Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM
10-Q
 
 
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
     
to
     
Commission file number
0-26946
 
 
INTEVAC, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
94-3125814
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
3560 Bassett Street
Santa Clara, California 95054
(Address of principal executive office, including Zip Code)
 
 
Registrant’s telephone number, including area code: (408)
986-9888
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock ($0.001 par value)
 
IVAC
 
The Nasdaq Stock Market LLC (Nasdaq) Global Select
Indicate 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 12 months (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 ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company
,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act:
 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
    
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act). ☐ Yes ☒ No
On November 2, 2023, 26,373,454 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.
 
 
 


Table of Contents

INTEVAC, INC.

INDEX

 

No.

       Page  
PART I. FINANCIAL INFORMATION       

Item 1.

  Financial Statements (unaudited)   
  Condensed Consolidated Balance Sheets      3  
  Condensed Consolidated Statements of Operations      4  
  Condensed Consolidated Statements of Comprehensive Loss      5  
  Condensed Consolidated Statements of Cash Flows      6  
  Notes to Condensed Consolidated Financial Statements      7  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      24  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      31  

Item 4.

  Controls and Procedures      31  
PART II. OTHER INFORMATION       

Item 1.

  Legal Proceedings      32  

Item 1A.

  Risk Factors      32  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      38  

Item 3.

  Defaults Upon Senior Securities      38  

Item 4.

  Mine Safety Disclosures      38  

Item 5.

  Other Information      38  

Item 6.

  Exhibits      38  

SIGNATURES

     39  

 

2


Table of Contents
P3Y
Item 1.
Financial Statements
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    
September 30,

2023
   
December 31,

2022
 
              
    
(Unaudited)
 
    
(In thousands, except par value)
 
ASSETS
    
Current assets:
    
Cash and cash equivalents
   $ 43,822     $ 68,904  
Short-term investments
     17,805       25,541  
Trade and other accounts receivable, net of allowances of $0 at both September 30, 2023 and December 31, 2022
     27,980       15,823  
Inventories
     42,837       30,003  
Prepaid expenses and other current assets
     1,905       1,898  
  
 
 
   
 
 
 
Total current assets
     134,349       142,169  
Long-term investments
     3,855       17,585  
Restricted cash
     700       786  
Property, plant and equipment, net
     7,536       3,658  
Operating lease
right-of-use-assets
     1,772       3,390  
Intangible assets, net of amortization of $144 at September 30, 2023 and $42 at December 31, 2022
     988       1,090  
Deferred income taxes and other long-term assets
     3,877       4,381  
  
 
 
   
 
 
 
Total assets
   $ 153,077     $ 173,059  
  
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
Current liabilities:
    
Current operating lease liabilities
   $ 1,694     $ 3,404  
Accounts payable
     5,538       11,610  
Accrued payroll and related liabilities
     3,196       3,087  
Other accrued liabilities
     2,732       5,430  
Customer advances
     21,523       2,444  
  
 
 
   
 
 
 
Total current liabilities
     34,683       25,975  
Noncurrent liabilities:
    
Noncurrent operating lease liabilities
     646       1,417  
Customer advances
     1,482       22,215  
Other noncurrent liabilities
     29       —   
  
 
 
   
 
 
 
Total noncurrent liabilities
     2,157       23,632  
Stockholders’ equity:
    
Common stock, $0.001 par value
     26       26  
Additional
paid-in
capital
     209,396       206,355  
Treasury stock, 5,087 shares at both September 30, 2023 and at December 31, 2022
     (29,551     (29,551
Accumulated other comprehensive loss
     (104     (193
Accumulated deficit
     (63,530     (53,185
  
 
 
   
 
 
 
Total stockholders’ equity
     116,237       123,452  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 153,077     $ 173,059  
  
 
 
   
 
 
 
 
Note:
Amounts as of December 31, 2022 are derived from the December 31, 2022 audited consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
 
3

Table of Contents
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,

2023
   
October 1,

2022
   
September 30,

2023
   
October 1,

2022
 
                          
    
(Unaudited)
 
    
(In thousands, except per share amounts)
 
Net revenues
   $ 17,915     $ 10,750     $ 39,758     $ 24,502  
Cost of net revenues
     10,916       5,860       25,471       14,402  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     6,999       4,890       14,287       10,100  
Operating expenses:
        
Research and development
     3,720       3,311       11,340       10,339  
Selling, general and administrative
     4,707       4,741       14,281       13,007  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     8,427       8,052       25,621       23,346  
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (1,428     (3,162     (11,334     (13,246
Interest income and other income (expense), net
     600       413       1,922       723  
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss before provision for income taxes
     (828     (2,749     (9,412     (12,523
Provision for income taxes
     796       467       1,298       992  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss from continuing operations, net of taxes
     (1,624     (3,216     (10,710     (13,515
Net income (loss) from discontinued operations, net of taxes
     48       (20     365       (394
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
   $ (1,576   $ (3,236   $ (10,345   $ (13,909
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss) per share:
        
Basic and diluted – continuing operations
   $ (0.06   $ (0.13   $ (0.41   $ (0.54
Basic and diluted – discontinued operations
   $ 0.00     $ (0.00   $ 0.01     $ (0.02
Basic and diluted – net loss
   $ (0.06   $ (0.13   $ (0.40   $ (0.55
Weighted-average common shares outstanding:
        
Basic and diluted
     26,287       25,370       26,033       25,104  
See accompanying notes to the condensed consolidated financial statements.
 
4

Table of Contents
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,

2023
   
October 1,

2022
   
September 30,

2023
   
October 1,

2022
 
                          
    
(Unaudited)
 
    
(In thousands)
 
Net loss
   $ (1,576   $ (3,236   $ (10,345   $ (13,909
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), before tax
        
Change in unrealized net gain (loss) on
available-for-sale
investments
     101       (225     323       (560
Foreign currency translation losses
     (15     (233     (234     (485
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), before tax
     86       (458     89       (1,045
Income tax (expense) benefit related to items in other comprehensive loss
     —        —        —        —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), net of tax
     86       (458     89       (1,045
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive loss
   $ (1,490   $ (3,694   $ (10,256   $ (14,954
  
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
5

Table of Contents
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
Nine Months Ended
 
    
September 30,

2023
   
October 1,

2022
 
              
    
(Unaudited)
 
    
(In thousands)
 
Operating activities
    
Net loss
   $ (10,345   $ (13,909
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
    
Depreciation and amortization
     1,038       1,097  
Net amortization (accretion) of investment premiums and discounts
     (145     (111
Amortization of intangible assets
     102       8  
Equity-based compensation
     3,393       2,698  
Straight-line rent adjustment and amortization of lease incentives
     (863     (686
Foreign currency loss on liquidation of entity
     —        14  
(Gain) loss on disposal of fixed assets
     (41     1,453  
Deferred income taxes
     629       632  
Changes in operating assets and liabilities
     (34,693     12,621  
  
 
 
   
 
 
 
Total adjustments
     (30,580     17,726  
  
 
 
   
 
 
 
Net cash and cash equivalents provided by (used in) operating activities
     (40,925     3,817  
Investing activities
    
Purchases of investments
     (10,453     (48,684
Proceeds from sales and maturities of investments
     31,887       14,062  
Proceeds from sales of fixed assets
     65       —   
Purchase of Hia, Inc.
     —        (763
Purchases of leasehold improvements and equipment
     (4,940     (1,426
  
 
 
   
 
 
 
Net cash and cash equivalents provided by (used in) investing activities
     16,559       (36,811
Financing activities
    
Net proceeds from issuance of common stock
     1,365       2,898  
Payment of acquisition-related contingent consideration
     (250     —   
Taxes paid related to net share settlement
     (1,683     (358
  
 
 
   
 
 
 
Net cash and cash equivalents provided by (used in) financing activities
     (568     2,540  
Effect of exchange rate changes on cash
     (234     (498
  
 
 
   
 
 
 
Net decrease in cash, cash equivalents and restricted cash
     (25,168     (30,952
Cash, cash equivalents and restricted cash at beginning of period
     69,690       103,514  
  
