product sales compared to product sales.Our costs of product sales consist primarily of materials, manufacturing overhead, and direct labor used to produce our products. For 2016, costs ofproduct sales decreased by $1.1 million, or 2% to $46.3 million in 2016 from $47.4 million in 2015. As a percentage of product sales, costs of product saleswere approximately 63% and 62% for 2016 and 2015, respectively. The increase in the percentage of costs of product sales compared to product sales wasdue to increases in product and freight costs, an increase in wage and benefit expenses due to a slight increase in headcount, as well as lower overheadabsorption due to lower manufacturing volumes driven by lower product sales. Mobile connectivity costs of product sales decreased by $1.0 million, or 3%,primarily due to a $1.4 million decrease in our marine mobile connectivity costs of product sales, partially offset by a $0.4 million increase in our landmobile costs of product sales. Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 74% and 72% for 2016and 2015, respectively. The increase was principally driven by lower marine product sales which are higher margin products. Inertial navigation costs ofproduct sales decreased by $0.1 million, or 1%, primarily due to a $0.9 million decrease in our FOG costs of product sales, offset by a $0.8 million increase inour TACNAV37Table of Contentscosts of product sales. Inertial navigation costs of product sales as a percentage of inertial navigation product sales was 50% and 49% for 2016 and 2015,respectively. The increase was primarily driven by product mix.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 costsassociated with customer-funded research and development, media materials and distribution costs, and service repair materials. For 2016, costs of servicesales decreased by $1.9 million, or 3%, to $53.0 million in 2016 from $54.8 million in 2015. As a percentage of service sales, costs of service sales wereapproximately 51% and 51% for 2016 and 2015, respectively. Mobile connectivity costs of service sales decreased by $0.8 million, or 2%, primarily due to a$1.2 million decrease in airtime costs due to airtime cost-saving initiatives, partially offset by a $0.4 million increase in airtime services and repairs costs ofservice sales due to an increase in installations. Mobile connectivity costs of service sales as a percentage of mobile connectivity service sales was 52% and51% for 2016 and 2015, respectively. Inertial navigation costs of service sales decreased by $1.1 million, or 68%, due to the decrease in contract engineeringservices. Inertial navigation costs of service sales as a percentage of inertial navigation service sales was 21% and 41% for 2016 and 2015, respectively. Thedecrease in the inertial navigation costs of service sales as a percentage of inertial navigation service sales was primarily due to the differences in the relativematerial and labor components needed for the different contract engineering services projects completed in the two periods.We expect that our costs of sales will increase in correlation with our expected growth in our mobile connectivity and inertial navigation net sales. Weexpect that the mobile connectivity costs of service sales as percentage of mobile connectivity sales will decrease slightly as we are seeking to implementadditional airtime cost-saving initiatives.Operating ExpensesResearch and development expense consists of direct labor, materials, external consultants, and related overhead costs that support our internallyfunded product development and product sustaining engineering activities. Research and development expense for 2016 increased by $2.0 million, or 14%,to $16.0 million from $14.0 million in 2015. The primary reasons for the increase in expense in 2016 were a $1.2 million increase in labor expenses andoutside consulting fees, an increase of $0.5 million in expensed materials, and a $0.1 million increase in tooling and set-up charges. The primary reason forthe increase in research and development expense is an increase in overall expenditures for new initiatives, as well as a decrease in the level of customer-funded engineering projects where the support costs are included in costs of service sales. As a percentage of net sales, research and development expense was9% and 8% in 2016 and 2015, respectively.We expect that research and development expense will grow year-over-year as we continue to invest in developing new technologies and applicationsfor 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 supportexpense also includes the operating expenses of our sales office subsidiaries in Denmark, Singapore, Brazil, and Japan. Sales, marketing, and support expensefor 2016 decreased by $1.8 million, or 5%, to $33.9 million from $35.7 million for 2015. The primary reasons for the decrease in 2016 were a $1.9 milliondecrease in commissions due to lower sales and a $0.3 million decrease in bad debt expense due to improved collection efforts, partially offset by a $0.3million increase in warranty expense primarily related to an increase in the number of our mobile connectivity products under warranty. As a percentage ofnet sales, sales, marketing and support expense was 19% in both 2016 and 2015.We expect that our sales, marketing, and support expense will increase year-over-year primarily driven by increased personnel, marketing andtechnology 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 2016 decreased by $1.3 million, or 4%, to $28.2million from $29.5 million for 2015. The primary reasons for the decrease in 2016 expense were a $1.5 million decrease in compensation and consultingexpense primarily due to the decrease in executive bonuses and profit sharing, as well as a decrease in expenses arising from the centralization ofadministrative functions in the UK and a $0.4 million decrease in legal settlement expense due to settlement of patent infringement matters where settlementwas accrued in 2015, partially offset by a $0.5 million increase in computer maintenance for new software subscriptions and software support as a result ofadditional purchased software and related maintenance. As a percentage of net sales, general and administrative expense was 16% for both 2016 and 2015.38Table of ContentsWe expect general and administrative expenses to increase year-over-year in 2017, primarily driven by increased personnel costs. Interest and Other Expense (Income), NetInterest income was $0.5 million for both 2016 and 2015 and relates to interest earned on our cash and cash equivalents, as well as from investments.Interest expense for 2016 decreased slightly by $0.1 million, or 7%, to $1.4 million from $1.5 million for 2015 due to a reduction in our overall debtobligations. Other income, net for 2016 decreased by $0.1 million or 25%, to $0.3 million from $0.4 million for 2015 primarily due to foreign exchangetransaction losses as a result of the fluctuation of the pounds sterling. Income Tax ExpenseIncome tax expense for 2016 was $5.5 million as compared to $0.4 million for 2015. The significant increase in income tax expense for 2016 wasprincipally due to a change in the valuation allowance of our deferred tax assets of approximately $6.8 million. We assessed evidence of the realizability ofour deferred tax assets as of December 31, 2016 and, based on the three-year cumulative pre-tax loss as of December 31, 2016, we concluded that it was morelikely than not that certain of our deferred tax assets were not realizable and recorded a full valuation allowance against these deferred tax assets. This is thekey driver of the difference between our effective tax rate as compared to the United States federal statutory rate. This impact was partially offset by theimpact of foreign tax rates and research and development tax credits. The effective income tax rate of approximately 16% for 2015 differs from the UnitedStates federal statutory rate of 35% principally as a result of the impact of foreign tax rates, research and development tax credits and reduction in uncertaintax positions as a result of settlements with taxing authorities partially offset by changes in the valuation allowance against our deferred tax assets.Segment Discussion - Years ended December 31, 2016 and 2015Our net sales by segment for 2016 and 2015 were as follows: Change For the year ended December31, 2016 vs. 2015 2016 2015 $ % (dollars in thousands)Mobile connectivity sales Product$40,904 $43,169 $(2,265) (5)%Service100,603 104,640 (4,037) (4)%Net sales$141,507 $147,809 $(6,302) (4)% Inertial navigation sales Product$32,171 $33,044 $(873) (3)%Service2,444 3,781 (1,337) (35)%Net sales$34,615 $36,825 $(2,210) (6)%39Table of ContentsOperating earnings (loss) by segment for 2016 and 2015 were as follows: Change For the year ended December 31, 2016 vs. 2015 2016 2015 $ % (dollars in thousands)Mobile connectivity$10,041 $9,459 $582 6 %Inertial navigation5,272 7,934 (2,662) (34)% $15,313 $17,393 $(2,080) (12)%Unallocated(16,635) (14,185) (2,450) 17 %Operating (loss) earnings$(1,322) $3,208 $(4,530) (141)%Mobile Connectivity SegmentNet sales in the mobile connectivity segment decreased approximately $6.3 million, or 4%, in 2016 as compared to 2015. Mobile connectivityproduct sales decreased by $2.3 million, or 5%, to $40.9 million in 2016 from $43.2 million in 2015. The decrease was primarily due to a $2.6 million, or21%, decrease in European mini-VSAT product sales due to a slowdown in the European maritime markets and a $0.3 million, or 1%, decrease in our USmarine mobile connectivity product sales, partially offset by a $0.6 million increase in sales of our land mobile connectivity products. Mobile connectivityservice sales decreased by $4.0 million, or 4%, to $100.6 million in 2016 from $104.6 million in 2015. The decrease was primarily due to a $3.6 milliondecrease in our content and training service revenue, which resulted primarily from exchange rate weakness arising from content and training service salesrecorded in pounds sterling, and a $0.7 million decrease in Inmarsat service sales due to a 14% decrease in Inmarsat airtime customers. Partially offsettingthese decreases was a $0.3 million increase in mini-VSAT service sales driven by an increase in the number of installed mini-VSAT units, as well as anincrease in number of service offerings.We expect that our mini-VSAT service sales will continue to grow year-over-year, primarily through the continued expansion of our mini-VSATBroadband customer base, and due to a new product offering, subscription service model, which would allow customers the option to receive mini-VSATBroadband airtime and hardware for a single monthly charge. Additionally, the continued recovery of the oil and gas market is expected to benefit productand airtime service revenues in 2017. We also expect to see value-added service sales such as IP-MobileCast, which had significant growth in 2016, toincrease in 2017 as we continue to sell to both new and existing customers. We expect that mini-VSAT product sales may decline if customers select the newsubscription service model.Operating earnings for the mobile connectivity segment increased approximately $0.6 million, or 6%, in 2016 as compared to 2015. This change wasprincipally due to a decrease in operating costs related to the centralization of certain administrative functions in the UK, a decrease in the exchange rate ofthe pounds sterling and airtime cost savings initiatives. The increase in operating expenses was partially offset by the decrease in product and service sales.We expect our overall mobile connectivity operating earnings to show modest growth in 2017 through market expansion and as existing customersexpand their mini-VSAT Broadband usage and as customers take advantage of the new subscription service option. We also anticipate that we will improveour service margins to the extent that customers adopt our mini-VSAT Broadband rate plans that provide customers with faster speeds with data caps.Additionally, we intend to seek to improve margins by lowering costs through increased network volume and lower-cost network capacity.Inertial Navigation SegmentNet sales in the inertial navigation segment decreased approximately $2.2 million, or 6%, in 2016 as compared to 2015. Inertial navigation productsales decreased $0.9 million, or 3%, to $32.2 million in 2016 from $33.1 million in 2015.Specifically, sales of our FOG products decreased $1.2 million, or 7%, partially offset by a $0.3 million, or 2%, increase in TACNAV sales. TACNAV salesincreased due to large but anticipated orders that were in our backlog. FOG product sales decreased due to a decrease in sales of our single and dual axis FOGunits, partially offset by increased sales of our IMU FOG units. Inertial navigation service sales decreased $1.4 million, or 35%, to $2.4 million in 2016 from$3.8 million for 2015. The primary reason for the decrease was a $1.6 million, or 53%, decrease in contracted engineering services due to a prior year40Table of Contentsproject which was completed during the first half of 2016. This decrease was partially offset by a $0.3 million increase in inertial navigation repair revenue.We expect that TACNAV product sales will continue to see growth in 2017 compared with 2016; however, it is challenging to forecast the specifictiming that orders will be received and delivered to the customer. Our current forecast is based on our expectation that these sales will be weighted towardsthe second half of 2017, and we anticipate that product sales on a quarter-to-quarter basis may be very uneven. Additionally, we expect to see modest growthin our FOG products in 2017 as these products are incorporated into additional commercial applications and programs. We also expect to see modest growthin contracted engineering services year-over-year.Operating earnings for the inertial navigation segment decreased approximately $2.7 million, or approximately 34%, in 2016 as compared to 2015.This decrease is primarily due to the $2.2 million decrease in product and service sales and a $0.6 million decrease in sales representative commissions due tothese lower sales. Partially offsetting this decrease is a slight increase in costs of product sales as a percentage of product sales.We expect our overall inertial navigation operating earnings to decline in 2017 due to lower contracted engineering service revenue, which oftengenerates higher margins than other inertial navigation revenue. Similar to inertial navigation net sales noted above, operating earnings are expected to beuneven during 2017 as a result of the specific timing of orders.UnallocatedCertain corporate-level costs have not been allocated because they are not attributable to either segment. These costs primarily consist of broadcorporate functions, including executive, legal, finance, information technology, and costs associated with corporate actions.Unallocated operating loss was approximately $16.6 million and $14.2 million for 2016 and 2015, respectively. The increase in the operating loss wasprimarily the result of a $1.4 million increase in salary and benefits due to an increase in corporate headcount partially offset by a decrease in executivebonuses, a $0.5 million increase in outside consulting that includes accounting and legal fees, and a $0.5 million increase in computer maintenance fees dueto new internal analytical software subscription and support.Years ended December 31, 2015 and 2014Net SalesAs discussed further under the heading, "Segment Discussion" below, product sales decreased $4.9 million, or 6%, to $76.2 million in 2015 from $81.1million in 2014, a decrease in inertial navigation product sales of $5.2 million, which was partially offset by an increase in mobile connectivity product salesof $0.3 million. Service sales for 2015 increased $17.0 million to $108.4 million from $91.4 million for 2014, due to an increase in mobile connectivityservice sales of $17.7 million, which was partially offset by a decrease in inertial navigation service sales of $0.7 million.Costs of SalesCosts of sales increased in 2015 to $102.2 million, from $99.1 million in 2014 primarily due to an increase in costs of service sales. As a percentage ofnet sales, costs of sales were 55% and 57% for 2015 and 2014, respectively.For 2015, costs of product sales decreased by $1.4 million, or 3%, to $47.4 million from $48.8 million in 2014. Inertial navigation costs of productsales decreased by $2.2 million, or 12%, primarily due to a $2.9 million decrease in our TACNAV costs of product sales as a result of lower sales, which waspartially offset by a $0.7 million increase in our FOG costs of product sales due to slightly higher sales. Inertial navigation costs of product sales as apercentage of inertial navigation product sales were 49% and 48% for 2015 and 2014, respectively. Mobile connectivity costs of product sales increased by$0.8 million, or 2%, primarily due to a $0.5 million increase in our marine mobile connectivity costs of product sales and $0.3 million increase in our landmobile costs of product sales. Mobile connectivity costs of product sales as a percentage of mobile connectivity product sales were 72% and 71% for 2015and 2014, respectively. For 2015, costs of service sales increased by $4.5 million, or 9%, to $54.8 million in 2015 from $50.3 million in 2014.Mobile connectivity costs of service sales increased by $5.6 million, primarily due to a $2.6 million increase in new e-Learning maritime safety media costsof service sales resulting from the Videotel acquisition in July 2014, a $2.4 million increase in airtime cost of service sales for our mini-VSAT Broadbandservice, and $0.4 million increase in costs of service sales for our41Table of Contentsother media and entertainment services. These increases were partially offset by a $0.3 million decrease in Inmarsat costs of service. Mobile connectivitycosts of service sales as a percentage of mobile connectivity service sales were 51% and 55% for 2015 and 2014, respectively. Inertial navigation costs ofservice sales decreased by $1.1 million, due to a reduction in contract engineering services in connection with the SANG contract as discussed below in theinertial navigation segment discussion. Inertial navigation costs of service sales as a percentage of inertial navigation service sales were 41% and 60% for2015 and 2014, respectively.Operating ExpensesResearch and development expense for 2015 decreased by $0.1 million, or 1%, to $14.0 million from $14.1 million in 2014. The primary reasons forthe decrease in expense in 2015 were a $0.7 million decrease in external engineering expenses and a $0.6 million decrease in material costs related to 2014development efforts for our marine TV product line, partially offset by a $1.1 million increase in U.S.-based employee compensation for research anddevelopment personnel due to an increase in headcount. As a percentage of net sales, research and development expense was 8% in both 2015 and 2014.Sales, marketing and support expense for 2015 increased by $2.7 million, or 8%, to $35.7 million from $33.0 million for 2014. The primary reasons forthe increase in 2015 were a $2.6 million increase in sales, marketing, and support expense related to our new Videotel business acquired on July 1, 2014, a$0.7 million increase from our KVH Media business due to increased growth, and a $0.4 million increase in U.S.-based employee compensation due toincrease in headcount to support increased sales activities. Offsetting this increase was a $1.2 million decrease in external commissions due to the decrease inproduct sales. As a percentage of net sales, sales, marketing and support expense was 19% for both 2015 and 2014.General and administrative expense for 2015 increased by $5.1 million, or 21%, to $29.5 million from $24.4 million for 2014. The primary reasons forthe increase in 2015 expense were a $5.4 million increase in expense from our new Videotel business, a $0.6 million increase in U.S.-based employeecompensation, and a $0.6 million increase in outside consulting and audit-related fees. Partially offsetting this increase was a $1.2 million decrease inVideotel transaction-related expenses incurred in connection with the acquisition in 2014. As a percentage of net sales, general and administrative expensefor 2015 was 16% as compared to 14% for 2014.Interest and Other Expense (Income), NetInterest income decreased $0.2 million, or 29%, to $0.5 million for 2015 from $0.7 million for 2014 and relates to interest earnings on our cash andcash equivalents, as well as investments. Interest expense for 2015 increased by $0.2 million, or 15%, to $1.5 million from $1.3 million for 2014 due to theincrease in outstanding debt obligations principally driven by the additional borrowings under our senior credit facility executed in July 2014 to finance thepurchase of Videotel in July 2014. Other income, net for 2015 increased by $0.4 million to other income, net of $0.4 million from other expense, net of lessthan $0.1 million for 2014. The primary reason for the increase in other income, net was foreign currency exchange gains primarily associated with our UKand Hong Kong operationsIncome Tax Expense Income tax expense for 2015 was $0.4 million as compared to income tax expense of $1.3 million for 2014. The decrease in income tax expense isprimarily due to discrete tax benefits in 2015, partially offset by a $1.4 million increase in pretax income. The effective income tax rate ofapproximately 16% for 2015 differs from the United States federal statutory rate of 35% principally as a result of the impact of foreign tax rates, research anddevelopment tax credits and reduction in uncertain tax positions as a result of settlements with taxing authorities partially offset by changes in the valuationallowance against our deferred tax assets. The effective income tax rate of approximately 96.9% for 2014 differs from the United States federal statutory rateof 35% principally as a result of changes in the valuation allowance against our deferred tax assets partially offset by the impact of foreign tax rates andresearch and development tax credits.42Table of ContentsSegment Discussion - Years ended December 31, 2015 and 2014Our net sales by segment for 2015 and 2014 were as follows: Change For the year endedDecember 31, 2015 vs. 2014 2015 2014 $ % (dollars in thousands)Mobile connectivity sales Product$43,169 $42,885 $284 1 %Service104,641 86,934 17,707 20 %Net sales$147,810 $129,819 $17,991 14 % Inertial navigation sales Product$33,044 $38,258 $(5,214) (14)%Service3,781 4,514 (733) (16)%Net sales$36,825 $42,772 $(5,947) (14)% Operating earnings (loss) by segment for 2015 and 2014 were as follows: Change For the year endedDecember 31, 2015 vs. 2014 2015 2014 $ % (dollars in thousands)Mobile connectivity$9,459 $5,056 $4,403 87 %Inertial navigation$7,934 $10,431 (2,497) (24)% $17,393 $15,487 $1,906 12 %Unallocated(14,185) (13,565) (620) 5 %Operating earnings3,208 1,922 $1,286 67 %Mobile Connectivity SegmentNet sales in the mobile connectivity segment increased $18.0 million, or 14%, in 2015 as compared to 2014. Mobile connectivity product salesincreased $0.3 million, or 1%, to $43.2 million in 2015 from $42.9 million in 2014. The increase was primarily due to increases in sales of our marine mobileconnectivity products of $0.4 million, or 1%, and sales of our land mobile connectivity products of $0.4 million, or 11%, partially offset by a $0.5 million, or3%, decrease in shipments of our TracPhone mini-VSAT products. Mobile connectivity service sales increased $17.7 million, or 20%, to $104.6 million in2015 from $86.9 million in 2014. The primary reasons for the increase were a $12.8 million increase in new service e-Learning and maritime safety trainingsales and a $4.0 million increase in airtime sales for our mini-VSAT Broadband service due to an increase in the installed customer base.Operating earnings for the mobile connectivity segment increased approximately $4.4 million, or 87%, in 2015 as compared to 2014 primarily due tothe increase in the new e-Learning and maritime safety training sales arising from our acquisition of Videotel in July 2014.43Table of ContentsInertial Navigation SegmentNet sales in the inertial navigation segment decreased approximately $5.9 million, or 14%, in 2015 as compared to 2014. Inertial navigation productsales decreased $5.2 million, or 14%, to $33.0 million in 2015 from $38.3 million in 2014. Specifically, sales of our TACNAV products decreased $3.6million, or 20%, primarily as a result of the timing of our customer contracts. Also contributing to the overall decrease was a decrease in sales of our FOGproducts of $1.5 million, or 8%, primarily a result of decreased shipments for commercial applications. Inertial navigation service sales decreased $0.7million, or 16%, to $3.8 million in 2015 from $4.5 million for 2014, primarily due to a decrease in contracted engineering services driven by a decrease ininstallation and program management services provided in connection with the SANG contract.Operating earnings for the inertial navigation segment decreased approximately $2.5 million, or 24%, in 2015 as compared to 2014. This decrease isprimarily due to the $5.9 million decrease in product and service sales coupled with a slight increase in cost of product sales as a percentage of product saleswhich were partially offset by a decrease in sales commissions of $0.7 million due to the lower sales.UnallocatedUnallocated operating loss was approximately $14.2 million and $13.6 million for 2015 and 2014, respectively. The increase in the operating loss wasprimarily the result of a $0.6 million increase in employee compensation including bonus, employee profit share and wages.Critical Accounting Policies and Significant EstimatesThe discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financialstatements. Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. The significant accounting policies thatwe believe are the most critical in understanding and evaluating our reported financial results include the following:Revenue RecognitionProduct sales. Product sales are recognized when persuasive evidence of an arrangement exists, goods are shipped, title has passed, and collectabilityis reasonably assured. Our standard sales terms require that:•All sales are final;•Terms are generally Net 30;•Shipments are tendered and shipped FOB (or as may be applicable, FCA or EXW) our plant or warehouse; and•Title and risk of loss or damage passes to the dealer or distributor at the point of shipment when delivery is made to the possession of the carrier.For certain inertial navigation product sales, customer acceptance or inspection may be required before title and risk of loss transfers to the customer.For those sales, revenue is recognized after transfer of title and risk of loss and after notification of customer acceptance. In certain circumstances customersmay request a bill and hold arrangement. Under these bill and hold arrangements, revenue is recognized when we have fulfilled all of our performanceobligations, the units are segregated and available for shipment in accordance with the defined contract delivery schedule, and we have received notificationof customer acceptance which transfers title and risk of loss to the customer.Under certain limited conditions, we, at our sole discretion, provide for the return of goods. No product is accepted for return and no credit is allowedon any returned product unless we have granted and confirmed prior written permission by means of appropriate authorization. We establish reserves forpotential sales returns, credits and allowances, and evaluate, on a monthly basis, the adequacy of those reserves based upon historical experience and ourexpectations for the future.44Table of ContentsMultiple-element revenue arrangements. Some of our sales involve multiple-element arrangements that include both hardware-related products andcontracted service, or satellite connectivity. We analyze revenue arrangements with multiple deliverables to determine if the deliverables should be dividedinto more than one unit of accounting. For contracts with more than one unit of accounting, we allocate the consideration we receive among the separateunits of accounting based on a selling price hierarchy for determining the selling price of each deliverable, which includes: (1) vendor-specific objectiveevidence (VSOE) if available; (2) third-party evidence (TPE) if VSOE is not available; and (3) best estimated selling price (BESP), if neither VSOE nor TPE isavailable. Best estimate selling price is determined based on prices of the deliverables if sold on a stand-alone basis, or if not sold on a stand-alone basis, theprices we would charge if sold on a stand-alone basis. We recognize revenue for each deliverable based on the revenue recognition policies described in thissection.We accounted for our $35.6 million contract received in June 2012 from SANG to purchase TACNAV defense products and services as a multiple-element arrangement. The total contract value associated with TACNAV defense products was $21.2 million, for which the final shipments were completed inthe second quarter of 2013. The total contract value associated with all services was $14.4 million, and such services were completed in the third quarter of2014. In October 2014, we entered into a $19.0 million TACNAV product and services contract with an international military customer. This contractincludes program management and engineering services expected to be delivered through 2017 and hardware shipments that were fulfilled in 2015 and 2016,and out-year support services. The revenue for these services is recognized using the proportional performance accounting method. Total revenue recognizedin 2016, 2015, and 2014 related to this order was $7.6 million, $9.6 million, and $1.1 million, respectively.Contracted service sales. We also engage in contracts for development, production and services activities related to standard product modification orenhancement, which we account for using the proportional performance method of revenue recognition. The use of contract accounting requires significantjudgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the contract, the natureand complexity of the work to be performed, and prices for subcontractor services and materials. Our estimates are based upon the professional knowledgeand experience of our engineers, program managers and other personnel, who review each long-term contract monthly to assess the contract's schedule,performance, technical matters, and estimated cost at completion. A cancellation, schedule delay, or modification of a fixed-price contract which is accountedfor using the proportional performance method may adversely affect our gross margins for the period in which the contract is modified. Changes in estimatesare applied when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earnings applicable toperformance in prior periods.Satellite connectivity and media content sales. Directly sold and re-sold satellite connectivity service for voice, data and Internet is recognizedmonthly based upon minutes or megabytes of traffic processed or contracted fixed fee schedules. Typically, all subscribers enter into a contracted one-yearminimum service agreement. We have evaluated the factors within ASC 605 regarding gross versus net revenue reporting for its satellite connectivity servicesales and our payments to the applicable service providers. Based on the evaluation of the factors within ASC 605, we have determined that the applicableindicators of gross revenue reporting were met. The applicable indicators of gross revenue reporting included, but were not limited to, the following:•We are the primary obligor in its arrangements with its subscribers. We manage all interactions with the subscribers, while satellite connectivityservice providers do not interact with the subscribers. In addition, we assume the entire performance risk under its arrangements with the subscribersand in the event of a performance issue, we may incur reduction in fees without regard for any recourse that we may have with the applicable satelliteconnective service providers.•We have latitude in establishing pricing, as the pricing under its arrangements with the subscribers is negotiated through a contracting process andhas discretion on establishing pricing. We then separately negotiated the fees with the applicable satellite service providers.•We have had complete discretion in determining which satellite service providers it will contract with.As a result, we have determined that we earn revenue (as a principal) from the delivery of satellite connectivity services to its subscribers and record allsatellite connectivity service sales to subscribers as gross sales. All associated regulatory service fees and costs are recorded net in our consolidated financialstatements. Media content sales include our distribution of commercially licensed news, sports, movies and music content for commercial and leisurecustomers in the maritime, hotel, and retail markets as well as training videos to the merchant marine market that are typically based on a contracted fixed feeschedule. We typically recognize revenue from media content sales ratably over the period of the service contract. The accounting estimates related to therecognition of satellite connectivity and media content service sales in our results of operations require us to make assumptions about future billingadjustments for disputes with subscribers as well as unauthorized usage.45Table of ContentsAccounts Receivable AllowanceOur estimate of allowance for doubtful accounts related to trade receivables is primarily based on specific and historical criteria. We evaluate specificaccounts where we have information that the customer may have an inability to meet its financial obligations. We make judgments, based on facts andcircumstances, regarding the need to record a specific reserve for that customer against amounts owed to reduce the receivable to the amount that we expectto collect. We also provide for a reserve based on an aging analysis of our accounts receivable. We evaluate these reserves on a monthly basis and adjust themas we receive additional information that impacts the amount reserved. If circumstances change, we could change our estimates of the recoverability ofamounts owed to us by a material amount. Our bad debt expense decreased by $0.5 million in 2016 from 2015, driven by improved collections efforts.We wrote off $0.9 million, $0.5 million, and $0.6 million of our accounts receivable in 2016, 2015, and 2014, respectively. These write-offs weredriven largely by the financial deterioration of several airtime and lease customers as well as several mobile connectivity product distributors. The currenteconomic downturn could continue to adversely impact the financial condition of our customers, which could result in additional write-offs and increases inour allowance for doubtful accounts and have a negative impact on our results of operations.InventoriesInventory is valued at the lower of cost or market. We generally must order components for our products and build inventory in advance of productshipments. We regularly review current quantities on hand, actual and projected sales volumes and anticipated selling prices on products and write down, asappropriate, slow-moving and/or obsolete inventory to its net realizable value. In 2016, 2015, and 2014, we wrote off $0.2 million, $0.3 million, and $0.2million of inventory, respectively, that were previously deemed excess or obsolete inventory and whose carrying values had previously been reduced to zero.However, if we overestimate projected sales or anticipated selling prices, our inventory might be overstocked or overvalued, and we would have to reduce ourinventory valuation accordingly.Accounting for Income TaxesAs part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions inwhich we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessingtemporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets andliabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce thedeferred tax assets to an amount that, in our judgment, is more likely than not to be recovered.Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowancerecorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect thedeferred tax assets to be recovered. Our assessment of future taxable income is based on historical experience and current and anticipated market andeconomic conditions and trends. In the event that actual results differ from these estimates or we adjust our estimates in the future, we may need to adjust ourvaluation allowance, which could materially impact our consolidated financial position and results of operations. As a result of negative evidence,principally three years of cumulative pre-tax operating losses as of December 31, 2016, we concluded that it was more likely than not that certain of ourdeferred tax assets were not realizable and therefore, recorded a full valuation allowance of $6.8 million against these deferred tax assets as of December 31,2016. At December 31, 2016, we had valuation allowances of $11.6 million to offset gross deferred tax assets of $13.7 million.Warranty ProvisionWe typically offer standard limited warranties that range from one to two years and vary by product. We provide for the estimated cost of productwarranties at the time product revenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated ratesof warranty repairs and the cost per repair. While we engage in extensive product quality programs and processes, including actively monitoring andevaluating the quality of our component suppliers, our estimated warranty obligation is affected by ongoing product failure rates, specific product classfailures outside our baseline experience, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates,material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. For example, our warrantyexpense increased $0.3 million in 2016 from 2015, driven primarily by a change in our standard warranty from two years for parts and one year for labor totwo years for both parts and labor associated with our mobile connectivity products.46Table of ContentsAssumptions and historical warranty experience are evaluated to determine the appropriateness of such assumptions. We assess the adequacy of thewarranty provision on a quarterly basis and we adjust this provision when necessary.Stock-Based CompensationOur stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisiteservice period, which is generally the vesting period.We use the Black-Scholes valuation model for estimating the fair value on the date of grant of compensatory stock options. Determining the fair valueof stock option awards at the grant date requires judgment regarding certain valuation assumptions, including the volatility of our stock price, expected termof the option, risk-free interest rate and expected dividends. Changes in these assumptions and estimates could result in different fair values and couldtherefore impact our earnings. These changes would not impact our cash flows. The fair value of restricted stock awards is based upon our stock price on thegrant date.The amount of stock-based compensation expense recorded in any period for unvested awards requires estimates of the amount of stock-based awardsthat are expected to be forfeited prior to vesting. As of January 1, 2017, we adopted ASC Update No. 2016-09, Compensation-Stock Compensation (Topic718): Improvements to Employee Share-Based Payment Accounting. As a result of this adoption, commencing on January 1, 2017 prospectively, we haveelected to account for forfeitures as they occur which could result in a significant reversal of previously recognized stock-based compensation expense.Compensation costs for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite serviceperiod for the entire award. We have no awards that are subject to performance or market conditions as of December 31, 2016.Goodwill, Intangible Assets, and other Long-Lived AssetsGoodwill is tested at least annually for impairment. If an event occurs or circumstances change that indicate that the carrying value may not berecoverable, we will perform an interim test at that time. The impairment test begins by allocating goodwill to its reporting unit. Goodwill is then tested usinga two-step process that begins with an estimation of the fair value of the reporting unit using an income approach, which looks to the present value ofexpected future cash flows. The impairment test is performed through the application of a two-step process. The first step is a screen for potential impairmentby comparing the carrying value of our reporting units to their estimated fair values as of the test date. The estimated cash flows are calculated using anincome approach. If fair value is less than carrying value, a second step is performed to quantify the amount of the impairment, if any. Considerable judgmentis required to estimate discounted future operating cash flows. Judgment is also required in determining whether an event has occurred that may impair thevalue of goodwill or identifiable intangible or other long-lived assets. Factors that could indicate an impairment may exist include significantunderperformance relative to plan or long-term projections, changes in business strategy, significant negative industry or economic trends, a significantchange in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a decline in our market capitalizationto below net book value. We must make assumptions about future cash flows, future operating plans, discount rates and other factors in our models andvaluation reports. To the extent these future projections and estimates change, the estimated amounts of impairment could differ from current estimates. Ourannual testing for impairment of goodwill is completed as of August 31 of each year.To date, we have not had to complete the second step of the goodwill impairment test. As of August 31, 2016, we performed our annual impairmenttest for goodwill at the reporting unit level, and after conducting the first step, it was determined that no goodwill impairment existed as the fair value of ourreporting units exceeded their carrying value. We utilized both an income approach and market approaches to estimate the fair value of our reporting units.We believe that our assumptions used to estimate the fair value of our reporting units were reasonable. As an additional corroborative test of thereasonableness of those assumptions, we completed a reconciliation of our market capitalization and overall enterprise value to the fair value of all of ourreporting units as of August 31, 2016. If different assumptions were used, particularly with respect to estimating future cash flows, weighted average costs ofcapital, and terminal growth rates, different estimates of fair value may have resulted. However, based on the excess of fair value over carrying value andadditional sensitivity analysis considered with respect to our valuation assumptions, we concluded it was more-likely-than-not that no goodwill impairmentexists. As of August 31, 2016, the Company notes that the fair value of all of the Company’s reporting units exceeded their carrying values by more than10%. We noted that the one reporting unit where the fair value exceeded the carrying value by less than 100% had goodwill of approximately $4.4 million atboth August 31, 2016 and December 31, 2016. A negative trend of operating results or material changes to forecasted operating results could result in therequirement for additional interim goodwill impairment tests and the potential of a future goodwill impairment charge, which could be material. We did notidentify any impairment indicators that required an interim goodwill impairment test as of December 31, 2016.47Table of ContentsIntangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured bycomparing the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If these comparisons indicate that anasset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset 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 the fourth quarter of 2016, we commenced certain facility and other operational improvements. As a result, we completed a review ofimpairment of other long-lived assets for the associated asset groups and a review of the estimated remaining useful lives under ASC 360-10, Impairment andDisposal of Long-Lived Assets, ("ASC 360-10"). Based on the impairment analysis under ASC 360-10, no impairment was noted. We did identify certainchanges in the remaining estimated useful lives of certain property and equipment and certain components of internally-developed software acquired in ouracquisition of Videotel. The impact of these changes in estimated useful lives resulted in approximately $0.4 million and $0.2 million of additionaldepreciation and amortization expense, respectively, in the fourth quarter of 2016. We noted that these changes in estimated useful lives are not expected tohave a material impact to our future results from operations.ContingenciesWe are subject to ongoing business risks arising in the ordinary course of business. See Item 3. Legal Proceedings, for more information regardinglitigation matters. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and theamount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such amounts should be adjusted andrecord changes in estimates in the period they become known. We reserve for legal contingencies and legal fees when the amounts are probable andreasonably estimable. During 2016, we had settled a legal claim for a cash payment by us. The cash payment was included in accrued other in ourconsolidated balance sheet at December 31, 2015. The cash payment was made in January 2016.Liquidity and Capital ResourcesOur primary liquidity needs are to fund general business requirements, including working capital requirements, capital expenditures, interestpayments, and debt repayments. In recent years, we have funded our operations primarily from cash flows from operations, bank financings, and proceedsreceived from exercises of stock options.We believe that our cash and cash equivalents as of December 31, 2016, our estimated cash flows from operations, and borrowings available under ourcredit agreement will be sufficient to fund our operations, anticipated capital expenditures, and debt repayment obligations through at least the next twelvemonths based on our current operating plans.We believe that our primary long-term capital requirements relate to servicing and repaying our indebtedness and our satellite service capacity andequipment lease obligations. At December 31, 2016, we had outstanding debt obligations with a principal balance of $58.1 million and had outstanding non-cancellable satellite service capacity and other lease obligations with future minimum payments of $29.3 million.Our ability to make payments on our indebtedness and satellite service capacity and equipment lease obligations, as well as our ability to fundplanned capital expenditures, will depend on our ability to generate cash in the future. Our ability to generate cash in the future will be dependent upon,among other things, the performance of our operating segments and general economic, financial, competitive, legislative, regulatory and other factors that arebeyond our control.As of December 31, 2016, we had $52.1 million in cash, cash equivalents, and marketable securities, of which $12.5 million in cash equivalents wereheld in local currencies by our foreign subsidiaries. There were no marketable securities held by our foreign subsidiaries as of December 31, 2016. As ofDecember 31, 2016, we had $69.2 million in working capital.Operating ActivitiesNet cash provided by operations for 2016 was $18.7 million as compared to net cash provided by operations of $8.4 million for 2015. The $10.3million increase is primarily due to a $16.5 million increase in cash inflows related to accounts receivable, a $4.6 million decrease in cash outflows related toinventory, a $3.5 million net increase in non-cash items, a $3.1 million increase in cash inflows related to deferred revenue, a $2.6 million decrease in cashoutflows related to accounts payable, and a $1.2 million decrease in cash outflows related to prepaid expenses and other assets. Partially offsetting theincrease in cash inflows were a $9.8 million shift from net income to net loss, a $6.7 million increase in cash outflows related to accrued expenses, a $3.9million increase in cash outflows related to other non-current assets, and a $0.8 million increase in cash outflows related to other long term liabilities.48Table of ContentsNet cash provided by operations for 2015 was $8.4 million as compared to $10.4 million for 2014. The $2.0 million decrease is primarily due to a $5.1million increase in cash outflows related to accounts payable, a $4.6 million increase in cash outflows related to inventory, a $3.3 million decrease in cashinflows related to deferred revenue, and a $2.7 million increase in cash outflows related to prepaid expenses and other current assets. Partially offsetting theincrease in cash outflows were a $4.2 million net increase in non-cash items, a $4.0 million decrease in cash outflows related to accrued expenses, a $2.4million increase in cash inflows related to accounts receivable, a $2.2 million increase in net income and a $1.0 million decrease in cash outflows related toother non-current assets.Investing ActivitiesNet cash used in investing activities for 2016 was $8.7 million as compared to net cash used in investing activities of $3.8 million for 2015. The $4.9million increase in cash used in investing activities was principally driven by an increase in available-for-sale marketable securities purchases of $1.9 millionand a decrease in available-for-sale marketable securities maturities or sales of $3.1 million, resulting in an overall increase in available-for-sale marketablesecurities held as of December 31, 2016. The net cash used in investing activities of $8.7 million for 2016 was principally comprised of $5.6 million ofcapital expenditures and a net increase in available-for-sale marketable securities held of $3.1 million. We expect capital expenditures to increase for 2017 asa result of certain of our key strategic initiatives with capital expenditures expected to be in the range of $15.0 million to $20.0 million in 2017.Net cash used in investing activities for 2015 was $3.8 million as compared to net cash used in investing activities of $26.7 million for 2014. The$22.9 million decrease in cash outflows is primarily due to the net cash paid for the acquisition of Videotel of $43.5 million in 2014, which was partiallyoffset by a $20.0 million decrease in cash outflows related to our net investment in marketable securities in 2015. The net cash used in investing activities of$3.8 million for 2015 was principally comprised of $5.7 million of cash used for capital expenditures and a net decrease in available-for-sale securities heldof $1.9 million.Financing ActivitiesNet cash used in financing activities for 2016 was $4.4 million as compared to $6.3 million for 2015. Net cash used in financing activities primarilyconsists of repayments of our term loan we undertook in connection with the acquisition of Videotel in July 2014 and other long-term debt as well as thepayment of employee withholdings on stock-based awards. Proceeds from stock purchases under our equity incentive plans increased by $2.2 million from2015 to 2016.Net cash used in financing activities for 2015 was $6.3 million as compared to net cash provided by financing activities of $32.7 million for 2014. The$39.0 million decrease in cash provided by financing activities is primarily due to the fact that, in 2014, we received proceeds from borrowings on a termnote, net of payments, in the amount of $63.8 million in 2014. These proceeds were offset in 2014 by a $30.0 million repayment of borrowings under a line ofcredit in connection with the debt restructuring we undertook in connection with the acquisition of Videotel. The decrease in cash provided by financingactivities also resulted from a $3.7 million increase in repayments of term note borrowings and a $0.2 million decrease in proceeds from exercises of stockoptions and purchases under our employee stock purchase plan.Borrowing ArrangementsPrincipal Credit FacilityAs of December 31, 2016, there was $53.6 million in aggregate principal amount outstanding under our principal credit facility. On July 1, 2014, weentered into a five-year senior credit agreement with Bank of America, N.A., as administrative agent, and the lenders named from time to time as partiesthereto, for an aggregate amount of up to $80.0 million, including a revolving credit facility of up to $15.0 million and a term loan of $65.0 million to beused for general corporate purposes, including both the refinancing of the $30.0 million of indebtedness then outstanding under our former credit facility andpermitted acquisitions. We also entered into a security agreement with respect to our grant of a security interest in substantially all of our assets in order tosecure our obligations under the credit agreement and the related notes and pledge agreements with respect to our grant of a security interest in 65% of thecapital stock of each of KVH Industries A/S and KVH Industries U.K. Limited held by us in order to secure our obligations under the credit agreement and thenotes. We amended the credit agreement in June 2015 to modify the circumstances under which certain changes in our Board of Directors would constitute achange of control. We further amended the credit agreement in September 2015 to modify the Maximum Consolidated Leverage Ratio as of September 30,2015, as described below. In addition, we amended the credit agreement again in March 2017 to further modify the Maximum Consolidated Leverage Ratio,to amend the Applicable Rate and amortization schedule of the term loan and to modify the definition of Consolidated Fixed Charges, as well as makecertain other changes, as described below.49Table of ContentsWe executed $65.0 million in term notes on July 1, 2014 in connection with our acquisition of Videotel. We applied proceeds in the amount of $35.0million toward the payment of a portion of the purchase price for Videotel, and we applied proceeds in the amount of $30.0 million toward the refinancing ofthe then-outstanding balance under our former credit facility. We were required to make principal repayments on the term loan in the amount ofapproximately $1.2 million at the end of each of the first eight three-month periods following the closing; thereafter, were required to make principalrepayments in the amount of approximately $1.6 million for each succeeding three-month period until the maturity of the loan on July 1, 2019. We had madeall required principal repayments on a timely basis. In connection with the amendment to the credit agreement entered into in March 2017, we made aprincipal repayment of $6.0 million on the term loan and amended the repayment terms. Under the amended terms, we must make principal repayments of$575,000 every three months starting on April 1, 2017 until the maturity of the loan on July 1, 2019. On the maturity date, the entire remaining principalbalance of the loan, including any future loans under the revolver, is due and payable, together with all accrued and unpaid interest, penalties and otheramounts due and payable under the credit agreement. The credit agreement contains provisions requiring the mandatory prepayment of amounts outstandingunder the term loan and the revolver under specified circumstances, including (i) 100% of the net cash proceeds from certain dispositions to the extent notreinvested 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 fromcertain receipts of more than $250,000 outside the ordinary course of business. The prepayments are first applied to the term loan, in inverse order ofmaturity, and then to the revolver. In the discretion of the administrative agent, certain mandatory prepayments made on the revolver can permanently reducethe amount of credit available under the revolver.Loans under the credit agreement bear interest at varying rates determined in accordance with the credit agreement. Each LIBOR Rate Loan, as definedin the credit agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at a rate perannum equal to the LIBOR Daily Floating Rate or LIBOR Monthly Floating Rate, each as defined in the credit agreement, as applicable, plus the ApplicableRate, as defined in the credit agreement, and each Base Rate Loan, as defined in the credit agreement, bears interest on the outstanding principal amountthereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the credit agreement, plus the Applicable Rate. TheApplicable Rate ranges from 1.75% to 2.25%, depending on our Consolidated Leverage Ratio, as defined in the credit agreement. The highest ApplicableRate applies when the Consolidated Leverage Ratio exceeds 1.50:1.00. Upon certain defaults, including failure to make payments when due, interestbecomes payable at a higher default rate.Borrowings under the revolver are subject to the satisfaction of numerous conditions precedent at the time of each borrowing, including the continuedaccuracy of our representations and warranties and the absence of any default under the credit agreement. As of December 31, 2016, there were no borrowingsoutstanding under the revolver.The credit agreement contains two financial covenants, a Maximum Consolidated Leverage Ratio and a Minimum Consolidated Fixed ChargeCoverage Ratio, each as defined in the credit agreement. In September 2015, the Maximum Consolidated Leverage Ratio was increased from 1.00:1.00 to1.75:1.00 for September 30, 2015, 1.50:1.00 for December 31, 2015, and 1.25:1.00 for March 31, 2016 and each fiscal quarter thereafter. The MinimumConsolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00. We were in compliance with these financial ratio debt covenants as ofDecember 31, 2016. As a result of the March 2017 amendment, the Maximum Consolidated Leverage Ratio was increased to 1.50:1.00. In addition, thedefinition of the Consolidated Fixed Charge Coverage Ratio was amended to include only maintenance capital expenditures as defined. We expect to be incompliance with the amended financial covenants for the foreseeable future.The credit agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the payment oftaxes and other obligations, compliance with laws, entry into 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 andleaseback arrangements.Our obligation to repay loans under the credit agreement could be accelerated upon a default or event of default under the terms of the creditagreement, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to comply with ouraffirmative and negative covenants under the credit agreement, a change of control, certain defaults in payment relating to other indebtedness, theacceleration of payment of certain other indebtedness, certain events relating to our liquidation, dissolution, bankruptcy, insolvency or receivership, theentry of certain judgments against us, certain events relating to the impairment of collateral or the lenders’ security interest therein, and any other materialadverse change with respect to us.Mortgage LoanOn April 6, 2009, we entered into a mortgage loan in the amount of $4.0 million related to our headquarters facility in Middletown, Rhode Island. OnJune 9, 2011, we entered into an amendment to the mortgage loan. The loan term is ten years, with a principal amortization of 20 years, and the interest ratewill be a rate per year adjusted periodically based on a defined50Table of Contentsinterest period equal to the BBA LIBOR Rate plus 2.00 percentage points. Land, building and improvements with an approximate carrying value ofapproximately $5.0 million as of December 31, 2016 secure the mortgage loan. The monthly mortgage payment is approximately $14,000, plus interest andincreases in increments of $1,000 each year throughout the life of the mortgage. Due to the difference in the term of the loan and amortization of theprincipal, a balloon payment of $2.6 million is due on April 1, 2019. The loan contains one financial covenant, a Fixed Charge Coverage Ratio, whichapplies in the event that our consolidated cash, cash equivalents, and marketable securities balance falls below $25.0 million at any time. As ourconsolidated cash, cash equivalents, and marketable securities balance was above $25.0 million throughout 2016, the Fixed Charge Coverage Ratio did notapply. Under the mortgage loan we may prepay our outstanding loan balance subject to certain early termination charges as defined in the mortgage loanagreement. If we were to default on our mortgage loan, the land, building and improvements would be used as collateral. As discussed in Note 16 to theconsolidated financial statements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, weentered into two interest rate swap agreements that are intended to hedge our mortgage interest obligations by fixing the interest rates specified in themortgage 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, 2010until the mortgage loan expires on April 16, 2019.Other MattersIt is our intent to continue to invest in the mini-VSAT Broadband network on a global basis as necessary to support anticipated future capacitydemand. As part of any future potential capacity expansion, we may need to acquire additional satellite capacity from satellite operators, expend funds toseek regulatory approvals and permits, develop product enhancements in anticipation of the expansion, and hire additional personnel. We plan to continueto invest in certain initiatives that we believe will position us for revenue growth in 2018 and beyond. These initiatives include enhancing our mini-VSATBroadband network with new high throughput satellite capacity, offering customers a new product offering, subscription service model, which would allowcustomers the option to receive mini-VSAT Broadband airtime and hardware for a single monthly charge, developing a low cost FOG for use in autonomousvehicles, and enhancing TACNAV product features.On January 30, 2013, we borrowed $4.7 million from a bank and pledged as collateral six satellite hubs and related equipment. The term of theequipment loan is five years, and the loan bears interest at a fixed rate of 2.76% per annum. The monthly payment is approximately $83,000, includinginterest expense. On December 30, 2013, we borrowed $1.2 million from a bank and pledged as collateral one satellite hub and related equipment. The termof the equipment loan is five years, and the loan bears interest at a fixed rate of 3.08% per annum. The monthly payment is approximately $21,000, includinginterest expense.On November 26, 2008, our Board of Directors authorized a program to repurchase up to one million shares of our common stock. The share repurchaseprogram is funded using our existing cash, cash equivalents, marketable securities and future cash flows. As of December 31, 2016, 341,009 shares of ourcommon stock remain available for repurchase under the program. We did not purchase any shares of our common stock in 2016.As of December 31, 2016, we held $52.1 million in cash, cash equivalents, and marketable securities. We believe that our cash, cash equivalents, andmarketable securities, together with our other existing working capital and cash flows from operations, will be adequate to meet planned operating andcapital requirements through at least the next twelve months. However, as the need or opportunity arises, we may seek to raise additional capital throughpublic 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 thatsuch funding will be available on terms acceptable to us.Contractual Obligations and Other Commercial CommitmentsAs of December 31, 2016, our contractual commitments consisted of satellite service capacity, near-term purchase commitments, term notes payable, amortgage note payable, equipment notes payable, and equipment and facility leases. Our purchase commitments include unconditional purchase orders forinventory, manufacturing materials and fixed assets extending out over various periods throughout 2017. We are also obligated under satellite servicecapacity leases and multi-year facility leases that terminate at various times between 2017 and 2025.51Table of ContentsThe following table summarizes our obligations under these commitments, excluding interest, at December 31, 2016: Payment Due by PeriodContractual Obligations Total Less than1 Year 1-3 Years 3-5 Years More than5 Years (in thousands)Term notes payable $53,625 $6,500 $47,125 $— $—Satellite service capacity and related equipment leaseobligations 27,158 13,196 12,590 1,372 —Inventory, materials, and fixed asset purchase commitments 14,818 14,818 — — —Mortgage notes payable 2,951 172 2,779 — —Equipment notes payable 1,477 1,228 249 — —Facility lease obligations 2,172 608 928 388 248Total $102,201 $36,522 $63,671 $1,760 $248The above table does not include our obligations related to certain interest rate swap derivative financial instruments that we entered into in April2010 to reduce the volatility of cash flows that arise from change in interest rates in order to hedge our mortgage loan related to our corporate headquarters byfixing the interest rates specified in the mortgage loan to 5.9% for 50% of the principal outstanding and 6.1% for the remaining principal outstanding. Thesederivative financial instruments mature on April 1, 2019 and as of December 31, 2016, we had a liability of $0.2 million recorded related to the fair value ofthese derivative financial instruments.The above table also does not reflect our liabilities associated with uncertain tax positions recorded under FIN 48 (codified primarily in ASC740, Income Taxes) totaling $1.3 million. Due to the complexity associated with tax uncertainties, we cannot reasonably make a reliable estimate of theperiod in which we expect to settle these liabilities. See Note 8 to our consolidated financial statements contained in Item 15 of this Annual Report for moreinformation on our unrecognized tax benefits.We did not have any other off-balance sheet commitments, guarantees, or standby repurchase obligations as of December 31, 2016.Recently Issued Accounting PronouncementsSee Note 1 of our accompanying audited consolidated financial statements for a description of recently issued accounting pronouncements includingthe dates of adoption and effects on our results of operations, financial position and disclosures.ITEM 7A.Quantitative and Qualitative Disclosure About Market RiskOur primary market risk exposures are interest rate risk and foreign currency exchange rate risk.We are exposed to changes in interest rates because we finance certain operations through fixed and variable rate debt instruments.We had $53.6 million in borrowings outstanding at December 31, 2016, at an interest rate equal to the LIBOR Daily Floating Rate plus 1.50% underour variable-rate credit facility. For more information regarding our credit facility, see Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Borrowing Arrangements. A hypothetical 10% increase or decrease in interest rates would have an approximately $0.1 millionimpact on our annual interest expense, based on the $53.6 million outstanding at December 31, 2016 with an interest rate of 2.18%.As discussed in Note 16 to the consolidated financial statements, effective April 1, 2010, in order to reduce the volatility of cash outflows that arisefrom changes in interest rates, we entered into two interest rate swap agreements. These interest rate swap agreements are intended to hedge our mortgage loanrelated to our headquarters facility in Middletown, Rhode Island by fixing the interest rates specified in the mortgage loan to 5.9% for half of the principalamount outstanding and 6.1% for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on April 16,2019.We are exposed to currency exchange rate fluctuations related to our subsidiary operations in the United Kingdom, Denmark, Norway, Brazil,Singapore, Hong Kong, Cyprus, Japan, Belgium, and the Netherlands. Certain transactions in these locations are made in the local currency, yet are reportedin the U.S. dollar, the functional currency. For foreign currency52Table of Contentsexposures existing at December 31, 2016, a 10% unfavorable movement in the foreign exchange rates for our subsidiary locations would not expose us tomaterial losses in earnings or cash flows.In the past, we have purchased foreign currency forward contracts. These forward contracts are intended to offset the impact of exchange ratefluctuations on cash flows of our foreign subsidiaries. Foreign exchange contracts are accounted for as cash flow hedges and are recorded on the balance sheetat fair value until executed. Changes in the fair value are recognized in earnings. We did not enter into any such contracts during 2014, 2015, or 2016. We donot currently anticipate that we will enter into new agreements to replace the settled contracts.The primary objective of our investment activities is to preserve principal and maintain liquidity, while at the same time maximizing income. We havenot entered into any instruments for trading purposes. Some of the securities that we invest in may have market risk. To minimize this risk, we maintain ourportfolio of cash equivalents and short-term investments in a variety of securities that can include United States treasuries, certificates of deposit, investmentgrade asset-backed corporate securities, money market mutual funds, municipal bonds, and government agency and non-government debt securities. As ofDecember 31, 2016, a hypothetical 100 basis-point increase in interest rates would have resulted in an immaterial decrease in the fair value of ourinvestments that had maturities of greater than one year. Due to the conservative nature of our investments and the relatively short duration of theirmaturities, we believe this interest rate risk is substantially mitigated. As of December 31, 2016, all of the $25.7 million classified as available-for-salemarketable securities will mature or reset within one year. Accordingly, long-term interest rate risk is not considered material for our investment activities. Wedid not invest in any financial instruments denominated in foreign currencies as of December 31, 2016.ITEM 8.Financial Statements and Supplementary DataOur consolidated financial statements and supplementary data, together with the reports of Grant Thornton LLP, our independent registered publicaccounting firm, are included in Part IV of this annual report.ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.53Table of ContentsITEM 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe 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 isrecorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that suchinformation is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate toallow 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 theeffectiveness of our disclosure controls and procedures as of December 31, 2016, the end of the period covered by this annual report. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31,2016.Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financialreporting is the process designed by and under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assuranceregarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accountingprinciples generally accepted in the United States of America. Management has evaluated the effectiveness of our internal control over financial reportingusing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework(2013).Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has assessed theeffectiveness of our internal control over financial reporting as of December 31, 2016 and concluded that it was effective.Our independent registered public accounting firm, Grant Thornton LLP, has issued a report regarding the effectiveness of our internal control overfinancial reporting as of December 31, 2016, and that report is included in Item 9A in this annual report.Evaluation of Changes in Internal Control over Financial ReportingUnder the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated changes inour internal control over financial reporting that occurred during the fourth quarter of 2016. Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.Important ConsiderationsThe 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, thepossibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controlsmay 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 willbe successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.54Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersKVH Industries, Inc.We have audited the internal control over financial reporting of KVH Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2016, basedon criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over FinancialReporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on ouraudit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based oncriteria established in the 2013 Internal Control-Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedfinancial statements of the Company as of and for the year ended December 31, 2016, and our report dated March 9, 2017, which expressed an unqualifiedopinion on those financial statements./s/ Grant Thornton LLP Boston, MassachusettsMarch 9, 2017ITEM 9B.Other Information None.55Table of ContentsPART IIIWe have omitted the information required in Part III of this annual report because we intend to include that information in our definitive proxystatement for our 2017 annual meeting of stockholders, which we expect to file before 120 days after the end of fiscal 2016. We incorporate the informationrequired in Part III of this annual report by reference to our 2017 proxy statement.ITEM 10.Directors, Executive Officers and Corporate GovernanceExcept as set forth below, the information required by this item is incorporated by reference to our 2017 proxy statement.Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our directors, executive officers and employees. Our Codeof Business Conduct and Ethics can be found on our website, which is located at www.kvh.com. We intend to make all required disclosures concerning anyamendments to or waivers from, our Code of Business Conduct and Ethics on our website. Any person may request a copy of the Code of Business Conductand Ethics, at no cost, by writing to us at the following address: KVH Industries, Inc., 50 Enterprise Center, Middletown, Rhode Island, 02842, Attention:Investor Relations.ITEM 11.Executive CompensationThe information required by this item is incorporated by reference to our 2017 proxy statement.ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item is incorporated by reference to our 2017 proxy statement.ITEM 13.Certain Relationships and Related Transactions and Director IndependenceThe information required by this item is incorporated by reference to our 2017 proxy statement.ITEM 14.Principal Accountant Fees and ServicesThe information required by this item is incorporated by reference to our 2017 proxy statement.56Table of ContentsPART IVITEM 15.Exhibits and Financial Statement Schedules Page(a)1.Financial Statements Report of Independent Registered Public Accounting Firm61 Consolidated Balance Sheets as of December 31, 2016 and 201562 Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 201463 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015 and 201463 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015, and 201465 Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 201466 Notes to Consolidated Financial Statements67 (a)2.Financial Statement Schedules None. 3.Exhibits Exhibit No. Description Filed withthis Form10-K Incorporated by Reference Form Filing Date Exhibit No.2.1 Share Purchase Agreement, dated as of July 2, 2014, by andbetween KVH Media Group Limited and Nigel Cleave 8-K July 3, 2014 2.13.1 Amended and Restated Certificate of Incorporation, as amended 10-Q August 6,2010 3.13.2 Amended and Restated Bylaws of KVH Industries, Inc. 8-K April 30, 2014 3.14.1 Specimen certificate for the common stock S-1/A March 22,1996 4.1*10.1 Second Amended and Restated 2003 Incentive and NonqualifiedStock Option Plan 10-Q May 6, 2009 10.21*10.2 Fourth Amended and Restated 2006 Stock Incentive Plan DEF 14A April 25, 2013 App. A*10.3 2016 Equity and Incentive Plan DEF 14A April 25, 2016 App. A*10.4 Amended and Restated 1996 Employee Stock Purchase Plan DEF 14A April 25, 2016 App. B*10.5 Form of Incentive Stock Option Agreement granted under the2016 Equity and Incentive Plan X *10.6 Form of Non-Statutory Stock Option Agreement granted under the2016 Equity and Incentive Plan X *10.7 Form of Restricted Stock Agreement granted under the 2016Equity and Incentive Plan X *10.8 Policy Regarding Automatic Grants to Non-Employee Directors 10-Q May 6, 2009 10.2310.9 Loan Agreement dated April 6, 2009 by and among KVHIndustries, Inc., and Bank of America, N.A. 8-K April 8,2009 10.157Table of ContentsExhibit No. Description Filed withthis Form10-K Incorporated by Reference Form Filing Date Exhibit No.10.10 Second Amendment, dated June 9, 2011 by and between KVHIndustries, Inc. and Bank of America, N.A., amending the LoanAgreement, dated April 6, 2009, as amended 8-K June 14,2011 10.210.11 Master Loan and Security Agreement, dated as of January 30, 2013by and between KVH Industries, Inc. and Banc of America Leasing& Capital, LLC 8-K February 5, 2013 10.110.12 Equipment Security Note, dated as of January 30, 2013 by andbetween KVH Industries, Inc. and Banc of America Leasing &Capital, LLC 8-K February 5, 2013 10.210.13 Credit Agreement, dated as of July 1, 2014, by and between Bankof America, N.A., The Washington Trust Company and KVHIndustries, Inc. 8-K July 3, 2014 10.110.14 Term Notes, dated as of July 1, 2014, by and between KVHIndustries, Inc. and each of Bank of America, N.A. and TheWashington Trust Company 8-K July 3, 2014 10.210.15 Revolving Credit Notes, dated as of July 1, 2014, by and betweenKVH Industries, Inc. and each of Bank of America, N.A. and TheWashington Trust Company 8-K July 3, 2014 10.310.16 Security Agreement, dated as of July 1, 2014, by and betweenBank of America, N.A. and KVH Industries, Inc. 8-K July 3, 2014 10.410.17 Pledge Agreements, dated as of July 1, 2014, by and between Bankof America, N.A. and KVH Industries, Inc. with respect to KVHIndustries A/S and KVH Industries U.K. Limited 8-K July 3, 2014 10.510.18 First Amendment to Credit Agreement, dated as of June 15, 2015,by and among Bank of America, N.A., The Washington TrustCompany and KVH Industries, Inc. 10-Q/A August 13, 2015 10.110.19 Second Amendment to Credit Agreement, dated as of September30, 2015, by and among Bank of America, N.A., The WashingtonTrust Company and KVH Industries, Inc. 8-K October 5, 2015 10.110.20 Third Amendment to Credit Agreement, dated as of March 7, 2017,by and among Bank of America, N.A., The Washington TrustCompany and KVH Industries, Inc. 8-K March 9, 2017 10.121.1 List of Subsidiaries X 23.1 Consent of Grant Thornton LLP X 31.1 Rule 13a-14(a)/15d-14(a) certification of principal executiveofficer X 31.2 Rule 13a-14(a)/15d-14(a) certification of principal financial officer X 32.1 Rule 1350 certification X 58Table of Contents101.1 Interactive Data File regarding (a) our Consolidated BalanceSheets as of December 31, 2016 and 2015, (b) our ConsolidatedStatements of Operations for the years ended December 31, 2016,2015, and 2014, (c) our Consolidated Statements ofComprehensive Loss for the years ended December 31, 2016,2015, and 2014, (d) our Consolidated Statements of Stockholders'Equity for the years ended December 31, 2016, 2015, and 2014, (e)our Consolidated Statements of Cash Flows for the years endedDecember 31, 2016, 2015, and 2014 and (e) the Notes to suchConsolidated Financial Statements X *Management contract or compensatory plan. 59Table of ContentsITEM 16.Form 10-K SummaryNone.SIGNATURESPursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. KVH Industries, Inc. Date: March 9, 2017By:/S/ MARTIN A. KITS VAN HEYNINGEN Martin A. Kits van HeyningenPresident, Chief Executive Officer and Chairman of the BoardPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities andon the dates indicated.Name Title Date /S/ MARTIN A. KITS VAN HEYNINGEN President, Chief Executive Officer and Chairman of the Board (PrincipalExecutive Officer) March 9, 2017Martin A. Kits van Heyningen /S/ DONALD W. REILLY Chief Financial Officer (Principal Financial and Accounting Officer) March 9, 2017Donald W. Reilly /S/ MARK S. AIN Director March 9, 2017Mark S. Ain /S/ STANLEY K. HONEY Director March 9, 2017Stanley K. Honey /S/ BRUCE J. RYAN Director March 9, 2017Bruce J. Ryan /S/ CHARLES R. TRIMBLE Director March 9, 2017Charles R. Trimble 60Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersKVH Industries, Inc.We have audited the accompanying consolidated balance sheets of KVH Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KVH Industries, Inc.and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2016 in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2017 expressed an unqualified opinion./s/ Grant Thornton LLPBoston, MassachusettsMarch 9, 201761Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2016 2015ASSETS Current assets: Cash and cash equivalents$26,422 $22,719Marketable securities25,712 22,619Accounts receivable, net of allowance for doubtful accounts of $3,477 as of December 31, 2016 and $3,534 as ofDecember 31, 201531,152 43,895Inventories20,745 21,589Prepaid expenses and other current assets4,801 4,271Total current assets108,832 115,093Property and equipment, less accumulated depreciation of $45,766 as of December 31, 2016 and $43,202 as ofDecember 31, 201536,586 39,900Intangible assets, less accumulated amortization of $16,344 as of December 31, 2016 and $11,390 as of December 31,201517,838 26,755Goodwill31,343 36,747Other non-current assets5,134 3,096Non-current deferred income tax asset24 4,686Total assets$199,757 $226,277LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$8,436 $8,975Accrued compensation and employee-related expenses4,766 6,588Accrued other8,317 12,042Accrued product warranty costs2,280 1,880Deferred revenue6,661 5,962Current portion of long-term debt7,900 6,638Liability for uncertain tax positions1,283 1,474Total current liabilities39,643 43,559Other long-term liabilities326 1,391Long-term debt, excluding current portion50,153 