 
 
   
 
 
 
Cash, cash equivalents and restricted cash at end of period
   $ 44,522     $ 72,562  
  
 
 
   
 
 
 
Non-cash
investing and financing activity
    
Additions to
right-of-use-assets
obtained from new operating lease liabilities
   $ 81     $ 1,122  
  
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
6

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Description of Business, Basis of Presentation and Significant Accounting Policy
Description of Business
Intevac, Inc. (together with its subsidiaries, “Intevac”, the “Company” or “we”) is a leader in the design and development of high-productivity, thin-film processing systems. Intevac’s production-proven platforms are designed for high-volume manufacturing of substrates with precise thin-film properties, such as for the hard disk drive (“HDD”) and display cover panel (“DCP”) markets.
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Intevac, Inc. and its subsidiaries after elimination of inter-company balances and transactions.
In the opinion of management, the unaudited interim condensed consolidated financial statements of Intevac included herein have been prepared on a basis consistent with the December 31, 2022 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Reportable Segment
During fiscal 2021, we sold the business of one of our reporting segments, Photonics. Therefore, we have one reportable segment remaining. See Note 2 for additional disclosure related to discontinued operations.
The remaining segment, Thin Film Equipment (“TFE”), designs, develops and markets vacuum process equipment solutions for high-volume manufacturing of small substrates with precise thin-film properties, such as for the HDD and DCP markets, as well as other adjacent thin-film markets. The TFE segment also previously designed, developed and marketed manufacturing equipment for the photovoltaic (“PV”) solar cell and advanced semiconductor packaging (“ASP”) industries.
In March 2022, the Company approved and implemented a restructuring program to realign the Company’s operational focus, scale the business and improve costs. The restructuring program included (i) reducing the Company’s headcount and (ii) eliminating several research and development (“R&D”) programs and product offerings. As part of this realignment effort, the Company ceased its efforts to develop and market several of its manufacturing platforms for the DCP, PV and ASP industries and ceased offering certain legacy products in these industries.
Trade Accounts Receivable and Allowance for Credit Losses
The Company’s accounts receivable are recorded at invoiced amounts less allowance for any credit losses. In accordance with the Financial Accounting Standards Board’s Accounting Standards Update (“ASU”)
2016-13 that
we adopted on January 1, 2023, the Company recognizes credit losses based on forward-looking current expected credit losses (“CECL”). The Company makes estimates of expected credit losses based upon its assessment of various factors, including the age of accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from customers. The allowance for credit losses is recognized in the condensed consolidated statement of operations. The uncollectible accounts receivable are written off in the period in which a determination is made that all commercially reasonable means of recovering them have been exhausted. The total allowance for credit losses was $0 at both September 30, 2023 and December 31, 2022, and there was no
write-off
of accounts receivable for the periods presented.
 
7

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
2.
Divestiture and Discontinued Operations
Sale of Photonics
On December 30, 2021, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with EOTECH, LLC (“EOTECH”) governing the sale of the Company’s Photonics business to EOTECH in exchange for (i) $70.0 million in cash consideration, (ii) up to $30.0 million in earnout payments and (iii) the assumption by EOTECH of certain liabilities of the Photonics business as specified in the Purchase Agreement. The transaction closed on December 30, 2021. Under the Purchase Agreement, EOTECH also agreed to pay to the Company, if earned, earnout payments of up to an aggregate of $30.0 million based on achievement of fiscal year 2023, 2024 and 2025 Photonics segment revenue targets for the Integrated Visual Augmentation System (“IVAS”) program as specified in the Purchase Agreement. At any time prior to December 31, 2024, EOTECH may elect to pay to the Company $14.0 million, which would terminate EOTECH’s obligations with respect to any remaining earnout payments. As of September 30, 2023, there have been no earnout payments under the Purchase Agreement. The cash proceeds do not include any estimated future payments from the revenue earnout as the Company has elected to record the proceeds when the consideration is deemed realizable. The Company believes the disposition of the Photonics business will allow it to benefit from a streamlined business model, simplified operating structure, and enhanced management focus.
In connection with the Photonics sale, the Company and EOTECH also entered into a Transition Service Agreement (the “TSA”) and a Lease Assignment Agreement. The TSA, which expired on June 30, 2022, outlined the information technology, people, and facility support the parties provided to each other for a period after the closing of the sale. The Lease Assignment Agreement assigns the lease obligation for two buildings in the Company’s California campus to EOTECH. As part of the assignment, the Company has agreed to subsidize a portion of EOTECH’s lease payments through the remainder of the lease term which expires in March 2024. In August 2022, Intevac and EOTECH entered into a Shared Services Agreement (the “Shared Services Agreement”) to share certain building maintenance costs.
TSA fees earned since the divestiture were $950,000 for the nine months ended October 1, 2022. The agreed-upon charges for such services were generally intended to allow the service provider to recover all costs and expenses of providing such services. The TSA fees were included in selling, general and administrative expenses and cost of net revenues, respectively, in the Company’s condensed consolidated statement of operations. In September 2022, Intevac entered into a settlement agreement and agreed to refund to EOTECH $200,000 as well as cancel $46,000 in outstanding invoices related to disputed TSA fees. These fees were reported in selling, general and administrative expenses for the nine months ended October 1, 2022. In August 2022, Intevac and EOTECH entered into a Shared Services Agreement to share certain building maintenance costs. Charges for the three and nine months ended September 30, 2023 associated with the Shared Services Agreement were $39,000 and $104,000, respectively. There were no charges for the three and nine months ended October 1, 2022 associated with the Shared Services Agreement. Additionally, during the nine months ended October 1, 2022, the Company sold inventory in the amount of $148,000 to EOTECH. Accounts receivable from EOTECH of $30,000 at September 30, 2023 and $49,000 at December 31, 2022 were included in trade and other accounts receivable in the Company’s condensed consolidated balance sheets.
Based on its magnitude and because the Company exited certain markets, the sale of the Photonics segment represents a significant strategic shift that has a material effect on the Company’s operations and financial results, and the Company has separately reported the results of its Photonics segment as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and October 1, 2022.
The operating results of the discontinued operations only reflect revenues and expenses that are directly attributable to the Photonics segment that have been eliminated from continuing operations. Previously reported expenses for the Photonics segment have been recast to exclude certain allocated expenses that are not directly attributable to the Photonics segment. The key components from discontinued operations related to the Photonics segment are as follows:
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,

2023
   
October 1,

2022
   
September 30,

2023
   
October 1,

2022
 
                          
    
(In thousands)
 
Selling, general and administrative
   $ (48   $ 20     $ (365   $ 394  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     (48     20       (365     394  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating income (loss) – discontinued operations
     48       (20     365       (394
Other income (expense) – discontinued operations
     —        —        —        —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss from discontinued operations before provision for income taxes
     48       (20     365       (394
Provision for income taxes
     —        —        —        —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss from discontinued operations, net of taxes
   $ 48     $ (20   $ 365     $ (394
  
 
 
   
 
 
   
 
 
   
 
 
 
 
8

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
The cash flows related to discontinued operations have not been segregated and are included in the condensed consolidated statements of cash flows. The following table presents cash flow and
non-cash
information related to discontinued operations for the three and nine months ended September 30, 2023 and October 1, 2022:
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 30,

2023
    
October 1,

2022
    
September 30,

2023
   
October 1,

2022
 
                            
    
(In thousands)
 
Equity-based compensation
   $ —       $ 31      $ (260   $ (260
 
3.
Revenue
The following tables represent a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2023 and October 1, 2022.
Major Products and Service Lines
 
    
Three Months Ended September 30, 2023
    
Three Months Ended October 1, 2022
 
                                                  
    
HDD
    
ASP
    
Total
    
HDD
    
PV
    
ASP
    
Total
 
Systems, upgrades and spare parts
   $ 16,477      $ 6      $ 16,483      $ 8,233      $ 77      $ 100      $ 8,410  
Field service
     1,335        97        1,432        2,160        180        —         2,340  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total net revenues
   $ 17,812      $ 103      $ 17,915      $ 10,393      $  257      $ 100      $ 10,750  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
    