58,054Non-current deferred income tax liability3,133 5,097Total liabilities$93,255 $108,101Commitments and contingencies (Notes 1, 5, 6, 16 and 17) 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, 18,420,914 and17,336,314 shares issued; 16,761,923 and 15,677,323 shares outstanding atDecember 31, 2016 and December 31, 2015, respectively184 173Additional paid-in capital129,660 124,619Accumulated earnings6,617 14,134Accumulated other comprehensive loss(16,809) (7,600) 119,652 131,326Less: treasury stock at cost, common stock, 1,658,991 shares as of December 31, 2016 and December 31, 2015,respectively(13,150) (13,150)Total stockholders’ equity106,502 118,176Total liabilities and stockholders’ equity$199,757 $226,277See accompanying Notes to Consolidated Financial Statements.62Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31, 2016 2015 2014Sales: Product$73,075 $76,213 $81,143Service103,047 108,421 91,448Net sales176,122 184,634 172,591Costs and expenses: Costs of product sales46,334 47,404 48,843Costs of service sales52,966 54,816 50,301Research and development16,030 14,039 14,101Sales, marketing and support33,942 35,714 32,976General and administrative28,172 29,453 24,448Total costs and expenses177,444 181,426 170,669(Loss) income from operations(1,322) 3,208 1,922Interest income513 546 738Interest expense1,436 1,460 1,296Other income (expense), net275 372 (39)(Loss) income before income tax expense(1,970) 2,666 1,325Income tax expense5,547 413 1,284Net (loss) income$(7,517) $2,253 $41Per share information: Net (loss) income per share, basic$(0.47) $0.14 $0.00Net (loss) income per share, diluted$(0.47) $0.14 $0.00Number of shares used in per share calculation: Basic15,834 15,625 15,420Diluted15,834 15,834 15,605See accompanying Notes to Consolidated Financial Statements.63Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) Year Ended December 31, 2016 2015 2014Net (loss) income$(7,517) $2,253 $41Other comprehensive (loss) income, net of tax: Unrealized (loss) gain on marketable securities(1) (3) 8Foreign currency translation adjustment(9,288) (4,207) (3,953)Unrealized gain on derivative instruments, net80 57 37Other comprehensive loss, net of tax (1)(9,209) (4,153) (3,908)Total comprehensive loss$(16,726) $(1,900) $(3,867)(1) Tax impact was nominal for all periods.See accompanying Notes to Consolidated Financial Statements.64Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock AdditionalPaid-inCapital AccumulatedEarnings AccumulatedOtherComprehensive(Loss) Income Treasury Stock TotalStockholders’Equity Shares Amount Shares AmountBalance at December 31,201316,936 $169 $117,147 $11,840 $461 (1,659) $(13,150) $116,467Net income— — — 41 — — — 41Other comprehensive loss— — — — (3,908) — — (3,908)Stock-based compensation— — 3,771 — — — — 3,771Registration fees— — 41 — — — — 41Excess tax shortfall on share-based awards— — (2) — — — — (2)Issuance of common stockunder employee stockpurchase plan12 — 138 — — — — 138Shares withheld, repurchasedand retired related to minimumstatutory tax withholdingrequirements(35) — (481) — — — — (481)Exercise of stock options andissuance of restricted stockawards, net of forfeitures240 3 470 — — — — 473Balance at December 31,201417,153 $172 $121,084 $11,881 $(3,447) (1,659) $(13,150) $116,540Net income— — — 2,253 — — — 2,253Other comprehensive loss— — — — (4,153) — — (4,153)Stock-based compensation— — 3,734 — — — — 3,734Issuance of common stockunder employee stockpurchase plan28 — 291 — — — — 291Shares withheld, repurchasedand retired related to minimumstatutory tax withholdingrequirements(27) — (578) — — — — (578)Exercise of stock options andissuance of restricted stockawards, net of forfeitures182 1 88 — — — — 89Balance at December 31,201517,336 $173 $124,619 $14,134 $(7,600) (1,659) $(13,150) $118,176Net loss— — — (7,517) — — — (7,517)Other comprehensive loss— — — — (9,209) — — (9,209)Stock-based compensation— — 3,651 — — — — 3,651Issuance of common stockunder employee stockpurchase plan18 — 146 — — — — 146Shares withheld, repurchasedand retired related to minimumstatutory tax withholdingrequirements(32) — (313) — — — — (313)Excess tax shortfall on share-based awards— — (869) — — — — (869)Exercise of stock options andissuance of restricted stockawards, net of forfeitures1,099 11 2,426 — — — — 2,437Balance at December 31,201618,421 $184 $129,660 $6,617 $(16,809) (1,659) $(13,150) $106,502See accompanying Notes to Consolidated Financial Statements.65Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2016 2015 2014Cash flows from operating activities: Net (loss) income$(7,517) $2,253 $41Adjustments to reconcile net (loss) income to net cash provided by operating activities: Provision for doubtful accounts872 1,337 1,610Depreciation and amortization12,564 12,719 9,987Deferred income taxes2,406 (411) (1,813)Loss (gain) on sale of fixed assets907 (4) 30Loss on derivatives instruments— 57 —Compensation expense related to stock-based awards and employee stock purchase plan3,651 3,734 3,771Unrealized currency translation loss881 391 —Changes in operating assets and liabilities: Accounts receivable10,709 (5,803) (8,235)Inventories806 (3,755) 867Prepaid expenses and other current assets(332) (1,576) 1,141Other non-current assets(2,378) 1,539 569Accounts payable(790) (3,390) 1,676Deferred revenue1,474 (1,643) 1,622Accrued expenses(3,687) 3,023 (1,002)Other long-term liabilities(867) (74) 106Net cash provided by operating activities$18,699 $8,397 $10,370Cash flows from investing activities: Capital expenditures(5,631) (5,694) (5,118)Net cash paid for business acquired— — (43,448)Purchases of marketable securities(13,173) (11,323) (12,270)Maturities and sales of marketable securities10,080 13,217 34,150Net cash used in investing activities$(8,724) $(3,800) $(26,686)Cash flows from financing activities: Repayments of long-term debt(1,358) (1,307) (1,272)Repayments of term note borrowings(5,281) (4,876) (1,219)Proceeds from term note borrowings— — 65,000Proceeds from stock options exercised and employee stock purchase plan2,583 432 608Payment of employee restricted stock withholdings(313) (578) (482)Repayments of line of credit borrowings— — (30,000)Other(4) — 41Net cash (used in) provided by financing activities$(4,373) $(6,329) $32,676Effect of exchange rate changes on cash and cash equivalents(1,899) (838) (429)Net increase in cash and cash equivalents3,703 (2,570) 15,931Cash and cash equivalents at beginning of period22,719 25,289 9,358Cash and cash equivalents at end of period$26,422 $22,719 $25,289Supplemental disclosure of cash flow information: Cash paid for interest$1,433 $1,467 $1,296Cash paid for income taxes, net of refunds$3,647 $2,182 $2,470Changes in accrued liabilities and accounts payable related to fixed asset additions$345 $— $—See accompanying Notes to Consolidated Financial Statements.66Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016, 2015 and 2014(in thousands, except per share amounts) (1)Summary of Significant Accounting Policies(a)Description of BusinessKVH Industries, Inc. (together with its subsidiaries, the Company or KVH) designs, develops, manufactures and markets mobile connectivity productsand services for the marine and land markets, and inertial navigation products for both the commercial and defense markets. In the fourth quarter of 2016,consistent with certain internal organizational changes implemented, the Company changed its reporting structure from two operating segments based ongeographies selling navigation, guidance and stabilization and mobile communication products, to two operating segments based on product lines: mobileconnectivity and inertial navigation. The change was driven by several factors including:•changes in the Company's overall organizational structure, including the appointment of a Chief Operating Officer and a new Chief FinancialOfficer;•the completion of the Company's planning process for 2017 and later years, as a result of which the Company changed how it will measure andassess its financial performance; and•the Company's process for measuring incentive compensation for key executives for 2016 and later years.KVH’s mobile connectivity products enable customers to receive voice and Internet services, and live digital television via satellite services in marinevessels, 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 anddistributors. KVH also sells and leases products directly to end users.KVH’s mobile connectivity service sales represent primarily sales earned from satellite voice and Internet airtime services. KVH provides, for monthlyfixed and usage fees, satellite connectivity services, including broadband Internet, data and Voice over Internet Protocol (VoIP) services, to its TracPhone V-series customers. Mobile connectivity service sales also include the distribution of commercially licensed entertainment, including news, sports, music, andmovies to commercial and leisure customers in the maritime, hotel, and retail markets through KVH Media Group (acquired as Headland Media Limited), themedia and entertainment service company that KVH acquired on May 11, 2013, and the distribution of training films and eLearning computer-based trainingcourses to commercial customers in the maritime market through Super Dragon Limited and Videotel Marine Asia Limited (together referred to as Videotel), amaritime training services company that KVH acquired on July 2, 2014. 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. Mobileconnectivity service sales also include engineering services provided under development contracts, sales from product repairs, and extended warranty sales.KVH's inertial navigation products offer precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation,pointing and guidance. KVH’s inertial navigation products also include tactical navigation systems that provide uninterrupted access to navigation andpointing information in a variety of military vehicles, including tactical trucks and light armored vehicles. KVH’s inertial navigation products are solddirectly to U.S. and foreign governments and government contractors, as well as through an international network of authorized independent salesrepresentatives. In addition, KVH's inertial navigation are used in numerous commercial products, such as navigation and positioning systems for variousapplications 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 warrantysales.(b)Principles of ConsolidationThe accompanying consolidated financial statements of KVH Industries, Inc. and its wholly owned subsidiaries have been prepared in accordance withaccounting principles generally accepted in the United States of America. All of the operating expenses of the subsidiaries that serve as the Company’sEuropean, Singaporean, Japanese, and Brazilian international distributors are reflected within sales, marketing, and support within the accompanyingconsolidated statements of operations. All significant intercompany accounts and transactions have been eliminated in consolidation. As a result of certainacquisitions as discussed in Note 9, “Acquisitions”, the operating results of these acquired entities are included in the Company’s67Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)consolidated results of operations from the date of acquisition prospectively. The Company adoption of ASU 2015-02, Consolidation (Topic 810) -Amendments to the Consolidation Analysis, on January 1, 2016 did not have an impact on the entities that the Company consolidates, which represent itswholly-owned subsidiaries, and had no impact on the Company’s consolidated results of operations or financial position. (c)Significant Estimates and Assumptions and Other Significant Non-Recurring TransactionsThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities asof the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. On an on-going basis, the Companyevaluates its significant estimates, including those related to revenue recognition, valuation of accounts receivable, value of inventory, valuations andpurchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and otherassumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of long-lived assets, includinggoodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, forfeituresand key valuation assumptions for its share-based awards, estimated fulfillment costs for warranty obligations, tax reserves and recoverability of theCompany’s net deferred tax assets and related valuation allowance.Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recordedin the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to bereasonable under the circumstances.The Company has accounted for its $35,600 contract received in June 2012 from SANG to purchase TACNAV products and services under ASC 605-25, Multiple-Element Arrangements. See section (e) of this note for estimates and assumptions related to multiple-element-arrangements and completedcontract sales accounting.The SANG total contract value associated with TACNAV products is $21,200, for which final shipments were completed in the second quarter of 2013.Revenue was recognized for these product sales after transfer of title and risk of loss and after inspection occurred. The total contract value associated with allservices is $14,400, and services were completed in the third quarter of 2014. The revenue for these services is recognized using the proportional performanceaccounting method. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future deliveryof products or services, future performance obligations, or subject to customer-specific return or refund privileges. Total revenue recognized on the SANGcontract in 2014 was approximately $1,300.During the fourth quarter of 2016, the Company entered into arrangements with certain third parties who co-produced certain content that theCompany distributes where the Company had certain ongoing royalty payments to these third parties. The agreements entered into during the fourth quarterof 2016 settled all outstanding liabilities owed by the Company to these third parties, as well as, resulted in the Company obtaining sole ownership andrights to the applicable content. Based on the final amounts paid under these agreements, the Company recognized a gain in the fourth quarter of 2016 ofapproximately $855. This amount was recorded as a reduction to sales, marketing and support expense in the Company's consolidated statement ofoperations for the year ended December 31, 2016.(d)Concentration of Credit Risk and Single Source SuppliersCash, cash equivalents and marketable securities. The Company is potentially subject to financial instrument concentration of credit risk through itscash, cash equivalent and marketable securities investments. To mitigate these risks the Company maintains cash, cash equivalents and marketable securitieswith reputable and nationally recognized financial institutions. As of December 31, 2016, $25,712 classified as marketable securities was held by WellsFargo and substantially all of the cash and cash equivalents were held by Bank of America, N.A. See Note 2 for a description of marketable securities.68Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Trade accounts receivable. Concentrations of risk (see Note 12) with respect to trade accounts receivable are generally limited due to the large numberof customers and their dispersion across several geographic areas. Although the Company does not foresee that credit risk associated with these receivableswill deviate from historical experience, repayment is dependent upon the financial stability of those individual customers. The Company establishesallowances for potential bad debts and evaluates, on a monthly basis, the adequacy of those reserves based upon historical experience and its expectations forfuture collectability concerns. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not requirecollateral. Activity within the Company’s allowance for doubtful accounts for the periods presented is as follows: 2016 2015 2014Beginning balance$3,534 $2,723 $1,705Additions872 1,342 1,610Deductions (write-offs/recoveries) from reserve(929) (531) (592)Ending balance$3,477 $3,534 $2,723Certain components from third parties used in the Company’s products are procured from single sources of supply. The failure of a supplier, includinga subcontractor, to deliver on schedule could delay or interrupt the Company’s delivery of products and thereby materially adversely affect the Company’srevenues and operating results.(e)Revenue RecognitionProduct sales. Product sales are recognized when persuasive evidence of an arrangement exists, goods are shipped, title has passed and collectability isreasonably assured. The Company’s standard sales terms require that:•All sales are final;•Terms are generally Net 30;•Shipments are tendered and shipped FOB (or as may be applicable, FCA, or EXW) the Company’s plant or warehouse; and•Title and risk of loss or damage passes to the dealer or distributor at the point of shipment when delivery is made to the possession of the carrier.For certain inertial navigation product sales, customer acceptance or inspection may be required before title and risk of loss transfers. For those sales,revenue is recognized after transfer of title and risk of loss and after notification of customer acceptance. In certain circumstances customers may request a billand hold arrangement. Under these bill and hold arrangements, revenue is recognized when the Company has fulfilled all of its performance obligations, theunits are segregated and available for shipment in accordance with the defined contract delivery schedule, and the Company has received notification ofcustomer acceptance which transfers title and risk of loss to the customer.Under certain limited conditions, the Company, at its sole discretion, provides for the return of goods. No product is accepted for return and no credit isallowed on any returned product unless the Company has granted and confirmed prior written permission by means of appropriate authorization. TheCompany establishes reserves for potential sales returns, credits, and allowances, and evaluates, on a monthly basis, the adequacy of those reserves basedupon historical experience and expectations for the future.Multiple-element revenue arrangements. Some of our sales involve multiple-element arrangements that include both hardware-related products andcontracted service, or satellite connectivity that are accounted under ASC 605-25, Multiple-Element Arrangements.Multiple elements, arrangement consideration is allocated to each element based on the relative selling prices of all of the elements in the arrangementusing the fair value hierarchy as required by “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” (Accounting StandardsCodification “ASC” 605-35). ASC 605-35 requires that the Company establish VSOE of fair value based upon the price charged when the same element issold separately or established by management having the relevant pricing authority. When VSOE exists it is used to determine the selling price of adeliverable. When VSOE is not established, the Company attempts to establish the selling price of each element based on TPE. When the Company is unableto establish selling price using VSOE or TPE, the Company uses BESP in the allocation of arrangement consideration for the relevant deliverables. Theobjective of BESP is to determine the price at which the Company would69Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)transact a sale if a product or service was sold on a stand-alone basis. The Company determines BESP for our products and certain services by consideringmultiple factors including, but not limited to, overall market conditions, including geographic or regional-specific market factors and profit objectives forsuch deliverables.Each deliverable within the Company's multiple-deliverable revenue arrangements is accounted for as a separate unit of accounting under theguidance of ASC 605-35 if both of the following criteria are met: the delivered item or items have value to the customer on a standalone basis; and for anarrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probableand substantially in the control of the Company. The Company considers a deliverable to have standalone value if the item is sold separately by theCompany or another vendor or if the item could be resold by the customer. Further, the Company's revenue arrangements generally do not include a generalright of return relative to delivered products.Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable that does meet that criterion. Theappropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting.Satellite connectivity and media content sales. Directly sold and re-sold satellite connectivity service for voice, data and Internet is recognizedmonthly based upon minutes or megabytes of traffic processed or contracted fixed fee schedules. Typically, all subscribers enter into a contracted one-yearminimum service agreement. The Company has evaluated the factors within ASC 605 regarding gross versus net revenue reporting for its satelliteconnectivity service sales and its payments to the applicable service providers. Based on the evaluation of the factors within ASC 605, the Company hasdetermined that the applicable indicators of gross revenue reporting were met. The applicable indicators of gross revenue reporting included, but were notlimited to, the following:•The Company is the primary obligor in its arrangements with its subscribers. The Company manages all interactions with the subscribers, whilesatellite connectivity service providers do not interact with the subscribers. In addition, the Company assumes the entire performance risk under itsarrangements with the subscribers and in the event of a performance issue, the Company may incur reduction in fees without regard for any recoursethat the Company may have with the applicable satellite connective service providers.•The Company has latitude in establishing pricing, as the pricing under its arrangements with the subscribers is negotiated through a contractingprocess and has discretion on establishing pricing. The Company then separately negotiates the fees with the applicable satellite service providers.•The Company has complete discretion in determining which satellite service providers it will contract with.As a result, the Company has determined that we earn revenue (as a principal) from the delivery of satellite connectivity services to its subscribers andrecords all satellite connectivity service sales to subscribers as gross sales. All associated regulatory service fees and costs are recorded net in the consolidatedfinancial statements. Media content sales include the Company's distribution of commercially licensed news, sports, movies and music content forcommercial and leisure customers in the maritime, hotel, and retail markets as well as training videos to the merchant marine market that are typically basedon a contracted fixed fee schedule. The Company typically recognizes revenue from media content sales ratably over the period of the service contract. Theaccounting estimates related to the recognition of satellite connectivity and media content service sales in results of operations requires the Company tomake assumptions about future billing adjustments for disputes with subscribers as well as unauthorized usage.Lease financing. Lease financing consists of sales-type leases primarily of the TracPhone V-IP Series. The Company records the leases at a pricetypically equivalent to normal selling price and in excess of the cost or carrying amount. Upon delivery, the Company records the present value of allpayments under these leases as revenues, and the related costs of the product are charged to cost of sales. Interest income is recognized throughout the leaseterm (typically three to five years) using an implicit interest rate. Through December 31, 2016, lease sales have not been a significant portion of theCompany’s total sales.Contracted service sales. The Company engages in contracts for development, production, and services activities related to standard productmodification or enhancement, which it accounts for using the proportional performance method of revenue recognition. The Company considers the nature ofthese contracts and the types of products and services provided when determining the proper accounting for a particular contract. Customer and government-agency contracted engineering service and grant sales under development contracts are recognized primarily under the proportional performance methodduring the period in which the Company performs the service or development efforts in accordance with the agreement. Services70Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)performed under these types of contracts include engineering studies, surveys, building construction, prototype development, and program management.Performance is determined principally by comparing the accumulated costs incurred to date with management’s estimate of the total cost to complete thecontracted work. The Company establishes billing terms at the time project deliverables and milestones are agreed. Unbilled revenue recognized in excess ofthe amounts invoiced to clients are classified within the accompanying consolidated balance sheets in the caption “prepaid expenses and other assets.”The use of contract accounting requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative tothe length of time to complete the contract, the nature and complexity of the work to be performed, and prices for subcontractor services and materials. Therisk to the Company on a fixed-price contract is that if estimates to complete the contract change from one period to the next, profit levels will vary fromperiod to period. The Company's estimates are based upon the professional knowledge and experience of its engineers, program managers and otherpersonnel, who review each long-term contract monthly to assess the contract's schedule, performance, technical matters and estimated cost at completion.Changes in estimates are applied when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments toearnings applicable to performance in prior periods. Any advance payments arising from such extended-term development contracts are recorded as deposits.If, in any period, estimated total costs under a contract indicate an expected loss, then such loss is provided for in that period. Through December 31, 2016,contracted service revenue has not been a significant portion of the Company’s total sales.Product service sales. Product service sales other than under development contracts are recognized when completed services are provided to thecustomer and collectability is reasonably assured. The Company establishes reserves for potential sales returns, credit and allowances, and evaluates, on amonthly basis, the adequacy of those reserves based upon historical experience and its expectations for the future. Through December 31, 2016, productservice sales have not been a significant portion of the Company’s total sales.Extended warranty sales. The Company sells extended warranty contracts on mobile connectivity and inertial navigation products. Sales under thesecontracts are recognized ratably over the contract term. Through December 31, 2016, warranty sales have not been a significant portion of the Company’stotal sales.