Nine Months Ended September 30, 2023
    
Nine Months Ended October 1, 2022
 
                                                                
    
HDD
    
PV
    
ASP
    
Total
    
HDD
    
DCP
    
PV
    
ASP
    
Total
 
Systems, upgrades and spare parts
   $ 36,345      $ 28      $ 17      $ 36,390      $ 19,112      $ 1      $ 212      $ 100      $ 19,425  
Field service
     3,271        —         97        3,368        4,844        43        190        —         5,077  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total net revenues
   $ 39,616      $ 28      $ 114      $ 39,758      $ 23,956      $     44      $  402      $ 100      $ 24,502  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Primary Geographical Markets
 
    
Three Months Ended
    
Nine Months Ended
 
                             
    
September 30,

2023
    
October 1,

2022
    
September 30,

2023
    
October 1,

2022
 
                             
    
(In thousands)
 
United States
   $ 784      $ 1,377      $ 3,060      $ 3,327  
Asia
     17,034        9,273        36,590        21,075  
Europe
     97        100        108        100  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total net revenues
   $ 17,915      $ 10,750      $ 39,758      $ 24,502  
  
 
 
    
 
 
    
 
 
    
 
 
 
Timing of Revenue Recognition
 
    
Three Months Ended
    
Nine Months Ended
 
                             
    
September 30,

2023
    
October 1,

2022
    
September 30,

2023
    
October 1,

2022
 
                             
    
(In thousands)
 
Products transferred at a point in time
   $ 17,915      $ 10,750      $ 39,758      $ 24,502  
Products and services transferred over time
     —         —         —         —   
  
 
 
    
 
 
    
 
 
    
 
 
 
Total net revenues
   $ 17,915      $ 10,750      $ 39,758      $ 24,502  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
9

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INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
The following table reflects the changes in our contract assets, which we classify as accounts receivable, unbilled or retainage, and our contract liabilities, which we classify as deferred revenue and customer advances, for the nine months ended September 30, 2023:
 
    
September 30,
2023
    
December 31,
2022
    
Nine Months

Change
 
                      
    
(In thousands)
 
Contract assets:
        
Accounts receivable, unbilled
   $ 394      $ 424      $ (30
  
 
 
    
 
 
    
 
 
 
Contract liabilities:
        
Deferred revenue
   $ 409      $ 2,446      $ (2,037
Customer advances
     23,005        24,659        (1,654
  
 
 
    
 
 
    
 
 
 
   $ 23,414      $ 27,105      $ (3,691
  
 
 
    
 
 
    
 
 
 
Accounts receivable, unbilled represents a contract asset for revenue that has been recognized in advance of billing the customer. For our system and certain upgrade sales, our customers generally pay in three installments, with a portion of the system price billed upon receipt of an order, a portion of the price billed upon shipment, and the balance of the price due upon completion of installation and acceptance of the system at the customer’s factory. Accounts receivable, unbilled generally represents the balance of the system price that is due upon completion of installation and acceptance, less the amount that has been deferred as revenue for the performance of the installation tasks. During the nine months ended September 30, 2023, contract assets decreased by $30,000 primarily due to the invoicing of accrued revenue related to certain upgrades and spare parts that were unbilled as of December 31, 2022, offset in part by the accrual of revenue for a system delivered in the quarter ended July 1, 2023 that was pending acceptance as of September 30, 2023 and the accrual of revenue related to the sale of upgrades and billable services during the nine months ended September 30, 2023.
Customer advances generally represent a contract liability for amounts billed to the customer prior to transferring goods. The Company has elected to use the practical expedient to disregard the effect of the time value of money in a significant financing component when its payment terms are less than one year. These customer advances are liquidated when revenue is recognized. Deferred revenue generally represents a contract liability for amounts billed to a customer for completed systems at the customer site that are undergoing installation and acceptance testing where transfer of control has not yet occurred as Intevac does not yet have a demonstrated history of meeting the acceptance criteria upon the customer’s receipt of product. During the nine months ended September 30, 2023, we recognized revenue of $3.4 million and $2.2 million that was included in customer advances
and
deferred revenue, respectively, at the beginning of the period.
In May 2023, the Company received notice of the cancellation of a $54.6 million order for eight 200 Lean HDD systems due to the customer postponing previously planned media capacity additions, and, accordingly, the Company removed the order from backlog. The customer contract associated with the cancelled order requires the customer to pay the Company a prorated price based upon the percentage of work completed on the order. The Company has received customer advances in the amount of $19.1 million associated with the cancelled order, all of which will be utilized to settle this customer obligation. In September 2023, the Company applied $444,000 of billings against these advances in connection with inventory scrapped at the customer’s direction.
On September 30, 2023, we had $46.5 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 25.3% of our remaining performance obligations as revenue in 2023, 50.2% in 2024 and 24.5% in 2025.
 
4.
Inventories
Inventories are stated at the lower of average cost or net realizable value and consist of the following:
 
    
September 30,
    
December 31,
 
    
2023
    
2022
 
               
    
(In thousands)
 
Raw materials
   $ 33,325      $ 19,116  
Work-in-progress
     9,512        9,499  
Finished goods
     —         1,388  
  
 
 
    
 
 
 
   $ 42,837      $ 30,003  
  
 
 
    
 
 
 
 
10

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
Finished goods inventory at December 31, 2022 is comprised of a refurbished system at a customer location where the sales transaction did not meet our revenue recognition criteria. In May 2023, the Company received notice of the cancellation of a $54.6 million order for eight 200 Lean HDD systems. The customer contract associated with the cancelled order requires the customer to pay the Company a prorated price based upon the percentage of work completed on the order. The Company has received customer advances in the amount of $19.1 million associated with the cancelled order, all of which will be utilized to settle this customer obligation. In the fourth quarter of 2023 and into the beginning of 2024, as part of the cancellation of the order for eight 200 Lean HDD systems, the customer is expected to take delivery of $12.7 million of inventory on hand at September 30, 2023 and $6.8 million of inventory on order plus reimburse us for any supplier cancellation charges.
 
5.
Equity-Based Compensation
At September 30, 2023, Intevac had equity-based awards outstanding under the 2020 Equity Incentive Plan, the 2012 Equity Incentive Plan, the 2022 Inducement Equity Incentive Plan (the “Inducement Plan”) (together, the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved the 2020 Equity Incentive Plan, the 2012 Equity Incentive Plan and the ESPP. The Plans permit the grant of incentive or
non-statutory
stock options, performance-based stock options (“PSOs”), restricted stock, stock appreciation rights, restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”) and performance shares.
On January 19, 2022, Intevac’s Board of Directors adopted the Inducement Plan and, subject to the adjustment provisions of the Inducement Plan, reserved 1,200,000 shares of the Company’s common stock for issuance pursuant to equity awards granted under the Inducement Plan. The Inducement Plan provides for the grant of equity-based awards, including nonstatutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to the Company’s 2020 Equity Incentive Plan. The Inducement Plan was adopted without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with that rule, awards under the Inducement Plan may only be made to individuals not previously employees or
non-employee
directors of the Company (or following such individuals’ bona fide period of
non-employment
with the Company), as an inducement material to the individuals’ entry into employment with the Company.
The ESPP provides that eligible employees may purchase Intevac’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the entry date of the applicable offering period or at the end of each applicable purchase interval. Offering periods are generally two years in length and consist of a series of
six-month
purchase intervals. Eligible employees may join the ESPP at the beginning of any
six-month
purchase interval. Under the terms of the ESPP, employees can choose to have up to 50% of their base earnings withheld to purchase Intevac common stock (not to exceed $25,000 per year).
Compensation Expense
The effect of recording equity-based compensation for the three and nine months ended September 30, 2023 and October 1, 2022 was as follows:
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 30,
2023
   
October 1,
2022
    
September 30,
2023
   
October 1,
2022
 
                           
    
(In thousands)
 
Equity-based compensation by type of award:
         
Stock options
   $ (3   $ 5      $ (14   $ (159
RSUs
     221       896        1,576       1,232  
PRSUs
     35       1,101        1,367       1,332  
ESPP purchase rights
     63       207        464       293  
  
 
 
   
 
 
    
 
 
   
 
 
 
Total equity-based compensation
   $ 316     $ 2,209      $ 3,393     $ 2,698  
  
 
 
   
 
 
    
 
 
   
 
 
 
Included in the table above are:
 
  (a)
A reversal of $462,000 in equity-based compensation expense related to forfeitures of awards due to our 2023 cost reduction plan for the three and nine months ended September 30, 2023. A reversal of $1.3 million in equity-based compensation expense related to forfeitures of awards due to our 2022 cost reduction plan and a $37,000 benefit related to the modification of certain stock-based awards for the nine months ended October 1, 2022. (See Note
13. Restructuring and Other Costs, Net); and
  (b)
Equity-based compensation reported in discontinued operations of $0 and ($260,000) for the three and nine months ended September
30, 2023, respectively, and $31,000 and ($260,000) for the three and nine months ended October 1, 2022, respectively. Equity-based compensation expense allocated to discontinued operations for the nine months ended October 1, 2022 includes $75,000 related to the modification of certain stock-based awards and is net of a divestiture-related forfeiture benefit of $446,000 that was recognized when employees were conveyed to EOTECH upon closing of the Photonics divestiture. (See Note 2. Divestiture and Discontinued Operations.)
 
11

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
Stock Options and ESPP
The fair value of stock options and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The determination of fair value of stock options and ESPP awards on the date of grant using an option-pricing model is affected by Intevac’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual employee stock option exercise behavior. Intevac accounts for forfeitures as they occur, rather than estimating expected forfeitures.
Option activity as of September 30, 2023 and changes during the nine months ended September 30, 2023 were as follows:
 
    
Shares
   
Weighted-Average

Exercise Price
 
              
Options outstanding at December 31, 2022
     383,099     $ 7.07  
Options cancelled and forfeited
     (48,093   $ 9.97  
Options exercised
     (52,813   $ 5.15  
  
 
 
   
Options outstanding at September 30, 2023
     282,193     $ 6.93  
  
 
 
   
Options exercisable at September 30, 2023
     281,443     $ 6.93  
Intevac issued 304,538 shares of common stock under the ESPP during the nine months ended September 30, 2023.
Intevac estimated the weighted-average fair value of ESPP purchase rights using the following weighted-average assumptions:
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,
2023
   
October 1,
2022
   
September 30,
2023
   
October 1,
2022
 
ESPP Purchase Rights:
        
Weighted-average fair value of grants per share
   $ 0.63     $ 0.65     $ 0.91     $ 1.26  
Expected volatility
     41.61     44.54     40.33     52.57
Risk-free interest rate
     5.29     2.94     5.15     1.94
Expected term of purchase rights (in years)
     1.09       1.24       1.08       1.24  
Dividend yield
     None       None       None       None  
The computation of the expected volatility assumptions used in the Black-Scholes calculations for ESPP purchase rights is based on the historical volatility of Intevac’s stock price, measured over a period equal to the expected term of the purchase right. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected term of purchase rights represents the period of time remaining in the current offering period. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.
RSUs
RSU activity as of September 30, 2023 and changes during the nine months ended September 30, 2023 were as follows:
 
    
Shares
   
Weighted-Average

Grant Date

Fair Value
 
Non-vested
RSUs at December 31, 2022
     1,309,792     $ 5.14  
Granted
     433,745     $ 4.70  
Vested
     (546,633   $ 5.16  
Cancelled and forfeited
     (252,678   $ 5.11  
  
 
 
   
Non-vested
RSUs at September 30, 2
023
     944,226     $ 4.93  
  
 
 
   
Time-based RSUs are converted into shares of Intevac common stock upon vesting on a
one-for-one
basis. Time-based RSUs typically are scheduled to vest over three or four years. Vesting of time-based RSUs is subject to the grantee’s continued service with Intevac. The compensation expense related to these awards is determined using the fair market value of Intevac common stock on the date of the grant, and the compensation expense is recognized over the vesting period.
 
12

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
PRSUs
PRSU activity as of September 30, 2023 and changes during the nine months ended September 30, 2023 were as follows:
 
    
Shares
   
Weighted-Average

Grant Date

Fair Value
 
Non-vested
PRSUs at December 31, 2022
     1,089,339     $ 3.54  
Granted
     525,656     $ 4.92  
Vested
     (190,903   $ 4.26  
Cancelled and forfeited
     (263,799   $ 3.57  
  
 
 
   
Non-vested
PRSUs at September 30, 2023
     1,160,293     $ 4.04  
  
 
 
   
In May 2023, we granted to members of our senior management awards of performance-based restricted stock units (the “2023 PRSU Awards”) covering an aggregate of 525,656 shares of Intevac common stock (at maximum performance). The 2023 PRSU Awards are eligible to be earned based on achievement of five strategic goals during a three-year performance period commencing on May 18, 2023 and ending on May 31, 2026 (the “2023 Performance Period”). The 2023 PRSU Awards will vest, if at all, in five possible tranches. Each of the five tranches will vest only if the applicable strategic goal is achieved within the 2023 Performance Period, and each tranche may only be achieved once during the 2023 Performance Period. If a strategic goal is not achieved within the 2023 Performance Period, the corresponding PRSUs will not vest, and all unvested PRSUs at the end of the 2023 Performance Period will immediately be forfeited. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant. The Company evaluated the strategic goals in the context of its current long-range financial plan and its product development roadmap and determined the probability of achieving each goal for accounting purposes commencing in the quarter granted. Management expectations related to the achievement of performance goals associated with PRSUs with performance conditions are assessed regularly to determine whether such grants are expected to vest. The fair value of each PRSU is the Company’s stock price on the date of grant. Over the 2023 Performance Period, the number of shares expected to be issued may be adjusted upward or downward based upon the probability of achievement of the performance conditions.
In September 2022 and May 2022, we granted to members of our senior management awards of performance-based restricted stock units (“2022 PRSU Awards”) covering an aggregate of 82,600 and 935,600 shares, respectively, of Intevac common stock (at maximum performance). The 2022 PRSU Awards are eligible to be earned based on achievement of certain stock prices based on the average closing price of the Company’s stock over a
30-day
period (the “Company Stock Price Hurdle”) during a performance period commencing on the grant date and ending on May 31, 2025 (or earlier, upon a change in control, as defined in the Company’s 2022 Inducement Equity Incentive Plan or 2020 Equity Incentive Plan, as applicable) (the “2022-2025 Performance Period”). The 2022 PRSU Awards will vest, if at all, in five possible tranches. Each of the five tranches will vest only if the applicable Company Stock Price Hurdle is achieved within the 2022-2025 Performance Period, and each tranche may only be achieved once during the Performance Period. If a Company Stock Price Hurdle is not achieved within the 2022-2025 Performance Period, the corresponding 2022 PRSUs will not vest, and all unvested 2022 PRSUs at the end of the 2022-2025 Performance Period will immediately be forfeited. The fair value of each 2022 PRSU award was estimated on the date of grant using a Monte Carlo simulation.
Intevac estimated the weighted-average fair value of the 2022 PRSU Awards using the following weighted-average assumptions:
 
    
Three Months Ended
   
Nine Months Ended
 
    
October 1, 2022
   
October 1, 2022
 
Weighted-average fair value of grants per share
   $ 3.17     $ 3.63  
Expected volatility
     65.81     55.34
Risk-free interest rate
     3.82     2.90
Dividend yield
     None       None  
 
6.
Warranty
Intevac provides for the estimated cost of warranty when revenue is recognized. Intevac’s warranty is subject to contract terms and, for its systems, the warranty typically ranges between 12 and 24 months from customer acceptance. During this warranty period any defective non-consumable parts are replaced and installed at no charge to the customer. Intevac uses estimated repair or replacement costs along with its historical warranty experience to determine its warranty obligation. The provision for the estimated future costs of warranty is based upon historical cost and product performance experience. Intevac exercises judgment in determining the underlying estimates.
 