(f)Fair Value of Financial InstrumentsThe carrying amounts of the Company’s financial instruments, which include cash equivalents, investments, accounts receivable, accounts payableand accrued expenses approximate their fair values due to the short maturity of these instruments. The carrying amount of the Company’s mortgage loanapproximates fair value based on currently available quoted rates of similarly structured mortgage facilities. See Note 2 for more information on the fair valueof the Company’s marketable securities.(g)Cash, Cash Equivalents, and Marketable SecuritiesIn accordance with the Company’s investment policy, cash in excess of operational needs is invested in money market mutual funds, governmentagency bonds, United States treasuries, municipal bonds, corporate notes, and certificates of deposit. All highly liquid investments with a maturity date ofthree months or less at the date of purchase are classified as cash equivalents. The Company determines the appropriate classification of marketable securitiesat each balance sheet date. As of December 31, 2016 and 2015, all of the Company’s marketable securities have been designated as available-for-sale and arecarried at their fair value with unrealized gains and losses included in accumulated other comprehensive (loss) income in the accompanying consolidatedbalance sheets.The Company reviews investments in debt securities for other than temporary impairment whenever the fair value of an investment is less thanamortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether animpairment is other-than-temporary, the Company considers whether it intends to sell the security, whether it expects to recover the credit loss, and if it ismore likely than not that the Company will be required to sell the security prior to recovery. Evidence considered in this assessment includes the reasons forthe impairment, compliance with the Company’s investment policy, the severity and duration of the impairment, changes in value subsequent to year-endand forecasted performance of the investee. The Company has reviewed its securities with unrealized losses as of December 31, 2016 and 2015 and hasconcluded that no other-than-temporary impairments exist.71Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)(h)InventoriesInventories are stated at the lower of cost or market using the first-in first-out costing method. The Company adjusted the carrying value of itsinventory based on the consideration of excess and obsolete components based on future estimate demand. The Company records inventory charges to costsof product sales.(i)Property and EquipmentProperty and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives ofthe respective assets. The principal lives used in determining the depreciation rates of various assets are: buildings and improvements, 5-40 years; leaseholdimprovements, shorter of original lease term or useful life; machinery, satellite hubs and equipment, and video-on-demand (VOD) units, 4-10 years; office andcomputer equipment, 3-7 years; and motor vehicles, 5 years.(j)Goodwill, Intangible Assets and other Long-Lived AssetsThe Company’s goodwill and intangible assets are associated with the purchase of Virtek Communication (now known as KVH Industries Norway AS)in September 2010, Headland Media Limited (now known as the KVH Media Group) in May 2013, and Videotel in July 2014.Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired.Goodwill is not amortized, but instead is tested for impairment at least annually, or if events or changes in circumstances indicate that the carrying value maynot be recoverable. The Company has not historically incurred any goodwill impairment losses. The Company estimates the fair value of the reporting unitusing a discounted cash flow model or other valuation models, such as comparative transactions and market multiples. The impairment test is performedthrough the application of a two-step process. The first step compares the carrying value of the Company’s reporting units to their estimated fair values as ofthe test date. If fair value is less than carrying value, a second step is performed to quantify the amount of the impairment, if any. As of August 31, 2016, theCompany performed its annual impairment test for goodwill at the reporting unit level and, after conducting the first step, determined that it was notnecessary to conduct the second step as it concluded that the fair value of its reporting units exceeded their carrying value. To date, the Company has not hadto complete the second step of the goodwill impairment test and therefore has no accumulated goodwill impairment losses. The Company utilized an incomeapproach and market approaches to estimate the fair value of the Company’s reporting units. The Company believes that its assumptions used to estimate thefair value of its reporting units were reasonable. As an additional corroborative test of the reasonableness of those assumptions, the Company completed areconciliation of its market capitalization and overall enterprise value to the fair value of all of its reporting units as of August 31, 2016. If differentassumptions were used, particularly with respect to estimating future cash flows, weighted average costs of capital, and terminal growth rates, differentestimates of fair value may have resulted. However, based on the excess of fair value over carrying value and additional sensitivity analysis considered withrespect to the Company’s valuation assumptions, the Company concluded it was more-likely-than-not that no goodwill impairment exists. As of August 31,2016, the Company notes that the fair value of all of the Company’s reporting units exceeded their carrying values by more than 10%. The Company notesthat its one reporting unit where the fair value exceeded the carrying value by less than 100% had goodwill of approximately $4,401 at both August 31, 2016and December 31, 2016. A negative trend of operating results or material changes to forecasted operating results could result in the requirement for additionalinterim goodwill impairment tests and the potential of a future goodwill impairment charge, which could be material. The Company did not identify anyimpairment indicators that required an interim goodwill impairment test as of December 31, 2016.Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by acomparison 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. Ifthese comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of theasset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraisedvalues, depending on the nature of the asset. During 2016, there were no events or changes in circumstances that indicated any of the carrying amounts of theCompany’s intangible assets may not be recoverable. See Note 10 for further discussion of goodwill and intangible assets. During the fourth quarter of 2016,the Company commenced certain facility and other operational improvements. As a result, the Company completed a review of impairment of other long-lived assets for the associated asset groups and a review of the estimated remaining useful lives under ASC 360-10, Impairment and Disposal of72Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Long-Lived Assets, ("ASC 360-10"). Based on the impairment analysis under ASC 360-10, no impairment was noted. The Company did identify certainchanges in the remaining estimated useful lives of certain property and equipment and certain components of internally-developed software acquired in theCompany’s acquisition of Videotel (see Note 9). The impact of these changes in estimated useful lives resulted in approximately $368 and $188 of additionaldepreciation and amortization expense, respectively, in the fourth quarter of 2016. The Company notes that the changes in estimated useful lives are notexpected to have a material impact to the Company’s future results from operations.(k)Other Non-Current AssetsOther non-current assets are primarily comprised of long-term lease receivables, prepaid expenses, and deposits.(l)Product WarrantyThe Company’s products carry standard limited warranties that range from one to two years and vary by product. The warranty period begins on thedate of retail purchase or lease by the original purchaser. The Company accrues estimated product warranty costs at the time of sale and any additionalamounts are recorded when such costs are probable and can be reasonably estimated. Factors that affect the Company’s warranty liability include the numberof 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 statements of operations. As of December 31, 2016 and 2015, the Company had accrued product warranty costsof $2,280 and $1,880, respectively. The following table summarizes product warranty activity during 2016 and 2015: 2016 2015Beginning balance$1,880 $1,853Charges to expense1,723 1,431Costs incurred(1,323) (1,404)Ending balance$2,280 $1,880(m)Shipping and Handling CostsShipping and handling costs are expensed as incurred and included in cost of sales. Billings for shipping and handling are reflected within net sales inthe accompanying statements of operations.(n)Research and DevelopmentExpenditures for research and development, including customer-funded research and development, are expensed as incurred. Revenue and relateddevelopment costs from customer-funded research and development are as follows: Year Ended December 31, 2016 2015 2014Customer-funded service sales$1,400 $3,002 $3,806Customer-funded costs included in costs of service sales498 1,546 2,633(o)Advertising CostsCosts related to advertising are expensed as incurred. Advertising expense was $2,761, $2,712, and $2,825 for the years ended December 31, 2016,2015, and 2014, respectively, and is included in sales, marketing, and support expense in the accompanying consolidated statements of operations.73Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)(p)Foreign Currency TranslationThe financial statements of the Company’s foreign subsidiaries located in Denmark and Singapore are maintained using the United States dollar as thefunctional currency. Exchange rates in effect on the date of the transaction are used to record monetary assets and liabilities. Revenue and other expenseelements are recorded at rates that approximate the rates in effect on the transaction dates. Foreign currency exchange gains and losses are recognized within“other (expense) income” in the accompanying consolidated statements of operations. For the years ended December 31, 2016, 2015, and 2014, theCompany recorded a total of net foreign currency exchange (gains) losses in its accompanying consolidated statements of operations of $(53), $59, and $126,respectively, which is comprised of both realized and unrealized foreign currency exchange gains and losses.The financial statements of the Company’s foreign subsidiaries located in the United Kingdom, Brazil, Norway, Cyprus, Belgium, the Netherlands andJapan use the foreign subsidiaries’ respective local currencies as the functional currency. The Company translates the assets and liabilities of these foreignsubsidiaries at the exchange rates in effect at year-end. Net sales, costs and expenses are translated using average exchange rates in effect during theyear. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive loss included in stockholders' equity inthe accompanying consolidated balance sheets.(q)Income TaxesIncome taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likelythan not to be realized. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not morelikely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. The tax benefit to be recognized of anytax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized uponresolution of the contingency. See Note 8 for further discussion of income taxes.(r)Net (Loss) Income per Common ShareBasic net (loss) income per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted netincome per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities, if any, as determined inaccordance with the treasury stock accounting method. For the year ended December 31, 2016, due to the net loss, the Company excluded all outstandingstock options and non-vested restricted shares from its diluted loss per share calculation as inclusion of these securities would have reduced the net loss pershare. Common stock equivalents related to options and restricted stock awards for 766 and 784 shares of common stock for the years ended December 31,2015, and 2014, respectively, have been excluded from the fully diluted calculation of net income per share, as inclusion would be anti-dilutive.A reconciliation of the basic and diluted weighted average common shares outstanding is as follows: 2016 2015 2014Weighted average common shares outstanding—basic15,834 15,625 15,420Dilutive common shares issuable in connection with stock plans— 209 185Weighted average common shares outstanding—diluted15,834 15,834 15,605(s)Contingent LiabilitiesThe Company estimates the amount of potential exposure it may have with respect to claims, assessments and litigation in accordance with ASC 450,Contingencies. As of December 31, 2016, the Company was not party to any lawsuit or proceeding that, in management's opinion, was likely to materiallyharm the Company's business, results of operations,74Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)financial condition or cash flows, as described in Note 17. It is not always possible to predict the outcome of litigation, as it is subject to many uncertainties.Additionally, it is not always possible for management to make meaningful estimate of the potential loss or range of loss associated with such litigation.As of December 31, 2015, the Company was party to a lawsuit, as described in Note 17. The Company settled the legal claim through a cash payment.The cash payment was included in accrued other in our consolidated balance sheet at December 31, 2015. The cash payment was made in January 2016.(t)Operating SegmentsThe Company operates in two segments, the mobile connectivity and inertial navigation segments. Operating segments are identified as componentsof an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisionsregarding resource allocation and assessing performance. The Company’s chief operating decision maker is its President, Chief Executive Officer andChairman of the Board.During the fourth quarter of 2016, the Company concluded that it had a change in its operating and reporting segments resulting in two new operatingsegments, which are also reportable segments and were organized based on products and services. The Company's reportable segments are: mobileconnectivity and inertial navigation (see Note 13, "Segment Reporting"). The Company operates in a number of major geographic areas, includinginternationally. Revenues from international locations, primarily consisting of Canada, European countries, both inside and outside the European Union, aswell as Africa, Asia/Pacific, the Middle East, and South America.(u) Film Production CostsThe Company capitalizes direct costs incurred in the production of its training videos, such as writing, directing, narrating, casting, location rental,and editing. These film costs are classified as a non-current asset on its consolidated balance sheet and are placed into service upon the film title beingreleased and available for customers' use. The Company’s sales model associated with training is subscription-based, in which fees from third parties are notdirectly attributable to the exhibition of a particular film but relate instead to access to the entire film library. Accordingly, management estimates that thestraight line method is the most representative method for the amortization of film costs. Consistent with the period over which revenues are assessed (i.e. thesubscription period), the film costs are amortized over four years. In the event that the film title is replaced or removed from the film library before theamortization period has expired, all unamortized costs are expensed immediately.(v) Recently Issued Accounting StandardsFrom time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Recently issued standards typically donot require adoption until a future effective date. Prior to their effective date, the Company evaluates the pronouncements to determine the potential effectsof adoption on our consolidated financial statements.Standards ImplementedASC Update No. 2015-03In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs relatedto a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debtdiscounts, and that amortization of debt issuance costs be reported as interest expense. The recognition and measurement guidance for debt issuance costs arenot affected by the amendments in this ASU. This ASU requires retrospective adoption and was effective for us beginning with our first quarterly filing in2016. The Company had no material capitalized debt issuance costs as of the date of adoption and therefore, there was no material impact to the Company'sconsolidated financial position as a result of the adoption.ASC Update No. 2015-05In April 2015, the FASB issued ASC Update No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’sAccounting for Fees Paid in a Cloud Computing Arrangement. Update No. 2015-05 provides accounting guidance on how customers should treat cloudcomputing arrangements. If a cloud computing arrangement includes75Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other softwarelicenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. UpdateNo. 2015-05 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods. The Companyelected to adopt the amendments prospectively to all arrangements entered into or materially modified after the effective date. The adoption of Update No.2015-05 did not have a material impact on the Company’s financial position or results of operations.ASC Update No. 2015-16In September 2015, the FASB issued ASC Update No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement -Period Adjustments. Update No. 2015-16 eliminates the requirement to restate prior period financial statements for measurement period adjustmentsfollowing a business combination. Update No. 2015-16 requires that the cumulative impact of a measurement period adjustment (including the impact onprior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should be eitherpresented separately on the face of the income statement or disclosed in the notes. Update No. 2015-16 is effective for fiscal years beginning after December15, 2015. The adoption of Update No. 2015-16 did not impact the Company’s financial position or results of operations.ASC Update No. 2015-17In November 2015, the FASB issued ASC Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. UpdateNo. 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. It is effective for fiscalyears beginning after December 15, 2016; however, earlier application is permitted. The Company elected to early adopt Update No. 2015-17 in 2016 on aprospective basis; as such, prior periods were not retrospectively adjusted. The adoption of Update No. 2015-17 did not have a material impact on theCompany’s financial position or results of operations.ASC Update No. 2017-01On January 6, 2017, the FASB issued new guidance that changes the definition of a business to assist entities with evaluating when a set of transferredassets and activities is a business. This guidance (ASU 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business) is effective forfiscal years beginning after December 15, 2017, including interim periods within those periods. However, early adoption is permitted. If the guidance is earlyadopted, early application of ASU 2017-01 is allowed for transactions for which the acquisition date occurs before the issuance date or effective date, onlywhen the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company has decided to earlyadopt Update No. ASU 2017-01 and adopted this guidance for transactions that occur subsequent to October 1, 2016. The adoption of Update No. ASU 2017-01 did not have a material impact on the Company’s financial position or results of operations.Standards to be ImplementedASC Updates No. 2014-09, No. 2016-08, No. 2016-10, No. 2016-11 and No. 2016-12In May 2014, the FASB issued ASC Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Update No. 2014-09 providesenhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies usingInternational Financial Reporting Standards and U.S. GAAP. The core principle requires entities to recognize revenue in a manner that depicts the transfer ofgoods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. In July2015, the FASB voted to approve a one year deferral, making the standard effective for public entities for annual and interim periods beginning afterDecember 15, 2017.In March 2016, the FASB issued ASC Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus AgentConsiderations (Reporting Revenue Gross versus Net). The purpose of Update No. 2016-08 is to clarify the guidance on principal versus agentconsiderations. It includes indicators that help to determine whether an entity controls the specified good or service before it is transferred to the customerand to assist in determining when the entity satisfied the performance obligation and as such, whether to recognize a gross or a net amount of consideration intheir consolidated statement of operations.76Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)In April 2016, the FASB issued ASC Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligationsand Licensing. Update No. 2016-10 clarifies that entities are not required to assess whether promised goods or services are performance obligations if they areimmaterial in the context of the contract. Update No. 2016-10 also addresses how to determine whether promised goods or services are separately identifiableand permits entities to make a policy election to treat shipping and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic606 related to licensing.In May 2016, the FASB issued ASC Update No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815). Update No.2016-11 rescinds previous SEC comments that were codified in Topic 605, Topic 932 and Topic 815. Upon adoption of ASC 606, certain SEC commentsincluding guidance on accounting for shipping and handling fees and costs and consideration given by a vendor to a customer should not be relied upon.In May 2016, the FASB also issued ASC Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements andPractical Expedients. Update No. 2016-12 provides clarity around collectability, presentation of sales taxes, non-cash consideration, contract modificationsat transition and completed contracts at transition. Update No. 2016-12 also includes a technical correction within ASC 606 related to required disclosures ifthe guidance is applied retrospectively upon adoption.The Company will adopt Topic 606 effective January 1, 2018. The Company anticipates it will adopt Topic 606 under the modified retrospectivemethod and will only apply this method to contracts that are not completed as of the date of adoption. The modified retrospective method will result in acumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application for anyopen contracts as of the adoption date. The Company is currently in the process of reviewing its contracts and related revenue streams to determine theimpact that the adoption will have on the Company’s financial position and results of operations.ASC Update No. 2016-01In January 2016, the FASB issued ASC Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement ofFinancial Assets and Financial Liabilities. It is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscalyears. Early application of certain provisions is permitted. Update No. 2016-01 requires entities to measure equity investments that do not result inconsolidation and are not accounted for under the equity method at fair value with changes recognized in net income. However, an entity may choose tomeasure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting fromobservable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also simplifies the impairment assessment ofequity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. Update No. 2016-01 also requiresseparate presentation of financial assets and financial liabilities by measurement category and form of financial asset and liability. The adoption of UpdateNo. 2016-01 is not expected to have a material impact on the Company's financial position or results of operations.ASC Update No. 2016-02In February 2016, the FASB issued ASC Update No. 2016-02, Leases (Topic 842). It is effective for fiscal years beginning after December 15, 2018,including interim periods within those fiscal years. Earlier application is permitted. Update No. 2016-02 is intended to increase the transparency andcomparability among organizations by recognizing lease asset and lease liabilities on the balance sheet, including those previously classified as operatingleases under current U.S. GAAP, and disclosing key information about leasing arrangements. The Company is in the process of determining the effect that theadoption of this standard will have on its financial position and results of operations.ASC Update No. 2016-09In March 2016, the FASB issued ASC Update No. 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting. This update is effective for annual reporting periods after December 15, 2016, including interim periods within those fiscal periods.Early adoption is permitted. The purpose of the update is to simplify several areas of the accounting for share-based payment transactions, including theincome tax77Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Upon adoption, the impact on ourfinancial position and results of operations will be dependent upon various factors including stock price and timing of option exercises which is difficult toestimate. The Company adopted this ASC update on January 1, 2017. Although, this ASC update does not impact the Company’s results of operations,financial position or cash flows for any periods prior to the adoption, the adoption of this ASC update had the following impact on the date of adoption:•The adoption of ASU 2016-09 also requires all income tax adjustments to be recorded in the consolidated statements of operations. The cumulativeadjustment upon adoption to accumulated earnings was zero since the increase in net deferred tax assets was fully offset by a corresponding increasein the deferred tax asset valuation allowance. The amount of deferred tax assets that had not been previously recognized due to the recognition ofexcess tax benefits was$1,571.•The Company has elected to account for forfeitures on share-based payments as these forfeitures occur, which represents a change from theaccounting previously required under ASC 718. As a result, the Company notes that future forfeitures could result in a significant reversal of stock-based compensation expense recognized in the period in which such forfeitures occur.ASC Update No. 2015-11In April 2015, the FASB issued ASC Update No. 2015-11, Simplifying the Measurement of Inventory regarding ASC Topic 330 - Inventory. UpdateNo. 