13

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
On the condensed consolidated balance sheets, the short-term portion of the warranty provision is included in other accrued liabilities, while the long-term portion, if any, is included in other noncurrent liabilities. The expense associated with product warranties issued or adjusted is included in cost of net revenues on the condensed consolidated statements of operations.
The following table displays the activity in the warranty provision account for the three and nine months ended September 30, 2023 and October 1, 2022:
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,

2023
   
October 1,

2022
   
September 30,

2023
   
October 1,

2022
 
                          
    
(In thousands)
 
Opening balance
   $ 181     $ 214     $ 163     $ 346  
Expenditures incurred under warranties
     (36     (60     (201     (286
Accruals for product warranties issued during the reporting period
     67       63       239       135  
Adjustments to previously existing warranty accruals
     (10     9       1       31  
  
 
 
   
 
 
   
 
 
   
 
 
 
Closing balance
   $ 202     $ 226     $ 202     $ 226  
  
 
 
   
 
 
   
 
 
   
 
 
 
The following table displays the balance sheet classification of the warranty provision account at September 30, 2023 and at December 31, 2022.
 
    
September 30,
2023
    
De
ce
mber 31,
2022
 
               
    
(In thousands)
 
Other accrued liabilities
   $ 173      $ 163  
Other noncurrent liabilities
     29        —   
  
 
 
    
 
 
 
Total warranty provision
   $ 202      $ 163  
  
 
 
    
 
 
 
 
7.
Guarantees
Officer and Director Indemnifications
As permitted or required under Delaware law and to the maximum extent allowable under that law, Intevac has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was, serving at Intevac’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Intevac could be required to make under these indemnification obligations is unlimited; however, Intevac has a director and officer insurance policy that mitigates Intevac’s exposure and enables Intevac to recover a portion of any future amounts paid. As a result of Intevac’s insurance policy coverage, Intevac believes the estimated fair value of these indemnification obligations is not material.
Other Indemnifications
As is customary in Intevac’s industry, many of Intevac’s contracts provide remedies to certain third parties such as defense, settlement, or payment of judgments for intellectual property claims related to the use of its products. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Letters of Credit
As of September 30, 2023, we had letters of credit and bank guarantees outstanding totaling $700,000 including the standby letter of credit outstanding under the Santa Clara, California facility lease and various other guarantees with our bank. These letters of credit and bank guarantees are collateralized by $700,000 of restricted cash.
 
14

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
8.
Cash, Cash Equivalents and Investments
Cash and cash equivalents, short-term investments and long-term investments consist of:
 
    
September 30, 2023
 
    
Amortized Cost
    
Unrealized
Holding Gains
    
Unrealized
Holding Losses
    
Fair Value
 
                             
    
(In thousands)
 
Cash and cash equivalents:
           
Cash
   $ 14,236      $ —       $ —       $ 14,236  
Money market funds
     15,154        —         —         15,154  
Commercial paper
     14,436        —         4        14,432  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash and cash equivalents
   $ 43,826      $ —       $ 4      $ 43,822  
Short-term investments:
           
Certificates of deposit
   $ 1,400        —       $ —       $ 1,400  
Commercial paper
     1,445        —         1        1,444  
Corporate bonds and medium-term notes
     5,873        —         78        5,795  
Municipal bonds
     1,222        —         4        1,218  
U.S. treasury securities
     7,997        —         49        7,948  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total short-term investments
   $ 17,937      $ —       $ 132      $ 17,805  
Long-term investments:
           
Asset-backed securities
   $ 1,650      $ —       $ 13      $ 1,637  
Corporate bonds and medium-term notes
     2,230        —         12        2,218  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total long-term investments
   $ 3,880      $ —       $ 25      $ 3,855  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash, cash equivalents, and investments
   $ 65,643      $ —       $ 161      $  65,482  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
    
December 31, 2022
 
    
Amortized Cost
    
Unrealized
Holding Gains
    
Unrealized
Holding Losses
    
Fair Value
 
                             
    
(In thousands)
 
Cash and cash equivalents:
           
Cash
   $ 26,465      $ —       $ —       $ 26,465  
Money market funds
     9,589        —         —         9,589  
Commercial paper
     32,856        —         6        32,850  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash and cash equivalents
   $ 68,910      $ —       $ 6      $ 68,904  
Short-term investments:
           
Asset-backed securities
   $ 2,012      $ —       $ 13      $ 1,999  
Certificates of deposit
     3,850        —         10        3,840  
Commercial paper
     9,443        —         28        9,415  
Corporate bonds and medium-term notes
     4,210        —         32        4,178  
Municipal bonds
     1,486        —         25        1,461  
U.S. treasury securities
     4,771        —         123        4,648  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total short-term investments
   $ 25,772      $ —       $ 231      $ 25,541  
Long-term investments:
           
Asset-backed securities
   $ 6,749      $ —       $ 85      $ 6,664  
Corporate bonds and medium-term notes
     5,366        —         102        5,264  
Municipal bonds
     224        —         6        218  
U.S. treasury and agency securities
     5,493        —         54        5,439  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total long-term investments
   $ 17,832      $ —       $ 247      $ 17,585  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash, cash equivalents, and investments
   $ 112,514      $ —       $ 484      $ 112,030  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
15

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
The contractual maturities of investment securities at September 30, 2023 are presented in the following table.
 
    
Amortized Cost
    
Fair Value
 
               
    
(In thousands)
 
Due in one year or less
   $ 47,527      $ 47,391  
Due after one through five years
     3,880        3,855  
  
 
 
    
 
 
 
   $ 51,407      $ 51,246  
  
 
 
    
 
 
 
We reassess our estimated credit losses on investments each reporting period. U.S. government securities and cash equivalents are under a
“zero-loss
exception” for credit losses, meaning no credit loss risk calculation is necessary on those instruments due to the exceptionally low rate of default, which continues to decrease as the securities approach maturity. We record changes in the allowance for credit losses for
available-for-sale
debt securities with a corresponding adjustment in credit loss expense on the consolidated statement of operations. No reversal of a previously recorded allowance for credit losses may be made to an amount below zero. The total allowance for credit losses was $0 at both September 30, 2023 and December 31, 2022.
Our investment portfolio includes both corporate and U.S. government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower
yield-at-cost
show a
mark-to-market
unrealized loss. Most of our unrealized losses are due to changes in market interest rates and bond yields. We believe that we have the ability to realize the full value of all these investments upon maturity. As of September 30, 2023, we had 71 investments in a gross unrealized loss position. The following table provides the fair market value of Intevac’s investments with unrealized losses that are not deemed to be other-than temporarily impaired as of September 30, 2023.
 
    
September 30, 2023
 
    
In Loss Position for

Less than 12 Months
    
In Loss Position for

Greater than 12 Months
 
    
Fair Value
    
Gross

Unrealized
Losses
    
Fair Value
    
Gross

Unrealized
Losses
 
                             
    
(In thousands)
 
Asset-backed securities
   $ —       $ —       $ 1,637      $ 13  
Commercial paper
     15,876        5        —         —   
Corporate bonds and medium-term notes
     1,989        14        5,309        76  
Municipal bonds
     —         —         218        4  
U.S. treasury securities
     3,500        1        4,448        48  
  
 
 
    
 
 
    
 
 
    
 
 
 
   $ 21,365      $ 20      $ 11,612      $ 141  
  
 
 
    
 
 
    
 
 
    
 
 
 
All prices for the fixed maturity securities including U.S. treasury and agency securities, certificates of deposit, commercial paper, corporate bonds, asset-backed securities and municipal bonds are received from independent pricing services utilized by Intevac’s outside investment manager. This investment manager performs a review of the pricing methodologies and inputs utilized by the independent pricing services for each asset type priced by the vendor. In addition, on at least an annual basis, the investment manager conducts due diligence visits and interviews with each pricing vendor to verify the inputs utilized for each asset class. The due diligence visits include a review of the procedures performed by each vendor to ensure that pricing evaluations are representative of the price that would be received if a security were sold in an orderly transaction. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price. Intevac uses the pricing data obtained from its outside investment manager as the primary input to make its assessments and determinations as to the ultimate valuation of the above-mentioned securities and has not made, during the periods presented, any material adjustments to such inputs.
 