2015-11 require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and netrealizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completionand disposal. Update No. 2015-11 is effective on a prospective basis for fiscal years, and for interim periods within those fiscal years, beginning afterDecember 15, 2016, with earlier application permitted. The Company adopted Update No. 2015-11 on January 1, 2017 and the adoption did not have amaterial effect on the Company's financial position, results of operations or cash flows.ASC Update No. 2016-13In June 2016, the FASB issued ASC Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses onFinancial Instruments. The update is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning afterDecember 15, 2018. The purpose of Update No. 2016-13 is to replace the current incurred loss impairment methodology for financial assets measured atamortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportableinformation, including forecasted information, to develop credit loss estimates. The Company is in the process of determining the effect that the adoptionwill have on its financial position and results of operation.ASC Update No. 2016-15In August 2016, the FASB issued ASC Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashPayments. The update is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption ispermitted, including adoption in an interim period. The purpose of Update No. 2016-15 is to reduce the diversity in practice in presentation andclassification of the following items within the statement of cash flows: debt prepayments, settlement of zero coupon debt instruments, contingentconsideration payments, insurance proceeds, securitization transactions and distributions from equity method investees. The update also addressesclassification of transactions that have characteristics of more than one class of cash flows. The Company is in the process of determining the effect that theadoption will have on its financial position and results of operations.ASC Update No. 2016-16In October 2016, the FASB issued ASU Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Theupdate is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption ispermitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available forissuance. The purpose of Update No. 2016-16 is to allow an entity to recognize the income tax consequences of an intra-entity transfer of an asset other thaninventory when the transfer78Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)occurs, as opposed to waiting until the asset is sold to an outside party. The Company is in the process of determining the effect that the adoption will haveon its financial position and results of operations.ASC Update No. 2017-04In January 2017, the FASB issued ASU Update No. 2017-04, Intangibles--Goodwill and Other (Topic 350): Simplifying the Test of GoodwillImpairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of thegoodwill impairment test under ASC 350. Under previous guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entitycalculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill iscalculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. Todetermine the implied fair value of goodwill, entities estimate the fair value of any unrecognized intangible assets (including in-process research anddevelopment) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unitin Step 1. Under this new guidance if a reporting unit's carrying value exceeds its fair value, an entity will record an impairment charge based on thatdifference with such impairment charge limited to the amount of goodwill in the reporting unit. This ASU does not change the guidance on completing Step1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determiningwhether to proceed to Step 1. This ASU will be applied prospectively and is effective for annual and interim impairment test performed in periods beginningafter December 15, 2019 for public business enterprises. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1,2017. The Company has elected to early adopt this ASU as of January 1, 2017. The adoption of this ASU had no impact on the Company's consolidatedstatements of operations, financial condition or cash flows. The Company expects that adoption of this ASU will simplify the evaluation and recording ofgoodwill impairment charges, if any.There are no other recent accounting pronouncements issued by the FASB that would have a material impact on the Company's financial statements.(2)Marketable SecuritiesMarketable securities consisted of the following as of December 31, 2016 and 2015:December 31, 2016AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValueMoney market mutual funds$21,848 $— $— $21,848Certificates of deposit3,864 — — 3,864Total marketable securities designated as available-for-sale$25,712 $— $— $25,712 December 31, 2015AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValueMoney market mutual funds$13,244 $— $— $13,244United States treasuries1,002 — — 1,002Corporate notes2,283 1 — 2,284Certificates of deposit6,089 — — 6,089Total marketable securities designated as available-for-sale$22,618 $1 $— $22,619The amortized costs and fair value of debt securities as of December 31, 2016 and 2015 are shown below by effective maturity. Effective maturitiesmay differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.79Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)December 31, 2016AmortizedCost FairValueDue in less than one year$3,864 $3,864Due after one year and within two years— — $3,864 $3,864December 31, 2015AmortizedCost FairValueDue in less than one year$5,515 $5,516Due after one year and within two years3,859 3,859 $9,374 $9,375Interest income from cash equivalents and marketable securities was $94 and $110 for the years ended December 31, 2016 and 2015, respectively.(3)InventoriesInventories are stated at the lower of cost or market using the first-in first-out costing method. Inventories as of December 31, 2016 and 2015 includethe costs of material, labor, and factory overhead. Inventories consist of the following: December 31, 2016 2015Raw materials$10,606 $12,833Work in process2,185 2,778Finished goods7,954 5,978 $20,745 $21,589(4)Property and EquipmentProperty and equipment, net, as of December 31, 2016 and 2015 consist of the following: December 31, 2016 2015Land$3,828 $3,828Building and improvements21,717 22,407Leasehold improvements155 299Machinery and equipment41,777 40,788Office and computer equipment14,824 15,729Motor vehicles51 51 82,352 83,102Less accumulated depreciation(45,766) (43,202) $36,586 $39,900Depreciation expense for the years ended December 31, 2016, 2015, and 2014 amounted to $7,608, $7,193, and $6,127, respectively.Included within machinery and equipment are certain hardware revenue generating assets that had a net book value of $7,734 and $10,201 as ofDecember 31, 2016 and 2015, respectively, that are utilized in the delivery of the Company's airtime services, media, and other content.80Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)(5)Debt and Line of CreditLong-term debt consists of the following: December 31, 2016 2015Term notes$53,625 $58,906Mortgage loan2,951 3,114Equipment loans1,477 2,672Total58,053 64,692Less amounts classified as current7,900 6,638Long-term debt, excluding current portion$50,153 $58,054Term Note and Line of CreditOn July 1, 2014, the Company entered into (i) a five-year senior credit facility agreement (the Credit Agreement) with Bank of America, N.A., asAdministrative Agent, and the lenders named from time to time as parties thereto (the Lenders), for an aggregate amount of up to $80,000, including arevolving credit facility (the Revolver) of up to $15,000 and a term loan (Term Loan) of $65,000 to be used for general corporate purposes, including both(A) the refinancing of the Company’s $30,000 then-outstanding indebtedness under its previous credit facility and (B) permitted acquisitions, (ii) revolvingcredit notes (together, the Revolving Credit Note) to evidence the Revolver, (iii) term notes (together, the Term Note, and together with the Revolving CreditNote, the Notes) to evidence the Term Loan, (iv) a Security Agreement (the Security Agreement) required by the Lenders with respect to the grant by theCompany of a security interest in substantially all of the assets of the Company in order to secure the obligations of the Company under the CreditAgreement and the Notes, and (v) Pledge Agreements (the Pledge Agreements) required by the Lenders with respect to the grant by the Company of a securityinterest 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 ofthe Company under the Credit Agreement and the Notes.The Credit Agreement was amended in June 2015 to modify the circumstances under which certain changes in the Company's Board of Directorswould constitute a change of control. The Credit Agreement was further amended in September 2015 to modify the Maximum Consolidate Leverage Ratio asof September 30, 2015. The Credit Agreement was amended again in March 2017 to further modify the Maximum Consolidated Leverage Ratio, to amendthe Applicable Rate and amortization schedule of the Term Loan and to modify the definition of Consolidated Fixed Charges, as well as make certain otherchanges.The $65,000 Term Note was executed on July 1, 2014 in connection with the acquisition of Videotel. See Note 13 below for more informationregarding the acquisition. Proceeds in the amount of $35,000 were applied toward the payment of a portion of the purchase price for the acquired shares ofVideotel, and proceeds in the amount of approximately $30,000 were applied toward the refinancing of the then-outstanding balance of the Company’sprevious credit facility. The Company was required to make principal repayments on the Term Loan in the amount of approximately $1,200 at the end ofeach of the first 8 three-month periods following the closing; thereafter, the Company was required to make principal repayments in the amount ofapproximately $1,600 for each succeeding three-month period until the maturity of the loan on July 1, 2019. The Company made the first payment on thisdebt in September 2014 and has made all required principal repayments on a timely basis. In connection with the March 2017 amendment, the Companymade an additional principal repayment of $6,000 on the Term Note and amended the repayment terms. Under the amended terms, the Company must makeprincipal repayments of $575 every three months starting on April 1, 2017 until the Term Note maturity on July 1, 2019. On the maturity date, the entireremaining principal balance of the loan, including any future loans under the Revolver, is due and payable, together with all accrued and unpaid interest,penalties, and other amounts due and payable under the Credit Agreement. The Credit Agreement contains provisions requiring the mandatory prepayment ofamounts outstanding under the Term Loan and the Revolver under specified circumstances, including (i) 100% of the net cash proceeds from certaindispositions 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 of more than $250 outside the ordinary course of business. The prepayments are first applied to theTerm Loan, in inverse order of maturity, and then to the Revolver. In the discretion of the Administrative Agent, certain mandatory prepayments made on theRevolver can permanently reduce the amount of credit available under the Revolver.81Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Loans under the Credit Agreement bear interest at varying rates determined in accordance with the Credit Agreement. Each LIBOR Rate Loan, asdefined in the Credit Agreement, bears interest on the outstanding principal amount thereof for each interest period from the applicable borrowing date at arate per annum equal to the LIBOR Daily Floating Rate or LIBOR Monthly Floating Rate, each as defined in the Credit Agreement, as applicable, plus theApplicable Rate, as defined in the Credit Agreement, and each Base Rate Loan, as defined in the Credit Agreement, bears interest on the outstandingprincipal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate, as defined in the Credit Agreement, plus theApplicable Rate. The Applicable Rate ranges from 1.75% to 2.25%, depending on the Company’s Consolidated Leverage Ratio, as defined in the CreditAgreement. The highest Applicable Rate applies when the Consolidated Leverage Ratio exceeds 1.50:1.00. Upon certain defaults, including failure to makepayments when due, interest becomes payable at a higher default rate.Borrowings under the Revolver are subject to the satisfaction of numerous conditions precedent at the time of each borrowing, including thecontinued accuracy of the Company’s representations and warranties and the absence of any default under the Credit Agreement. As of December 31, 2016,there were no borrowings outstanding under the revolver and the full balance of $15,000 was available for borrowing.The Credit Agreement contains two financial covenants, a Maximum Consolidated Leverage Ratio and a Minimum Consolidated Fixed ChargeCoverage Ratio, each as defined in the Credit Agreement. In September 2015, the Maximum Consolidated Leverage Ratio was increased from 1.00:1.00 to1.75:1.00 for September 30, 2015, 1.50:1.00 for December 31, 2015, and 1.25:1.00 for March 31, 2016 and each fiscal quarter thereafter. The MinimumConsolidated Fixed Charge Coverage Ratio may not be less than 1.25:1.00. The Company was in compliance with these financial ratio debt covenants as ofDecember 31, 2016. As a result of the March 2017 amendment, the Maximum Consolidated Leverage Ratio was increased to 1.50:1.00. In addition, thedefinition of the Consolidated Fixed Charge Coverage Ratio was amended to include only maintenance capital expenditures as defined.The Credit Agreement imposes certain other affirmative and negative covenants, including without limitation covenants with respect to the paymentof taxes and other obligations, compliance with laws, entry into 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 Credit Agreement could be accelerated upon a default or event of default under the terms of theCredit Agreement, including certain failures to pay principal or interest when due, certain breaches of representations and warranties, the failure to complywith the Company’s affirmative and negative covenants under the Credit Agreement, a change of control of the Company, certain defaults in paymentrelating 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 events relating to the impairment of collateral or theLenders' security interest therein, and any other material adverse change with respect to the Company.Mortgage LoanOn April 6, 2009, the Company entered into a mortgage loan in the amount of $4,000 related to its headquarters facility in Middletown, Rhode Island.On June 9, 2011, the Company entered into an amendment to the mortgage loan. The loan term is ten years, with a principal amortization of 20 years, and theinterest rate will be a rate per year adjusted periodically based on a defined interest period equal to the BBA LIBOR Rate of 2.18% plus 2.00 percentagepoints. Land, building and improvements with an approximate carrying value of $5,000 as of December 31, 2016 secure the mortgage loan. The monthlymortgage payment is approximately $14 plus interest and increases in increments of approximately $1 each year throughout the life of the mortgage. Due tothe difference in the term of the loan and amortization of the principal, a balloon payment of $2,551 is due on April 1, 2019. The loan contains one financialcovenant, a Fixed Charge Coverage Ratio, which applies in the event that the Company’s consolidated cash, cash equivalents, and marketable securitiesbalance falls below $25,000 at any time. As the Company’s consolidated cash, cash equivalents, and marketable securities balance was above the minimumthreshold throughout the year ended December 31, 2016, the Fixed Charge Coverage Ratio did not apply. Under the mortgage loan, the Company mayprepay its outstanding loan balance subject to certain early termination charges as defined in the mortgage loan agreement. If the Company were to defaulton its mortgage loan, the land, building and improvements would be used as collateral. As discussed in Note 16 to the consolidated financial statements,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 interest rateswap82Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)agreements that are intended to hedge its mortgage interest obligations by fixing the interest rates specified in the mortgage loan to 5.91% for half of theprincipal amount outstanding and 6.07% for the remaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires onApril 16, 2019.Equipment LoanOn January 30, 2013, the Company borrowed $4,700 from a bank and pledged as collateral six satellite hubs and related equipment, including threehubs purchased in 2012. The term of the equipment loan is five years, and the loan bears interest at a fixed rate of 2.76% per annum. The monthly payment isapproximately $83, including interest expense. On December 30, 2013, the Company borrowed $1,200 from a bank and pledged as collateral one satellitehub and related equipment. The term of the equipment loan is five years, and the loan bears interest at a fixed rate of 3.08% per annum. The monthly paymentis approximately $21, including interest expense.The following is a summary of future principal payments under these long-term debt agreements:Year ending December 31, PrincipalPayment2017 $7,9002018 6,9312019 43,222Total outstanding at December 31, 2016 $58,053(6)Commitments and ContingenciesThe Company has certain operating leases for satellite capacity, various equipment, and facilities. The following reflects future minimum paymentsunder operating leases that have initial or remaining non-cancelable lease terms at December 31, 2016:Years ending December 31,OperatingLeases2017$13,80420188,85120194,66720201,5812021179Thereafter248Total minimum lease payments$29,330Total rent expense incurred under facility operating leases for the years ended December 31, 2016, 2015, and 2014 amounted to $601, $630, and $820,respectively. Total expense incurred under satellite capacity and equipment operating leases for the years ended December 31, 2016, 2015, and 2014amounted to $31,606, $32,793, and $30,280, respectively, which also includes payments for usage charges in excess of the minimum contractualrequirements.In the normal course of business, the Company enters into unconditional purchase order obligations with its suppliers for inventory and otheroperational purchases. Outstanding and unconditional purchase order obligations were $14,818 as of December 31, 2016, which the Company expects tofulfill in 2017.Other than the interest rate swaps (see Note 16), the Company did not have any off-balance sheet commitments, guarantees, or standby repurchaseobligations as of December 31, 2016.83Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)(7)Stockholders’ Equity(a)Employee Stock OptionsOn June 15, 2016, at the Company's 2016 Annual Meeting of Stockholders, the stockholders of the Company approved the 2016 Equity and IncentivePlan (2016 Plan). The 2016 Plan authorizes the Company to issue up to 3,000 shares of common stock (plus an additional 1,690 shares intended to roll overinto the 2016 Plan shares subject to awards outstanding on June 15, 2016 under earlier plans that may be forfeited, canceled, reacquired by the Company orterminated) pursuant to stock options, restricted stock awards and other stock-based awards.Options are generally granted with an exercise price equal to the fair market value of the common stock on the date of grant and generally vest in equalannual amounts over four years beginning on the first anniversary of the date of the grant. No options are exercisable for periods of more than five years afterdate of grant. Under the 2016 Plan, each share issued under awards other than options and stock appreciation rights will reduce the number of shares reservedfor issuance by two shares. Shares issued under options or stock appreciation rights will reduce the shares reserved for issuance on a share-for-share basis. The2016 Plan and earlier equity compensation plans, pursuant to which 12,415 shares of the Company’s common stock were reserved for issuance, were allapproved by the Company's shareholders. As of December 31, 2016, 2,895 shares were available for future grants. The Compensation Committee of the Boardof Directors administers the equity compensation plans, approves the individuals to whom awards will be granted and determines the number of shares andother terms of each award. Outstanding options under the Company's equity compensation plans at December 31, 2016 expire from February 2017 throughNovember 2021. None of the Company’s outstanding options includes performance-based or market-based vesting conditions as of December 31, 2016.The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The expectedvolatility assumption is based on the historical daily price data of the Company’s common stock over a period equivalent to the weighted average expectedlife of the Company’s options. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns andrepresents the period of time the options granted are expected to be outstanding. The risk-free interest rate is based on the actual U.S. Treasury zero-couponrates for bonds matching the expected term of the option as of the option grant date. The dividend yield of zero is based upon the fact that the Company hasnot historically declared or paid cash dividends, and does not expect to declare or pay dividends in the foreseeable future.The per share weighted-average fair values of stock options granted during 2016, 2015, and 2014 were $2.77, $4.39, and $4.71, respectively. Theweighted-average assumptions used to value options as of their grant date were as follows: Year EndedDecember 31, 2016 2015 2014Risk-free interest rate1.43% 1.55% 1.52%Expected volatility38.2% 43.3% 46.5%Expected life (in years)4.18 4.17 4.21Forfeiture rate5.00% 5.00% 5.00%Dividend yield0% 0% 0%84Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)The changes in outstanding stock options for the year ended December 31, 2016 are as follows: Number of Options Weighted AverageExercise Price Weighted AverageRemainingContractual Life(in Years) Aggregate IntrinsicValueOutstanding at December 31, 20151,177 $11.60 Granted75 $8.90 Exercised(269) $9.06 Expired, canceled or forfeited(297) $13.68 Outstanding at December 31, 2016686 $11.41 2.23 $681Exercisable at December 31, 2016379 $11.39 1.50 $382Options vested or expected to vest at December 31,2016674 $11.42 2.04 $662The total aggregate intrinsic value of options exercised was $484, $50, and $232 in 2016, 2015, and 2014, respectively. The total aggregate intrinsicvalue of options outstanding at December 31, 2015 and 2014 was $123 and $1,814, respectively. The total aggregate intrinsic value of options exercisable atDecember 31, 2015 and 2014 was $122 and $761, respectively. As of December 31, 2015 and 2014, the number of options exercisable was 687 and 490, respectively, and the weighted average exercise price of thoseoptions was $11.60 and $11.87 per share, respectively. The weighted average remaining contractual term for options exercisable at December 31, 2015 and2014 was 2.00 and 1.76 years, respectively. The weighted average remaining contractual term for options outstanding at December 31, 2015 and 2014 was2.04 and 2.72 years, respectively.As of December 31, 2016, there was $790 of total unrecognized compensation expense related to stock options, which is expected to be recognizedover a weighted-average period of 1.94 years. In 2016, 2015, and 2014, the Company recorded compensation charges of $702, $1,229, and $1,368,respectively, related to stock options. Compensation costs for options subject only to service conditions that vest ratably are recognized on a straight-linebasis over the requisite service period for the entire award. During 2016, 2015, and 2014, cash received under stock option plans for exercises was $2,438,$90 and $471, respectively. (b)Restricted StockThe Company granted 424, 203, and 265 restricted stock awards to employees under the terms of the 2016 Plan or the Amended and Restated 2006Stock Incentive Plan (2006 Plan) for the years ended December 31, 2016, 2015, and 2014, respectively. The restricted stock awards generally vest annuallyover four years from the date of grant subject to the recipient remaining an employee through the applicable vesting dates. Compensation expense forrestricted stock awards is measured at fair value on the date of grant based on the number of shares granted and the quoted market closing price of theCompany’s common stock. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures. The weighted-averagegrant-date fair value of restricted stock granted during 2016, 2015, and 2014 was $8.68, $12.43, and $13.57 per share, respectively.As of December 31, 2016, there was $4,344 of total unrecognized compensation expense related to restricted stock awards, which is expected to berecognized over a weighted-average period of 2.32 years. Compensation costs for awards subject only to service conditions that vest ratably are recognizedon a straight-line basis over the requisite service period for the entire award. Compensation cost for awards initially subject to certain performance conditionsare recognized on a ratable basis over the requisite service period for the entire award. In 2016, 2015, and 2014, the Company recorded compensation chargesof $2,938, $2,422, and $2,317, respectively, related to restricted stock awards.85Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Restricted stock activity under the 2006 Plan and the 2016 Plan for 2016 is as follows: Number ofShares Weighted-averagegrant datefair valueOutstanding at December 31, 2015, unvested458 $13.22Granted424 8.68Vested(186) 12.82Forfeited(52) 10.39Outstanding at December 31, 2016, unvested644 $10.58 (c)Employee Stock Purchase PlanOn June 15, 2016, at the Company's 2016 Annual Meeting of Stockholders, the stockholders of the Company also approved amendments to theCompany's Amended and Restated 1996 Employee Stock Purchase Plan (ESPP) that, among other things, increased the number of shares of common stockreserved for issuance by 1,000 to a total of 1,650, of which 1,000 shares remain available as of December 31, 2016.The ESPP covers all of the Company’s employees. Under the terms of the ESPP, eligible employees can elect to have up to six percent of their pre-taxcompensation withheld to purchase shares of the Company’s common stock on a semi-annual basis. Before the amendment to the plan, the ESPP allowedeligible employees the right to purchase the Company’s common stock on a semi-annual basis at 85% of the market price at the end of each purchase period.Under the amendment, the ESPP now allows eligible employees the right to purchase the Company's common stock on a semi-annual basis at 85% of themarket price on the first or last day of each purchase period, whichever is lower. During 2016, 2015, and 2014, shares issued under this plan were 18, 28, and12 shares, respectively. The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of these discounted purchases. The fairvalue of the 15% discount is recognized as compensation expense over the purchase period. The Company applies a graded vesting approach because theESPP provides for multiple purchase periods and is, in substance, a series of linked awards. In 2016, 2015, and 2014, the Company recorded compensationcharges of $11, $58, and $55, respectively, related to the ESPP. During 2016, 2015, and 2014, cash received under the ESPP was $146, $291, and $138,respectively.(d)Stock- Based Compensation Expense The following presents stock-based compensation expense in the Company's consolidated statements of operations for the years ended December 31,2016, 2015, and 2014. 