16

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
The following table represents the fair value hierarchy of Intevac’s investment securities measured at fair value on a recurring basis as of September 30, 2023.
 
    
Fair Value Measurements
at September 30, 2023
 
    
Total
    
Level 1
    
Level 2
 
                      
    
(In thousands)
 
Recurring fair value measurements:
        
Investment securities
        
Money market funds
   $ 15,154      $ 15,154      $ —   
U.S. treasury and agency securities
     7,948        4,448        3,500  
Asset-backed securities
     1,637        —         1,637  
Certificates of deposit
     1,400        —         1,400  
Commercial paper
     15,876        —         15,876  
Corporate bonds and medium-term notes
     8,013        —         8,013  
Municipal bonds
     1,218        —         1,218  
  
 
 
    
 
 
    
 
 
 
Total recurring fair value measurements
   $ 51,246      $ 19,602      $ 31,644  
  
 
 
    
 
 
    
 
 
 
 
9.
Derivative Instruments
The Company uses foreign currency forward contracts to mitigate variability in gains and losses generated from the
re-measurement
of certain monetary assets and liabilities denominated in foreign currencies and to offset certain operational exposures from the impact of changes in foreign currency exchange rates. These derivatives are carried at fair value with changes recorded in interest income and other income (expense), net in the condensed consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by
re-measurement
of the underlying assets and liabilities. Cash flows from such derivatives are classified as operating activities. The derivatives have original maturities of approximately 30 days.
The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in its condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022:
 
    
Notional Amounts
    
Derivative Assets
    
Derivative Assets
 
Derivative Instrument
  
September 30,
2023
    
December 31,
2022
    
September 30,
2023
    
December 31,
2022
 
                                           
                  
Balance

Sheet

Line
    
Fair

Value
    
Balance

Sheet

Line
    
Fair

Value
 
    
(In thousands)
                             
Undesignated Hedges:
                                         
Forward Foreign Currency Contracts
   $ 1,099        2,240       
a
 
   $ 1       
a
 
 
 
   $ 4  
  
 
 
    
 
 
       
 
 
       
 
 
 
Total Hedges
   $ 1,099        2,240         $ 1         $ 4  
  
 
 
    
 
 
       
 
 
       
 
 
 
 
a
Other current assets
 
17

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
10.
Equity
Condensed Consolidated Statement of Changes in Equity
The changes in stockholders’ equity by component for the three and nine months ended September 30, 2023 and October 1, 2022, are as follows (in thousands):
 
    
Three Months Ended September 30, 2023
 
    
Common
Stock and
Additional
Paid-in

Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Accumulated
Deficit
   
Total
Stockholders’
Equity
 
                                
Balance at July 1, 2023
   $ 208,698     $ (29,551   $ (190   $ (61,954   $ 117,003  
Common stock issued under employee plans
     527       —        —        —        527  
Shares withheld for net share settlement of RSUs
     (120     —        —        —        (120
Equity-based compensation expense
     317       —        —        —        317  
Net loss
     —        —        —        (1,576     (1,576
Other comprehensive income
     —        —        86       —        86  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2023
   $ 209,422     $ (29,551   $ (104   $ (63,530   $ 116,237  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Nine Months Ended September 30, 2023
 
    
Common
Stock and
Additional
Paid-in

Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Accumulated
Deficit
   
Total
Stockholders’
Equity
 
                                
Balance at December 31, 2022
   $ 206,381     $ (29,551   $ (193   $ (53,185   $ 123,452  
Common stock issued under employee plans
     1,331       —        —        —        1,331  
Shares withheld for net share settlement of RSUs
     (1,683     —        —        —        (1,683
Equity-based compensation expense
     3,393       —        —        —        3,393  
Net loss
     —        —        —        (10,345     (10,345
Other comprehensive income
     —        —        89       —        89  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2023
   $ 209,422     $ (29,551   $ (104   $ (63,530   $ 116,237  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Three Months Ended October 1, 2022
 
    
Common
Stock and
Additional
Paid-in

Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Total
Stockholders’
Equity
 
                                
Balance at July 2, 2022
   $ 201,503     $ (29,551   $ (9   $ (46,783   $ 125,160  
Common stock issued under employee plans
     687       —        —        —        687  
Shares withheld for net share settlement of RSUs
     (63     —        —        —        (63
Equity-based compensation expense
     2,209       —        —        —        2,209  
Net loss
     —        —        —        (3,236     (3,236
Other comprehensive loss
     —        —        (458     —        (458
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at October 1, 2022
   $ 204,336     $ (29,551   $ (467   $ (50,019   $ 124,299  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
18

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
    
Nine Months Ended October 1, 2022
 
    
Common
Stock and
Additional
Paid-in

Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Accumulated
Deficit
   
Total
Stockholders’
Equity
 
                                
Balance at January 1, 2022
   $ 199,098     $ (29,551   $ 578     $ (36,110   $ 134,015  
Common stock issued under employee plans
     2,898       —        —        —        2,898  
Shares withheld for net share settlement of RSUs
     (358     —        —        —        (358
Equity-based compensation expense
     2,698       —        —        —        2,698  
Net loss
     —        —        —        (13,909     (13,909
Other comprehensive loss
     —        —        (1,045     —        (1,045
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at October 1, 2022
   $ 204,336     $ (29,551   $ (467   $ (50,019   $ 124,299  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2023 and October 1, 2022, are as follows.
 
    
Three Months Ended
   
Nine Months Ended
 
                                      
    
September 30, 2023
 
    
Foreign
currency
   
Unrealized
holding gains
(losses) on
available-for-sale

investments
   
Total
   
Foreign
currency
   
Unrealized
holding gains
(losses) on
available-for-sale

investments
   
Total
 
                                      
    
(In thousands)
 
Beginning balance
   $ 72     $ (262   $ (190   $ 291     $ (484   $ (193
Other comprehensive income (loss) before reclassification
     (15     101       86       (234     323       89  
Amounts reclassified from other comprehensive income (loss)
     —        —        —        —        —        —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive income (loss)
     (15     101       86       (234     323       89  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 57     $ (161   $ (104   $ 57     $ (161   $ (104
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Three Months Ended
   
Nine Months Ended
 
                                      
    
October 1, 2022
 
    
Foreign
currency
   
Unrealized
holding losses on
available-for-sale

investments
   
Total
   
Foreign
currency
   
Unrealized
holding losses on
available-for-sale

investments
   
Total
 
                                      
    
(In thousands)
 
Beginning balance
   $ 356     $ (365   $ (9   $ 608     $ (30   $ 578  
Other comprehensive loss before reclassification
     (247     (225     (472     (499     (560     (1,059
Amounts reclassified from other comprehensive loss
     14       —        14       14       —        14  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive loss
     (233     (225     (458     (485     (560     (1,045
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
   $ 123     $ (590   $ (467   $ 123     $ (590   $ (467
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Stock Repurchase Program
On November 21, 2013, Intevac announced that its Board of Directors approved a stock repurchase program authorizing up to $30.0 million in repurchases. On August 20, 2018, Intevac announced that its Board of Directors approved a $10.0 million increase to the original stock repurchase program for an aggregate authorized amount of up to $40.0 million. At September 30, 2023, $10.4 million remains available for future stock repurchases under the repurchase program. Intevac did not make any common stock repurchases during the three and nine months ended September 30, 2023 and October 1, 2022.
 
19

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
Intevac records treasury stock purchases under the cost method using the
first-in,
first-out
method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional
paid-in
capital. If Intevac reissues treasury stock at an amount below its acquisition cost and additional
paid-in
capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against the accumulated deficit.
 