2016 2015 2014Cost of product sales$321 $317 $384Cost of service sales1 — 1Research and development690 619 695Sales, marketing and support1,027 927 926General and administrative1,612 1,871 1,765 $3,651 $3,734 $3,771(e) Accumulated Other Comprehensive LossComprehensive income (loss) includes net earnings (loss), unrealized gains and losses from foreign currency translation, and pension liabilityadjustments, net of tax attributes, which substantially relate to the pension liability adjustment. 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). 86Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts) Foreign CurrencyTranslation Unrealized Gain (Loss)on Available for SaleMarketable Securities Interest RateSwaps Total AccumulatedOther ComprehensiveLossBalance, December 31, 2013$797 $(4) $(332) $461Other comprehensive (loss) income beforereclassifications(3,953) 8 (84) (4,029)Amounts reclassified from AOCI to Otherincome (expense), net (1)— — 121 121Net other comprehensive (loss) income,December 31, 2014(3,953) 8 37 (3,908)Balance, December 31, 2014(3,156) 4 (295) (3,447)Other comprehensive (loss) income beforereclassifications(4,207) (3) (58) (4,268)Amounts reclassified from AOCI to Otherincome (expense), net (1)— — 115 115Net other comprehensive (loss) income,December 31, 2015(4,207) (3) 57 (4,153)Balance, December 31, 2015(7,363) 1 (238) (7,600)Other comprehensive (loss) income beforereclassifications(9,288) (1) (20) (9,309)Amounts reclassified from AOCI to Otherincome (expense), net (1)— — 100 100Net other comprehensive (loss) income,December 31, 2016(9,288) (1) 80 (9,209)Balance, December 31, 2016(16,651) — (158) (16,809)(1) For additional information, see Note 2, "Marketable Securities", and see Note 16, "Derivative Instruments and Hedging Activities"87Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)(8)Income TaxesIncome tax expense (benefit) for the years ended December 31, 2016, 2015, and 2014 attributable to income (loss) from operations is presented below. Current Deferred TotalYear ended December 31, 2016 Federal$227 $3,197 $3,424State144 457 601Foreign2,770 (1,248) 1,522 $3,141 $2,406 $5,547Year ended December 31, 2015 Federal$(555) $(94) $(649)State120 765 885Foreign295 (118) 177 $(140) $553 $413Year ended December 31, 2014 Federal$325 $(623) $(298)State(2) 1,036 1,034Foreign1,640 (1,092) 548 $1,963 $(679) $1,284The actual income tax expense (benefit) differs from the “expected” income tax expense (benefit) computed by applying the United States Federalcorporate income tax rate of 34% to income before tax expense (benefit) as follows:88Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts) Year Ended December 31, 2016 2015 2014Computed “expected” tax expense$(670) $906 $451Increase (decrease) in income taxes resulting from: State income tax expense, net of federal benefit(156) (37) (31)State research and development, investment credits(363) (317) (365)Non-deductible meals & entertainment49 33 37Non-deductible stock compensation expense216 181 29Non-deductible deferred compensation expense116 260 87Non-deductible transaction costs— — 73Subpart F income, net of foreign tax credits523 61 296Foreign branch income52 — —Manufacturing deduction— (102) (123)Nontaxable interest income(162) (106) (105)Foreign tax rate differential(1,258) (792) (289)Federal research and development credits(395) (348) (453)Uncertain tax positions283 (413) 97Provision to tax return adjustments(95) 80 (317)Change in tax rates14 (313) 235Change in valuation allowance7,425 1,392 1,665Foreign research and development incentives(45) (59) —Other13 (13) (3)Net income tax expense$5,547 $413 $1,284The components of results of income before income tax expense (benefit) determined by tax jurisdiction, are as follows: Year Ended December 31, 2016 2015 2014United States$(7,775) $(570) $907Foreign5,805 3,236 418Total$(1,970) $2,666 $1,32589Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities for the periods presented are asfollows: December 31, 2016 2015Deferred tax assets: Accounts receivable, due to allowance for doubtful accounts$1,104 $900Inventories792 562Operating loss carry-forwards3,078 2,094Stock-based compensation expense1,231 1,981Property and equipment, due to difference in depreciation148 209Research and development, alternative minimum tax credit carry-forwards3,031 3,111Foreign tax credit carry-forwards754 —State tax credit carry-forwards2,277 2,228Warranty reserve822 675Accrued expenses432 424Gross deferred tax assets13,669 12,184Less valuation allowance(11,567) (4,688)Total deferred tax assets2,102 7,496Deferred tax liabilities: Purchased intangible assets(3,197) (4,944)Property and equipment, due to differences in depreciation(2,003) (2,849)Other(11) (114)Total deferred tax liabilities(5,211) (7,907)Net deferred tax liability$(3,109) $(411)Net deferred tax asset—non-current$24 $4,686Net deferred tax liability—non-current$(3,133) $(5,097)As of December 31, 2016, the Company had federal research and development tax credit carry-forwards in the amount of $3,875 and other generalbusiness credits of $9 that expire in years 2026 through 2036. The Company also had alternative minimum tax credits of $54 that have no expiration date. Asof December 31, 2016, the Company had state research and development tax credit carry-forwards in the amount of $3,529 that expire in years 2016 through2023. The Company also had other state tax credit carry-forwards of $241 available to reduce future state tax expense that expire in years 2018 through 2019.The tax benefit related to $1,571 of federal and state tax credits would result in a credit to additional paid-in capital when these deferred tax assets reducetaxes payable.The Company’s ability to utilize these net operating loss carry-forwards and tax credit carry-forwards may be limited in the future if the Companyexperiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% orgreater stockholders change by more than 50% over a three-year period.In assessing the reliability of its net deferred tax assets, the Company considered whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. As of December 31, 2016, the Company concluded that a net increase of $6,879 of the valuation allowance wasappropriate. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating taxable income and its near-termforecasts of future taxable income. The net increase in valuation allowance of $6,879 is composed of expense of $7,425, a decrease of $287 related to theexpiration of previously reserved state tax credit carry-forwards, and a decrease of $258 related to the use of net operating loss and credit carryforwardsattributed to tax deductions in excess of recognized compensation expense from employee stock compensation awards that existed as of the adoption of ASC718, Compensation - Stock Compensation. Approximately $454 of the valuation allowance is attributable to tax deductions in excess of recognizedcompensation cost from employee stock compensation awards that existed as of the adoption of ASC 718. The Company will recognize the net deferred taxasset and corresponding90Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)benefit to additional paid-in capital for these windfall tax benefits once such amounts reduce income taxes payable, in accordance with the requirements ofASC 718.As of December 31, 2016, the Company has not provided for U.S. deferred income taxes on undistributed earnings of its foreign subsidiaries ofapproximately $14,543 since these earnings are expected to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends orotherwise, the Company will be subject to additional U.S. and state income taxes (less foreign tax credits), as well as withholding taxes in its foreignlocations. The amount of taxes attributable to the undistributed earnings is not practicably determinable.The Company establishes reserves for uncertain tax positions based on management’s assessment of exposure associated with tax deductions,permanent tax differences, and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to thereserve. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.During the years ended December 31, 2016, 2015, and 2014, the aggregate changes in the total gross amount of unrecognized tax benefits aresummarized as follows: Year Ended December 31, 2016 2015 2014Unrecognized tax benefits as of January 1$983 $2,487 $—Gross increase in unrecognized tax benefits - prior year tax positions— 168 —Gross decrease in unrecognized tax benefits due to currency fluctuations - prioryear tax positions(131) (116) —Gross increase in unrecognized tax benefits - current year tax position293 13 14Settlements with taxing authorities(330) (1,569) —Lapse of statute of limitations— — —Positions assumed in Videotel transaction— — 2,473Ending balance$815 $983 $2,487The Company had gross unrecognized tax benefits of $815, $983, and $2,487 as of December 31, 2016, 2015, and 2014, respectively. $815, $983, and$1,172 represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company's effective tax rate at December 31,2016, 2015, and 2014, respectively.The Company recorded interest and penalties of $40, $78, and $84 in its statement of operations for the years ended December 31, 2016, 2015, and2014, respectively. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-currentincome taxes payable was approximately $545, $468, and $1,067 as of December 31, 2016, 2015, and 2014, respectively.The timing of any resolution of income tax examinations is highly uncertain, as are the amounts and timing of any settlement payment. These eventscould cause fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company does not expect a reduction ofunrecognized tax benefits within the next twelve months.The Company’s tax jurisdictions include the United States, the UK, Denmark, Cyprus, Norway, Brazil, Singapore, Belgium, Bermuda, the Netherlands,Hong Kong, Japan, and India. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for yearsprior to 2013, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state andforeign taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each precedingyear.91Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)(9) AcquisitionOn July 2, 2014, KVH Media Group Limited (KMG UK), an indirectly wholly owned subsidiary of KVH, entered into a Share Purchase Agreement withNigel Cleave to acquire all of the issued share capital of Super Dragon Limited and Videotel Marine Asia Limited, for an aggregate purchase price ofapproximately $47,446, which excluded $1,719 of cash consideration that was considered deferred compensation in purchase accounting. The Companyexpensed approximately $358 and $770 related to the deferred compensation during the year ended December 31, 2016 and 2015, respectively. Videotel is amaritime training services company headquartered in London that produces and distributes training films and eLearning computer-based training courses tocommercial customers in the maritime market. Videotel also has sales offices in Hong Kong and Singapore. The purchase price was determined through arm’s-length negotiation and was subject to a potential post-closing adjustment based on the value of the net assets delivered at the closing. In the second quarterof 2015, the Company finalized its valuations of the fair value of the assets acquired and liabilities assumed, which resulted in no adjustments to the purchaseprice.The Share Purchase Agreement contains certain representations, warranties, covenants and indemnification provisions. The Share Purchase Agreementprovides that 10% of the purchase price would be held in escrow for a period of approximately 21 months after the closing in order to satisfy validindemnification claims that KMG UK may assert for specified breaches of representations, warranties and covenants. The escrow and holdback amounts ofapproximately $6,000 were fully funded during the first quarter of 2015. In April 2016, approximately $600 of the $4,400 total escrow funds were released tothe Company to cover post-completion accounts receivable write-offs and the balance was released to the seller. The holdback of approximately $1,600 wasreleased to the seller in July 2016.In the Share Purchase Agreement, Mr. Cleave agreed to comply with certain confidentiality, non-competition and non-solicitation covenants withrespect to the business of Videotel for a period of 18 months after the closing.The total purchase price and the excess of the total purchase price over the estimated fair value of the net assets acquired are as follows:Consideration transferred - cash $47,446Book value of tangible net assets acquired$1,732 Fair value adjustments to deferred revenue961 Fair value of tangible net assets acquired $2,693 Identifiable intangibles at acquisition-date fair value Subscriber relationships$12,759 Proprietary content9,814 Internally developed software2,160 Favorable operating leases791 Total intangible assets $25,524Deferred income taxes (3,922)Goodwill $23,151The acquired finite-lived intangible assets from the Videotel acquisition were recorded at their estimated fair value of $25,524 on the acquisition date.Refer to Note 1 and Note 10 for the classification of Videotel intangible assets including their useful lives.From the acquisition on July 2, 2014 through December 31, 2016, the Company has recorded approximately $55,100 of service revenues attributableto Videotel within its consolidated financial statements, of which approximately $21,500 was recorded during the year ended December 31, 2016.Transaction costs related to the acquisition of Videotel were $1,200 for the year ended December 31, 2014.92Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)The following table summarizes the supplemental statements of operations information on an unaudited pro forma basis as if the Videotel acquisitionhad occurred on January 1, 2013: Year Ended December 31, 2014Pro forma net revenues $183,886Pro forma net income $2,386Basic pro forma net income per share $0.15Diluted pro forma net income per share $0.15The pro forma results presented above are for illustrative purposes only for the periods presented and do not purport to be indicative of the actualresults which would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operationswhich may occur in the future.(10) Goodwill and Intangible AssetsThe Company’s goodwill and intangible assets are associated with the purchase of Virtek Communication (now KVH Industries Norway AS) inSeptember 2010, Headland Media Limited (now known as the KVH Media Group) in May 2013, and Videotel in July 2014.Intangible assets are subject to amortization. The following table summarizes other intangible assets as of December 31, 2016 and 2015, respectively: GrossCarryingAmount AccumulatedAmortization Net CarryingValueDecember 31, 2016 Subscriber relationships$16,888 $6,431 $10,457Distribution rights4,122 1,180 2,942Internally developed software2,301 1,904 397Proprietary content7,960 4,431 3,529Intellectual property2,284 2,056 228Favorable lease627 342 285 $34,182 $16,344 $17,838December 31, 2015 Subscriber relationships$19,161 $4,426 $14,735Distribution rights4,736 895 3,841Internally developed software2,457 1,244 1,213Proprietary content8,812 2,879 5,933Intellectual property2,283 1,729 554Favorable lease696 217 479 $38,145 $11,390 $26,755The Company amortizes its intangible assets over the estimated useful lives of the respective assets as discussed above in our Summary of SignificantAccounting Policies. Amortization expense related to intangible assets was $4,956, $5,526, and $3,859 for years ended December 31, 2016, 2015, and 2014,respectively.93Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Amortization expense related to intangible assets for the years ended December 31, 2016, 2015, and 2014 was as follows:Expense Category2016 2015 2014Cost of service sales$2,068 $1,978 $1,123General administrative expense2,888 3,548 2,736Total amortization expense$4,956 $5,526 $3,859As of December 31, 2016, the total weighted average remaining useful lives of the definite-lived intangible assets was 5.2 years and the weightedaverage remaining useful lives by the definite-lived intangible asset category are as follows:Intangible AssetWeighted Average Remaining Useful Life inYearsSubscriber relationships5.8Distribution rights11.3Internally developed software1.4Proprietary content2.5Intellectual property0.8Favorable lease2.5Estimated future amortization expense for intangible assets recorded by the Company at December 31, 2016 is as follows:Years ending December 31,AmortizationExpense2017$4,12920183,72020192,84220202,08420212,084Thereafter2,979Total amortization expense$17,838The changes in the carrying amount of intangible assets during the year ended December 31, 2016 is as follows: 2016Balance at January 1$26,755Amortization expense(4,956)Foreign currency translation adjustment(3,961)Balance at December 31$17,83894Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. All ofthe Company's goodwill as of December 31, 2016 relates to its mobile connectivity reportable segment. None of the Company's goodwill is deductible for taxpurposes. The changes in the carrying amount of goodwill during the year ended December 31, 2016 is as follows: GoodwillBalance at January 1, 2015$40,454Foreign currency translation adjustment$(3,707)Balance at December 31, 2015$36,747Foreign currency translation adjustment(5,404)Balance at December 31, 2016$31,343(11) 401(k) PlanThe Company has a 401(k) Plan (the Plan) for all eligible employees. Participants may defer a portion of their pre-tax earnings subject to limitsdetermined by the Internal Revenue Service. Participants age 50 or older may be eligible to make additional contributions. As of December 31, 2016, theCompany matches one half of the first 6% contributed by the Plan participants. The Company’s contributions vest over a five-year period from the date ofhire. Total Company matching contributions were $671, $608, and $462 for the years ended December 31, 2016, 2015, and 2014, respectively. In addition,the Company may make contributions to the Plan at the discretion of the Compensation Committee of the Board of Directors. There were no discretionarycontributions in 2016, 2015, or 2014.(12) Business and Credit ConcentrationsThe Company had no customers that accounted for 10% or more of its consolidated net sales for the years ended December 31, 2016, 2015, and 2014,respectively. The Company had one customer that accounted for 17% of accounts receivable as of December 31, 2015, and all amounts were collected within2016 in accordance with the contractual payment terms. The Company had no customers who account for 10% or more of the Company's consolidatedaccounts receivable as of December 31, 2016 or December 31, 2014.(13) Segment ReportingDuring the fourth quarter of 2016, the Company had a change in its operating and reportable segments. This change was a result of the following:•Changes in overall organizational structure, including appointments of a Chief Operating Officer and a new Chief Financial Officer•Changes in how financial performance is measured and assessed based on current operating results and planned future operations driven bycompletion of the Company’s fiscal 2017 and long-term planning process•Consideration regarding how incentive compensation for key executives will be measured for both 2016 and prospectively.Therefore, in the fourth quarter of 2016, the Company concluded that it has two new operating segments, which are also reportable segments, and wereorganized based on products and services. The Company’s reportable segments are:•Mobile connectivity, and•Inertial navigationThe Company’s Chief Operating Decision Maker (CODM), whom the Company has identified as its Chief Executive Officer, primarily evaluates thebusiness and assesses performance based on the revenue and operating income of the segments. The Company does not allocate interest, taxes, and certaincorporate-level costs to its reportable segments, as discussed further below.95Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)The financial results of each segment are based on revenues from external customers, cost of revenue and operating expenses that are directlyattributable to the segment and an allocation of costs from shared functions. These shared functions include, but are not limited to, facilities, humanresources, 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 contributes to the shared costs. Certain corporate-level costs have not been allocated as they are notattributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance, and costs associated withcorporate actions. Segment-level asset information has not been provided as such information is not reviewed by the CODM for purposes of assessingsegment performance and allocating resources. There are no inter-segment sales or transactions.The Company's performance is impacted by the levels of activity in the marine and land mobile markets and defense sectors, among others.Performance in any particular period could be impacted by the timing of sales to certain large customers.The mobile connectivity segment primarily manufactures and distributes a comprehensive family of mobile satellite antenna products and servicesthat provide access to television, the Internet and voice services while on the move. Product sales within the mobile connectivity segment accountedfor approximately 23%, 23% and 25% of our consolidated net sales for 2016, 2015 and 2014, respectively. Sales of mini-VSAT Broadband airtime serviceaccounted for approximately 37%, 35%, and 35% of our consolidated net sales for 2016, 2015, 2014, respectively. Sales of content and training sales withinthe mobile connectivity segment accounted for approximately 20%, 21% and 14% of our consolidated net sales for 2016, 2015 and 2014, respectively.The inertial navigation segment manufactures and distributes a portfolio of digital compass and fiber optic gyro (FOG)-based systems that address therigorous requirements of military and commercial customers and provide reliable, easy-to-use and continuously available navigation and pointing data. Theprincipal product categories in this segment include the FOG based inertial measurement units (IMUs) for precision guidance, FOGs for tactical navigation aswell 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 segmentaccounted for approximately 10%, 10%, and 12% of consolidated net sales for 2016, 2015, and 2014, respectively. Sales of tactical guidance and navigationsystems within the inertial navigation segment accounted for approximately 8%, 8%, and 11% of consolidated net sales for 2016, 2015, and 2014,respectively.No other single product class accounts for 10% or more of consolidated net sales.The Company operates in a number of major geographic areas, including internationally. Revenues from international locations, primarily consistingof Canada, European countries, both inside and outside the European Union, as well as Africa, Asia/Pacific, the Middle East, and India. Revenues are basedupon customer location and internationally represented 63%, 67%, and 58% of consolidated net sales for 2016, 2015 and 2014, respectively. Sales to Canadarepresented 11% and 10% of net sales for 2016 and 2015, respectively. No other individual foreign country represented 10% or more of the Company’sconsolidated net sales for 2016 or 2015, respectively. No individual foreign country represented 10% or more of the Company's consolidated net sales for2014.As of December 31, 2016 and 2015, the long-lived tangible assets related to the Company’s international subsidiaries were less than 10% of theCompany’s long-lived tangible assets and were deemed not material.96Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)Net sales and operating earnings (loss) for the Company's reporting segments and the Company's loss (income) before benefit from income taxes for theyears ended December 31, 2016, 2015, and 2014 were as follows: For the year ended December 31, 2016 2015 2014Net sales: Mobile connectivity$141,507 $147,809 $129,819Inertial navigation34,615 36,825 42,772Consolidated net sales$176,122 $184,634 $172,591 Operating earnings (loss): Mobile connectivity$10,041 $9,459 $5,056Inertial navigation5,272 7,934 10,431Subtotal15,313 17,393 15,487Unallocated, net(16,635) (14,185) (13,565)Consolidated operating earnings(1,322) 3,208 1,922Net interest and other expense(648) (542) (597)(Loss) income before income tax expense$(1,970) $2,666 $1,325Depreciation expense and amortization expense for the Company's segments are presented in the table that follows for the periods presented: For the year ended December 31, 2016 2015 2014Depreciation expense: Mobile connectivity6,084 5,843 4,827Inertial navigation1,063 961 935Unallocated461 389 365Total consolidated depreciation expense7,608 7,193 6,127 Amortization expense: Mobile connectivity4,956 5,526 3,859Inertial navigation— — —Unallocated— — —Total consolidated amortization expense4,956 5,526 3,859(14) Share Buyback ProgramOn 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. Asof December 31, 2016, 341 shares of the Company’s common stock remain available for repurchase under the authorized program. The repurchase program isfunded using the Company’s existing cash, cash equivalents, marketable securities and future cash flows. Under the repurchase program, the Company, atmanagement’s discretion, may repurchase shares on the open market from time to time, in privately negotiated transactions or block transactions, or throughan 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 hasno expiration date. There were no other97Table of ContentsKVH INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)December 31, 2016, 2015, and 2014(in thousands except per share amounts)repurchase programs outstanding during the year ended December 31, 2016 and no repurchase programs expired during the period.During the years ended December 31, 2016, 2015, and 2014, the Company did not repurchase any shares of its common stock in open markettransactions.(15) Fair Value MeasurementsASC 820, Fair Value Measurements and Disclosures, provides a framework for measuring fair value and requires expanded disclosures regarding fairvalue 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 theprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 alsoestablishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs whenmeasuring 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. TheCompany’s Level 1 assets are investments in money market mutual funds, United States treasuries, and certificates of deposit.Level 2:Quoted prices for similar assets or liabilities in active markets; or observable prices that are based on observable market data, based ondirectly or indirectly market-corroborated inputs. The Company’s Level 2 assets are investments in certain corporate notes and its Level 2liabilities 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 thecircumstances. The Company has no Level 3 assets.Assets and liabilities measured at fair value are based 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-partyfinancial institution using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of eachinstrument. This analysis utilizes observable market-based inputs, including interest rate curves and interest rate volatility, and reflects thecontractual terms of these instruments, including the period to maturity.The following tables present financial assets and liabilities at December 31, 2016 and December 31, 2015 for which the Company measures fair valueon a recurring basis, by level, within the fair value hierarchy: 98Table of ContentsDecember 31, 2016Total Level 1 Level 2 Level 3 ValuationTechniqueAssets Money market mutual funds$21,848 $21,848 $— $— (a)Certificates of deposit3,864 3,864 — — (a)Liabilities Interest rate swaps$158 $— $158 $— (b)December 31, 2015Total Level 1 Level 2 Level 3 ValuationTechniqueAssets Money market mutual funds$13,244 $13,244 $— $— (a)United States treasuries1,002 1,002 — — (a)Corporate notes2,284 — 2,284 — (a)Certificates of deposit6,089 6,089 — — (a)Liabilities Interest rate swaps$238 $— $238 $— (b)Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highlyliquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses.Assets Measured and Recorded at Fair Value on a Nonrecurring BasisThe Company's non-financial assets, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, aremeasured 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 December 31, 2016 or 2015. The Company does not have any liabilities thatare recorded at fair value on a non-recurring basis.