11.
Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended September 30, 2023 and October 1, 2022:
 
    
Three Months Ended
   
Nine Months Ended
 
                          
    
September 30,
2023
   
October 1,
2022
   
September 30,
2023
   
October 1,
2022
 
                          
    
(In thousands, except per share amounts)
 
Net loss from continuing operations
   $ (1,624   $ (3,216   $ (10,710   $ (13,515
Net income (loss) from discontinued operations, net of taxes
     48       (20     365       (394
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
   $ (1,576   $ (3,236   $ (10,345   $ (13,909
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average shares – basic
     26,287       25,370       26,033       25,104  
Effect of dilutive potential common shares
     —        —        —        —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average shares – diluted
     26,287       25,370       26,033       25,104  
  
 
 
   
 
 
   
 
 
   
 
 
 
Basic and diluted net income (loss) per share:
        
Continuing operations
   $ (0.06   $ (0.13   $ (0.41   $ (0.54
  
 
 
   
 
 
   
 
 
   
 
 
 
Discontinued operations
   $ 0.00     $ (0.00   $ 0.01     $ (0.02
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss per share
   $ (0.06   $ (0.13   $ (0.40   $ (0.55
  
 
 
   
 
 
   
 
 
   
 
 
 
As the Company is in a net loss position, all of the Company’s equity instruments are considered antidilutive.
 
12.
Income Taxes
Intevac recorded income tax provisions of $796,000 and $1.3 million for the three and nine months ended September 30, 2023, respectively, and income tax provisions of $467,000 and $992,000 for the three and nine months ended October 1, 2022, respectively. The income tax provisions (benefits) for the three and nine month periods are based upon estimates of annual income (loss), annual permanent differences and statutory tax rates in the various jurisdictions in which Intevac operates. For the three month period ended September 30, 2023 Intevac recorded a $505,000 income tax provision on income of its international subsidiaries and recorded $288,000 for withholding taxes on royalties paid to the United States from Intevac’s Singapore subsidiary as a discrete item. For the nine month period ended September 30, 2023 Intevac recorded a $685,000 income tax provision on income of its international subsidiaries and recorded $608,000 for withholding taxes on royalties paid to the United States from Intevac’s Singapore subsidiary as a discrete item. For the three and nine month periods ended October 1, 2022 Intevac recorded income tax provisions on income of its international subsidiaries of $392,000 and $756,000, respectively, and recorded $127,000 and $285,000, respectively, for withholding taxes on royalties paid into the United States from Intevac’s Singapore subsidiary as discrete items. The tax provisions for the three and nine months ended October 1, 2022 are net of a tax benefit recorded for the partial release of the U.S. valuation allowance in the amount of $52,000 due to the acquired intangibles of Hia, Inc. (“Hia”). Intevac’s tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, the utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences. Intevac’s future effective income tax rate depends on various factors, including the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carry-forwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into U.S. law. The IRA includes a new Corporate Alternative Minimum Tax (“CAMT”) that is effective for tax years beginning after December 31, 2022. The CAMT applies to corporations that report over $1.0 billion in profits to shareholders. The Company does not expect the provisions of the CAMT to have a material impact to the Company’s consolidated financial statements.
 
20

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
13.
Restructuring Charges
During the third quarter of fiscal 2023, Intevac substantially completed implementation of a cost reduction plan (the “2023 Cost Reduction Plan”), which is intended to reduce expenses by reducing our workforce by 23 percent including employees and contractors. Intevac incurred restructuring costs of $1.9 million in severance, $2,000 in stock-based compensation associated with the modification of certain stock-based awards and other employee-related expenses associated with the 2023 Cost Reduction Plan. Additionally, as part of the 2023 Cost Reduction Plan the Company incurred a benefit of $462,000 related to the stock-based compensation forfeitures related to the employees affected by the reduction in workforce. Substantially all cash outlays in connection with the 2023 Cost Reduction Plan occurred in the third quarter of fiscal 2023. Implementation of the 2023 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses and contractor payments by approximately $4.6 million on an annual basis.
The changes in restructuring reserves, which resulted from cash-based severance payments and other employee-related costs, associated with the 2023 Cost Reduction Plan for the three and nine months ended September 30, 2023 were as follows.
 
    
Employee
Termination
Costs
 
    
(In thousands)
 
Balance at July 1, 2023
   $ —   
Provision for restructuring charges under the 2023 Cost Reduction Plan
     1,950  
Cash payments made
     (1,948
Non-cash
utilization (a)
     (2
  
 
 
 
Balance at September 30, 2023
   $ —   
  
 
 
 
 
(a)
Acceleration of equity awards.
During the first quarter of fiscal 2022, Intevac substantially completed implementation of the 2022 cost reduction plan (the “2022 Cost Reduction Plan”), which was intended to reduce our overall cost structure and optimize our operational design, inclusive of the stranded overhead associated with the divestiture of the Photonics business. The restructuring program includes management reorganization and the right sizing of certain technology development, marketing and administrative functions. We incurred restructuring costs of $1.2 million in estimated severance and the related modification of certain stock-based awards. Other costs incurred as part of the 2022 Cost Reduction Plan include: (i) a benefit of $1.3 million related to the stock-based compensation forfeitures related to the employees affected by the reduction in workforce, (ii) $1.5 million for fixed asset disposals and (iii) $755,000 for write-offs of excess inventory. The 2022 Cost Reduction Plan reduced Intevac’s workforce by 6 percent. The cost of implementing the 2022 Cost Reduction Plan was reported under cost of net revenues and operating expenses in the condensed consolidated statements of operations. Implementation of the 2022 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses by approximately $2.1 million on an annual basis.
The changes in restructuring reserves, which resulted from cash-based severance payments and ot
her
employee-related costs, associated with the 2022 Cost Reduction Plan for the three and nine months ended October 1, 2022 were as follows.
 
    
Employee
Termination
Costs
 
    
(In thousands)
 
Balance at January 1, 2022
   $ —   
Provision for restructuring charges under the 2022 Cost Reduction Plan
     1,232  
Cash payments made
     (757
Non-cash
utilization (a)
     37  
  
 
 
 
Balance at April 2, 2022
   $ 512  
Cash payments made
     (179
  
 
 
 
Balance at July 2, 2022
   $ 333  
Cash payments made
     (154
  
 
 
 
Balance at October 1, 2022
   $ 179  
  
 
 
 
 
(a)
Acceleration of
eq
uity awards.
 
21

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
During the fourth quarter of fiscal 2021, the Company recorded asset impairment and restructuring charges associated with the sale of the Photonics division including (i) $693,000 in severance and other employee-related costs related to the termination of the Photonics general manager, (ii) $1.2 million in asset impairment charges on the Company’s ROU asset and (iii) $665,000 in accruals for common area charges associated with an unused space commitment to EOTECH. In consideration of EOTECH’s assumption of certain lease obligations related to the Company’s Santa Clara, California campus, which assumed lease obligations pertain in part to excess space beyond that required by EOTECH’s currently anticipated operation of the Photonics division, the Company agreed to pay EOTECH the amount of $2.1 million, which is payable in (i) one initial installment of $308,000 on January 10, 2022 and (ii) seven equal quarterly installments of $259,000. The Company recorded an asset impairment charge against its ROU asset in the amount of $1.2 million associated with the excess space noted above. The Company recorded a liability to EOTECH in the amount of $665,000, the amount related to common area charges which are not included in the base rental payments or the lease liability on the Company’s condensed consolidated balance sheet. During the first quarter of fiscal 2022, the Company recorded restructuring charges associated with the sale of the Photonics division including $37,000 in severance and other employee-related costs related to the termination of four Photonics employees and $75,000 in stock-based compensation associated with the modification of certain stock-based awards for eighty Photonics employees.
The changes in restructuring reserves, which resulted from cash-based severance payments and other employee-related costs and other exit costs associated with the Photonics divestiture for the three and nine months ended September 30, 2023 and October 1, 2022 were as follows.
 