(16) Derivative Instruments and Hedging ActivitiesEffective April 1, 2010, in order to reduce the volatility of cash outflows that arise from changes in interest rates, the Company entered into twointerest rate swap agreements. These interest rate swap agreements are intended to hedge the Company’s mortgage loan related to its headquarters facility inMiddletown, 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 theremaining half of the principal amount outstanding as of April 1, 2010 until the mortgage loan expires on April 16, 2019. The Company does not usederivatives for speculative purposes. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized inaccumulated other comprehensive income ("AOCI") to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until thehedged item affects earnings. To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediatelyrecognized in earnings in other income (expense) in the Consolidated Statements of Income. The interest rate swap is recorded within accrued other liabilitieson the balance sheet. The critical terms of the interest rate swaps were designed to mirror the terms of the Company’s mortgage loans. The Companydesignated these derivatives as cash flow hedges of the variability of the LIBOR-based interest payments on principal over a nine-year period, which ends onApril 1, 2019. As of December 31, 2016, the Company determined that the existence of hedge ineffectiveness, if any, was immaterial and all changes in thefair value of the interest rate caps were recorded in the Consolidated Statements of Comprehensive (Loss) Income as a component of AOCI.As of December 31, 2016, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest raterisk:Interest Rate DerivativesNotional(in thousands) Asset(Liability) Effective Date Maturity Date Index Strike RateInterest rate swap$1,476 (76) April 1, 2010 April 1, 2019 1-month LIBOR 5.91%Interest rate swap$1,476 (82) April 1, 2010 April 1, 2019 1-month LIBOR 6.07%(17) Legal Matters99Table of ContentsFrom 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 aparty to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. The Company is not a party to anylawsuit or proceeding that, in management's opinion, is likely to materially harm the Company's business, results of operations, financial condition or cashflows.Advanced Media Networks, L.L.C., or AMN, filed suit in the United States District Court for the District of Rhode Island against us for allegedlyinfringing two of its patents, seeking unspecified monetary damages and other relief. The Company settled this claim in January 2016 with a payment of cashto AMN.(18) Quarterly Financial Results (Unaudited)The following financial information for interim periods includes transactions which affect comparability of the quarterly results for the years endedDecember 31, 2016 and 2015.Financial information for interim periods was as follows: FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (in thousands, except per share amounts)2016 Product sales$15,382 $20,062 $19,020 $18,611Service sales24,998 25,904 26,826 25,319Cost of product sales10,670 12,989 11,001 11,674Cost of service sales12,991 13,259 13,576 13,140Operating expenses20,093 20,411 18,256 19,384(Loss) income from operations(3,374) (693) 3,013 (268)Net (loss) income$(2,791) $(806) $2,863 $(6,783)Net (loss) income per share (a): Basic$(0.18) $(0.05) $0.18 $(0.43)Diluted$(0.18) $(0.05) $0.18 $(0.43)2015 Product sales$15,386 $17,946 $15,622 $27,259Service sales25,919 26,909 28,833 26,760Cost of product sales10,485 12,017 10,275 14,627Cost of service sales13,260 13,693 14,454 13,409Operating expenses19,468 19,403 19,520 20,815(Loss) income from operations(1,908) (258) 206 5,168Net (loss) income$(1,422) $37 $(463) $4,101Net (loss) income per share (a): Basic$(0.09) $0.00 $(0.03) $0.26Diluted$(0.09) $0.00 $(0.03) $0.26 (a)Net (loss) income per share is computed independently for each of the quarters. Therefore, the net (loss) income per share for the four quarters may notequal the annual net (loss) income per share data.100Exhibit 10.5INCENTIVE STOCK OPTIONGranted byKVH Industries, Inc. (the “Company”)Under the 2016 Equity and Incentive PlanThis Option is and shall be subject in every respect to the provisions of the Company’s 2016 Equity and Incentive Plan (the“Plan”), as amended from time to time, which is incorporated herein by reference and made a part hereof. The holder of this Option(the “Holder”) hereby accepts this Option subject to all the terms and provisions of the Plan and agrees that (a) in the event of anyconflict between the terms hereof and those of the Plan, the latter shall prevail, and (b) all decisions under and interpretations of thePlan by the Administrator shall be final, binding and conclusive upon the Holder and his or her heirs and legal representatives.Capitalized terms used but not defined herein shall have the respective meanings set forth in the Plan.1. Name of Holder:2. Grant Date:3.Maximum number of shares of Stockfor which this Option is exercisable:4. Exercise (purchase) price per share:5. Payment method:In cash or by certified or bank check or other instrument acceptable to the Administrator in an amount equal to theexercise price of the shares being purchased;By a “cashless exercise” arrangement pursuant to which the Holder delivers to the Company a properly executedexercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a checkpayable and acceptable to the Company in an amount equal to the exercise price of the shares being purchased;provided that in the event the Holder chooses to pay the purchase price as so provided, the Holder and the broker shallcomply with such procedures and enter into such agreements of indemnity and other agreements as the Administratorshall prescribe as a condition of such payment procedure; orwith the consent of the Administrator, any of the other methods set forth in the Plan.6.Expiration Date of Option:7.Vesting Schedule:8.Termination of Employment. This Option shall terminate on the earliest to occur of:(i) the Expiration Date set forth at Section 6 above;(ii)the Holder’s Termination Date in the event of termination by the Company for Cause;(iii)three (3) months following the Holder’s Termination Date upon any termination other than forDisability, death or Cause; or(iv)twelve (12) months following the Termination Date upon termination for Disability or death, or if theHolder dies within three (3) months after his or her Termination Date upon any termination other thanfor Cause.9.Incentive Stock Option; Disqualifying Disposition. Although this Option is intended to qualify as an incentive stock optionunder the Code, the Company makes no representation as to the tax treatment upon exercise of this Option or sale or otherdisposition of the shares covered by this Option, and the Holder is advised to consult a personal tax advisor. Upon aDisqualifying Disposition of shares received upon exercise of this Option, the Holder will forfeit the favorable income taxtreatment otherwise available with respect to the exercise of this Option. A “Disqualifying Disposition” shall have the meaningspecified in Section 421(b) of the Code; as of the Grant Date of this Option a Disqualifying Disposition is any disposition(including any sale) of such shares before the later of (a) the second anniversary of the Grant Date of this Option and (b) thefirst anniversary of the date on which the Holder acquired such shares by exercising this Option, provided that such holdingperiod requirements terminate upon the death of the Holder. The Holder shall notify the Company in writing immediately uponmaking a Disqualifying Disposition of any shares received pursuant to the exercise of this Option, and shall provide theCompany with any information that the Company shall request concerning any such Disqualifying Disposition.10.Notice. Any notice to be given to the Company hereunder shall be deemed sufficient if addressed to the Company anddelivered to the office of the Company, KVH Industries, Inc., 50 Enterprise Center, Middletown, RI 02842, Attention:President, or such other address as the Company may hereafter designate.Any notice to be given to the Holder hereunder shall be deemed sufficient if addressed to and delivered in person to the Holderat his or her address furnished to the Company or when deposited in the mail, postage prepaid, addressed to the Holder at suchaddress.IN WITNESS WHEREOF, the parties have executed this Option, or caused this Option to be executed, as of the Grant Date.KVH Industries, Inc.By: ___________________________The undersigned Holder hereby acknowledges receipt of a copy of the Plan and this Option, and agrees to the terms of this Option andthe Plan.______________________________HolderExhibit 10.6NON-STATUTORY STOCK OPTIONGranted byKVH Industries, Inc. (the “Company”)Under the 2016 Equity and Incentive PlanThis Option is and shall be subject in every respect to the provisions of the Company’s 2016 Equity and Incentive Plan (the“Plan”), as amended from time to time, which is incorporated herein by reference and made a part hereof. The holder of this Option(the “Holder”) hereby accepts this Option subject to all the terms and provisions of the Plan and agrees that (a) in the event of anyconflict between the terms hereof and those of the Plan, the latter shall prevail, and (b) all decisions under and interpretations of thePlan by the Administrator shall be final, binding and conclusive upon the Holder and his or her heirs and legal representatives.Capitalized terms used but not defined herein shall have the respective meanings set forth in the Plan.1. Name of Holder:2. Grant Date:3.Maximum number of shares of Stockfor which this Option is exercisable:4. Exercise (purchase) price per share:5. Payment method:In cash or by certified or bank check or other instrument acceptable to the Administrator in an amount equal to theexercise price of the shares being purchased;By a “cashless exercise” arrangement pursuant to which the Holder delivers to the Company a properly executedexercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a checkpayable and acceptable to the Company in an amount equal to the exercise price of the shares being purchased;provided that in the event the Holder chooses to pay the purchase price as so provided, the Holder and the broker shallcomply with such procedures and enter into such agreements of indemnity and other agreements as the Administratorshall prescribe as a condition of such payment procedure; orwith the consent of the Administrator, any of the other methods set forth in the Plan.6.Expiration Date of Option:7.Vesting Schedule:8. Termination of Employment. This Option shall terminate on the earliest to occur of:(i) the Expiration Date set forth at Section 6 above;(ii)the Holder’s Termination Date in the event of termination by the Company for Cause;(iii)three (3) months following the Holder’s Termination Date upon any termination other than forDisability, death or Cause; or(iv)twelve (12) months following the Termination Date upon termination for Disability or death, or if theHolder dies within three (3) months after his or her Termination Date upon any termination other thanfor Cause.9.Tax Withholding. The Company’s obligation to deliver shares upon exercise of this Option shall be subject to the Holder’ssatisfaction of all applicable tax withholding requirements, including any federal, state and local income and employment taxwithholding requirements.10.Notice. Any notice to be given to the Company hereunder shall be deemed sufficient if addressed to the Company anddelivered to the office of the Company, KVH Industries, Inc., 50 Enterprise Center, Middletown, RI 02842, Attention:President, or such other address as the Company may hereafter designate.Any notice to be given to the Holder hereunder shall be deemed sufficient if addressed to and delivered in person to the Holderat his or her address furnished to the Company or when deposited in the mail, postage prepaid, addressed to the Holder at suchaddress.IN WITNESS WHEREOF, the parties have executed this Option, or caused this Option to be executed, as of the Grant Date.KVH Industries, Inc.By: ___________________________The undersigned Holder hereby acknowledges receipt of a copy of the Plan and this Option, and agrees to the terms of this Option andthe Plan.______________________________HolderExhibit 10.7Award Number: Grant Date: Restricted Stock Awardgranted byKVH Industries, Inc.(hereinafter called the “Company”)to[Employee Name](hereinafter called the “Stockholder”)under the2016 Equity and Incentive PlanThis Restricted Stock Award is and shall be subject in every respect to the provisions of the Company’s 2016 Equity andIncentive Plan, as amended from time to time (the “Plan”), which is incorporated herein by reference and made a part hereof. Theholder of this Award (the “Stockholder”) hereby accepts the Award subject to all the terms and provisions of the Plan and agrees that(a) in the event of any conflict between the terms hereof and those of the Plan, the latter shall prevail, and (b) all decisions under andinterpretations of the Plan by the Administrator shall be final, binding and conclusive upon the Stockholder and his or her heirs andlegal representatives. Capitalized terms used but not defined herein shall have the respective meanings set forth in the Plan.The Stockholder is hereby granted a Restricted Stock Award consisting of shares (the “Shares”) of the Company’s commonstock, $.01 par value per share (“Common Stock”), on the terms and conditions set forth in the “Notice of Grant of Award and AwardAgreement” attached hereto (the “Notice of Grant”) and identified by the Award Number set forth above (which agreement, togetherwith this agreement, are hereinafter collectively referred to as the “Agreement”), the provisions of which are incorporated herein byreference. The Notice of Grant sets forth (a) the number of Shares granted pursuant to this Award, (b) the vesting schedule of theShares, and (c) certain other terms and conditions applicable to this Award.1. Termination of Employment or Provision of Services; Forfeiture of Unvested Shares. Vesting shall cease, and allunvested Shares shall automatically be deemed forfeited to the Company upon the Stockholder’s Termination Date.2. Restrictions. The Shares may not be sold, assigned, transferred by gift or otherwise, pledged, hypothecated, or otherwisedisposed of, by operation of law or otherwise, and shall be subject to forfeiture in accordance with the provisions of Section 1 above,until Stockholder becomes vested in the Shares. Upon vesting, the restrictions in this Section 2 shall lapse, the Shares shall no longerbe subject to forfeiture, and Stockholder may transfer the Shares in accordance with the Securities Act of 1933 and other applicablesecurities laws.3. Enforcement of Restrictions. To enforce the restrictions set forth in Section 2, the Shares may be held in electronic formin an account by the Company’s transfer agent or other designee until the restrictions set forth in Section 2 have lapsed with respect tosuch Shares, or until this Agreement no longer is in effect. In the event the Company elects not to hold the shares in electronic form,the Shares may be evidenced in such manner as the Company shall determine, including, but not limited to, the issuance of sharecertificates in the name of Stockholder. In such case, Stockholder appoints the Secretary of the Company, or any other persondesignated by the Company, as escrow agent and attorney-in-fact to assign and transfer to the Company any Shares forfeited byStockholder pursuant to Section 1 above, and upon execution of the Notice of Grant, any stock certificate(s) representing the Shares,together with a stock assignment duly endorsed in blank, shall be held in escrow by the Company and as the Shares vest, upon thewritten request of the Stockholder, the Company shall provide the Stockholder with a stock certificate representing the vested Shares.The stock assignment and any stock certificates shall be held by the Company until the restrictions set forth in Section 2 have lapsedwith respect to the Shares, or until this Agreement is no longer in effect.4. Effect of Prohibited Transfer. If any transfer of any of the Shares is made or attempted to be made contrary to the termsof this Agreement, the Company shall have the right to acquire for its own account, without the payment of any consideration therefor,such Shares from the owner thereof or his transferee, at any time before or after such prohibited transfer. In addition to any other legalor equitable remedies it may have, the Company may enforce its rights to specific performance to the extent permitted by law and mayexercise such other equitable remedies then available to it. The Company may refuse for any purpose to recognize any transferee whoreceives shares contrary to the provisions of this Agreement as a stockholder of the Company and may retain and/or recover alldividends on such shares that were paid or payable subsequent to the date on which the prohibited transfer was made or attempted.5. Voting; Dividends. The Shares shall be registered on the Company’s books in the Stockholder’s name as of the date ofacceptance of this Award by Stockholder as evidenced by the Stockholder’s execution of the Notice of Grant (the “Date ofAcceptance”). During the vesting period described in the Notice of Grant, the Stockholder shall be entitled to all rights of a stockholderof the Company, including the right to vote the Shares and receive dividends and/or distributions on the Shares, provided that any suchdividends and/or distributions shall be subject to the same restrictions and other terms and conditions, including vesting, forfeiture andwithholding requirements, as the underlying Shares to which they relate. If any dividends or distributions with respect to the Shares (orany dividends or distributions thereon) constitute shares of capital stock, the Stockholder shall have the right to vote such shares andreceive dividends and/or distributions on such shares, but for avoidance of doubt such shares (and anydividends and/or distributions thereon) shall be subject to the same restrictions and other terms and conditions, including vesting,forfeiture and withholding requirements, as the underlying Shares to which they relate. If any dividends or distributions with respect tothe Shares (or any dividends or distributions thereon) constitute cash or property other than shares of capital stock, such dividends ordistributions shall not be paid or delivered to the Stockholder until the underlying Shares to which they relate shall vest. TheStockholder shall immediately forfeit any dividend or distribution derived from any unvested Shares that are forfeited by theStockholder.6. No Right to Continued Employment or Service. This Agreement shall not confer on the Stockholder any right withrespect to the continuation of employment or service by the Company or limit in any way the right of the Company to terminate theStockholder’s employment or service.7. Tax Consequences. Set forth below is a brief summary as of the Grant Date of certain United States federal income taxconsequences of the award of the Shares. THIS SUMMARY DOES NOT ADDRESS EMPLOYMENT, STATE, LOCAL ORFOREIGN TAX CONSEQUENCES THAT MAY BE APPLICABLE TO STOCKHOLDER. STOCKHOLDERUNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THAT TAX LAWS ANDREGULATIONS ARE SUBJECT TO CHANGE.Unless Stockholder makes a Section 83(b) election as described below, Stockholder shall recognize ordinary income at the timeor times the Shares are released from the restrictions in Section 2, in an amount equal to the Fair Market Value of the Shares on suchdate(s) less the amount paid, if any, for such Shares, and the Company shall be required to collect all applicable withholding taxes withrespect to such income.8. Tax Withholding Obligations. The Company’s obligation to deliver Shares shall be subject to the Stockholder’ssatisfaction of all applicable tax withholding requirements, including any federal, state and local income and employment taxwithholding requirements, and the terms and conditions set forth in Section 15 of the Plan. Except as set forth below, Stockholder shallpay such withholdings to the Company in cash by opening and maintaining a stock plan account with E*TRADE Securities (or suchother broker as may be designated by the Company) and irrevocably electing the “Sell-to-Cover” tax payment method pursuant towhich Stockholder irrevocably directs E*TRADE Securities or such other broker to, on each vesting date (the “Tax Date”),automatically place a market order to sell enough shares from the vesting period to cover all applicable tax withholding requirements,commissions, and fees as determined by the broker in its sole discretion. Stockholder understands and agrees that E*TRADESecurities or such other broker shall transfer the amount of such withholding taxes to the Company, and the released shares will bedeposited in Stockholder’s stock plan account and be available for sale once the sale and tax-payment transactions settle. Stockholderaccepts the terms and conditions of E*TRADE Securities or such other broker for use of this tax payment type and agrees to confirmsuch acceptance electronically by logging in and checking the appropriate box on Stockholder’s electronic stock plan accountaccessible via the Internet. Election of the Sell-to-Cover tax payment method will be subject to the following restrictions:(i) All elections once made shall be irrevocable with respect to the entire Award.(ii) If Stockholder is an officer or director of the Company within the meaning of Section 16 of the Exchange Act (“Section16”), Stockholder must satisfy the requirements of such Section 16 and any applicable rules thereunder with respect to the use of stockto satisfy such tax withholding obligation.Notwithstanding the foregoing, if the Stockholder files a Section 83(b) election, then, upon the Date of Acceptance, the Stockholdershall provide a copy of such filed Section 83(b) election to the Company together with cash payment of all applicable tax withholdingsas determined by E*TRADE Securities or another broker designated by the Company.9. Section 83(b) Election. Stockholder hereby acknowledges that he/she has been informed that he/she may file with theInternal Revenue Service, within 30 days of the Grant Date, an election pursuant to Section 83(b) of the Code to be taxed as of theGrant Date on the amount by which the Fair Market Value of the Shares as of such date exceeds the price paid for such Shares, if any.IF STOCKHOLDER CHOOSES TO FILE AN ELECTION UNDER SECTION 83(b) OF THE CODE,STOCKHOLDER ACKNOWLEDGES THAT IT IS STOCKHOLDER’S SOLE RESPONSIBILITY AND NOT THECOMPANY’S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE.BY SIGNING THIS AGREEMENT, STOCKHOLDER REPRESENTS THAT HE/SHE HAS BEEN ADVISED TOCONSULT WITH HIS/HER OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAXCONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND THAT STOCKHOLDERIS NOT RELYING ON ANY STATEMENTS OR REPRESENTATIONS OF THE COMPANY OR ANY OF ITS AGENTS.STOCKHOLDER UNDERSTANDS AND AGREES THAT THE STOCKHOLDER (AND NOT THE COMPANY) SHALLBE RESPONSIBLE FOR ANY TAX LIABILITY THAT MAY ARISE AS A RESULT OF THE TRANSACTIONSCONTEMPLATED BY THIS AGREEMENT.10. Notice. Any notice to be given to the Company hereunder shall be deemed sufficient if addressed to the Company anddelivered to the office of the Company, KVH Industries, Inc., 50 Enterprise Center, Middletown, RI 02842, Attention: President, orsuch other address as the Company may hereafter designate.Any notice to be given to the Stockholder hereunder shall be deemed sufficient if addressed to and delivered in person to theStockholder at his or her address furnished to the Company or when deposited in the mail, postage prepaid, addressed to theStockholder at such address.***IN WITNESS WHEREOF, the Company has caused this instrument to be executed in its name and on its behalf as of theGrant Date of this Restricted Stock Award set forth in the cover page “Notice of Grant of Award and Award Agreement”.KVH INDUSTRIES, INC.By:  Exhibit 21.1List of Subsidiaries KVH Industries A/SDenmark KVH Industries Pte. Ltd.Singapore KVH Industries Brasil Comunicacao Por Satelite Ltda.Brazil KVH Industries Norway ASNorway KVH Industries Japan Co. Ltd.Japan KVH Industries UK Ltd.United Kingdom KVH Media Group Ltd.United Kingdom KVH Media Group Entertainment Ltd.United Kingdom KVH Media Group Communication Ltd.United Kingdom KVH Media Group International Ltd.United Kingdom KVH Media Group Ltd.Cyprus Good Morning News Sprl.Belgium KVH Media Group ApSDenmark KVH Media Group Communication, Inc.United States KVH Media Group, Inc.United States Rigstream B.V.The Netherlands Super Dragon Ltd.Hong Kong Videotel Consultants and Rentals Ltd.United Kingdom Videotel Marine International Ltd.United Kingdom Videotel Training Services Ltd.United Kingdom Videotel Marine Asia Ltd.Hong Kong Videotel Pte. Ltd.Singapore  KVH Media Group India Private LtdIndia Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated March 9, 2017, with respect to the consolidated financial statements and internal control over financial reporting includedin the Annual Report of KVH Industries, Inc. on Form 10-K for the year ended December 31, 2016. We hereby consent to the incorporation by reference ofsaid reports in the Registration Statements of KVH Industries, Inc. on Forms S-8 (Nos. 333-212959, 333-190541, 333-168406, 333-160230, 333-141404,333-112341, 333-67556, and 333-08491)./s/ Grant Thornton LLP Boston, MassachusettsMarch 9, 2017Exhibit 31.1CertificationI, Martin A. Kits van Heyningen, certify that:1. I have reviewed this annual report on Form 10-K of KVH Industries, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 9, 2017 /s/ Martin A. Kits van Heyningen Martin A. Kits van Heyningen President, Chief Executive Officer and Chairman of the Board Exhibit 31.2CertificationI, Donald W. Reilly, certify that:1. I have reviewed this annual report on Form 10-K of KVH Industries, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 9, 2017 /s/ Donald W. Reilly Donald W. Reilly Chief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of KVH Industries, Inc. (the “Company”) for the year ended December 31, 2016, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), each of the undersigned President, Chief Executive Officer and Chairman of theBoard, and Chief Financial Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the by /s/ Martin A. Kits van Heyningen /s/ Donald W. Reilly Martin A. Kits van Heyningen Donald W. Reilly President, Chief Executive Officer and Chief Financial Officer Chairman of the Board Date:March 9, 2017 Date:March 9, 2017

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