    
Other Exit Costs
 
    
(In thousands)
 
Balance at December 31, 2022
   $ 318  
Provision for restructuring charges associated with Photonics divestiture (a)
     3  
Cash payments made
     (81
  
 
 
 
Balance at April 1, 2023
   $ 240  
Provision for restructuring charges associated with Photonics divestiture (a)
     2  
Cash payments made
     (80
  
 
 
 
Balance at July 1, 2023
   $ 162  
Provision for restructuring charges associated with Photonics divestiture (a)
     2  
Cash payments made
     (80
  
 
 
 
Balance at September 30, 2023
   $ 84  
  
 
 
 
 
    
Employee
Termination
Costs
   
Other Exit
Costs
   
Total
 
                    
    
(In thousands)
 
Balance at January 1, 2022
   $ 358     $ 665     $ 1,023  
Provision for restructuring charges associated with Photonics divestiture (a)
     112       2       114  
Cash payments made
     (137     (128     (265
Non-cash
utilization (b)
     (75     —        (75
  
 
 
   
 
 
   
 
 
 
Balance at April 2, 2022
   $ 258     $ 539     $ 797  
  
 
 
   
 
 
   
 
 
 
Provision for restructuring charges associated with Photonics divestiture (a)
     —        4       4  
Cash payments made
     (90     (77     (167
  
 
 
   
 
 
   
 
 
 
Balance at July 2, 2022
   $ 168     $ 466     $ 634  
  
 
 
   
 
 
   
 
 
 
Provision for restructuring charges associated with Photonics divestiture (a)
     —        5       5  
Cash payments made
     (77     (77     (154
  
 
 
   
 
 
   
 
 
 
Balance at October 1, 2022
   $ 91     $ 394     $ 485  
  
 
 
   
 
 
   
 
 
 
 
(a)
Included in loss from discontinued operations (See Note 2).
(b)
Acceleration of equity awards.
 
22

Table of Contents
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
14.
Contingencies
From time to time, Intevac may have certain contingent liabilities that arise in the ordinary course of its business activities. Intevac accounts for contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Legal Matters
From time to time, Intevac receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions in connection with claims made against them. In addition, from time to time, Intevac receives notification from third parties claiming that Intevac may be or is infringing their intellectual property or other rights. Intevac also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business. Although the outcome of these claims and proceedings cannot be predicted with certainty, Intevac does not believe that any existing proceedings or claims will have a material adverse effect on its consolidated financial condition or results of operations.
In July 2020, Robin Quiusky, a former contract employee who worked for us via a staffing agency, filed an action against us under the Private Attorneys General Act (“PAGA”) in California state court (Quiusky v. Intevac, Inc., et al) alleging that the Company failed to provide rest and meal breaks, pay overtime and reimburse business expenses for
non-exempt
California employees. The former employee subsequently added class action claims to his original complaint. The parties participated in a confidential mediation on February 1, 2022, and reached a settlement resolving the case. The court approved the settlement in November 2022 and payment on the claims was made on January 20, 2023. The settlement effectively extinguishes the Quiusky v. Intevac, Inc., et al lawsuit. The settlement includes the dismissal of all claims against the Company and related parties in the Quiusky lawsuit and claim under the PAGA, without any admission of liability or wrongdoing attributed to the Company. Because of the uncertainty surrounding this litigation, no litigation reserve had been previously established by the Company resulting in the full $1.0 million settlement expense being recognized in the fourth quarter of fiscal 2021.
 
15.
Acquisition of Hia, Inc.
On August 26, 2022 (the “Closing Date”), the Company completed the acquisition of Hia, Inc., a supplier of magnetic bars, to bring the manufacturing of these magnetic bars
in-house
and to protect our technology and product quality while continuing to improve our products. Pursuant to the Stock Purchase Agreement, dated August 26, 2022, between the Company, Hia and the other parties thereto, the Company paid an aggregate purchase price of $700,000 to Hia’s stockholders on the Closing Date. Further contingent consideration will consist of amounts payable upon achievement of certain development and commercialization milestones, which consideration is estimated to be up to $500,000. The first milestone was achieved and contingent consideration in the amount of $250,000 was paid on January 17, 2023 and was accrued in the fourth quarter of 2022. The Company is also obligated to pay a royalty of $1,500 for each magnetic bar sold through December 31, 2030. If at any time prior to December 31, 2030, the Company effects a change of control or a sale, license, transfer or other disposition to a third party (other than an affiliate of Intevac) of all or substantially all of the assets or rights associated with the magnetic bars, then, upon the closing of such transaction, a payment of $1.7 million (minus any royalty payments previously paid) will immediately become due and payable, which payment shall fulfill the Company’s royalty obligations. Transaction costs incurred in connection with the Hia acquisition totaled $63,000, which are included as a component of the purchase price paid in connection with the Hia acquisition.
The Company determined this transaction represented an asset acquisition as substantially all of the value was in the technology intangible assets of Hia. Contingent consideration is not recorded in an asset acquisition until the contingency is resolved (when the contingent consideration is paid or becomes payable) or when probable and reasonably estimable. The first milestone was achieved and contingent consideration in the amount of $250,000 was paid on January 17, 2023. The technology intangible assets are being amortized on a straight-line basis over a period of 8.3 years. Total amortization expense during the three and nine months ended September 30, 2023 was $34,000 and $102,000, respectively. Annual amortization expense related to the acquired technology intangible assets in each of the succeeding years is estimated to be approximately $34,000 for the remainder of fiscal 2023 and approximately $136,000 per year from fiscal 2024 through fiscal 2030.
The following table represents the carrying amount of the Hia technology intangible assets at September 30, 2023 (in thousands):
 
Gross carrying amount at September 30, 2023
   $ 1,132  
Accumulated amortization
     (144
  
 
 
 
Net carrying amount at September 30, 2023
   $ 988  
  
 
 
 
 
 
23


Table of Contents
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements, which involve risks and uncertainties. Words such as “believes,” “expects,” “anticipates” and the like indicate forward-looking statements. These forward-looking statements include comments related to Intevac’s shipments, projected revenue recognition, product costs, gross margin, operating expenses, interest income, income taxes, cash balances and financial results in 2023 and beyond; projected customer requirements for Intevac’s new and existing products, and when, and if, Intevac’s customers will place orders for these products; the timing of delivery and/or acceptance of the systems and products that comprise Intevac’s backlog for revenue and the Company’s ability to achieve cost savings. Intevac’s actual results may differ materially from the results discussed in the forward-looking statements for a variety of reasons, including those set forth under “Risk Factors” and in other documents we file from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on February 16, 2023, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

Intevac’s trademarks include the following: “200 Lean®,” and “INTEVAC TRIO.”

Discontinued Operations

On December 30, 2021, the Company completed the sale of its Photonics business to EOTECH, LLC, a Michigan limited liability company (“EOTECH”). As a result of the disposition, the results of operations from the Photonics reporting segment are reported as “Net loss from discontinued operations, net of taxes” in the condensed consolidated financial statements. All discussion herein, unless otherwise noted, refers to Intevac’s remaining operating segment after the disposition, the Thin Film Equipment (“TFE”) business. See Note 2 “Divestiture and Discontinued Operations” to the condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.

Overview

Intevac is a provider of vacuum deposition equipment for a wide variety of thin-film applications. The Company leverages its core capabilities in high-volume manufacturing of small substrates to provide process manufacturing equipment solutions to the hard disk drive (“HDD”) and display cover panel (“DCP”) industries. Intevac’s customers include manufacturers of hard disk media and DCPs. Intevac operates in a single segment: TFE. Product development and manufacturing activities occur in North America and Asia. Intevac also has field offices in Asia to support its customers. Intevac’s products are highly technical and are sold primarily through Intevac’s direct sales force.

Intevac’s results of operations are driven by a number of factors including success in its equipment growth initiatives in the DCP market and by worldwide demand for HDDs. Demand for HDDs depends on the growth in digital data creation and storage, the rate of areal density improvements, and the end-user demand for PCs, enterprise data storage, nearline “cloud” applications, video players and video game consoles that include such drives. Intevac continues to execute its strategy of diversification beyond the HDD industry by focusing on the Company’s ability to provide proprietary tools to enhance scratch protection and durability for the DCP market and by working to develop the next generation of high volume DCP manufacturing equipment. Intevac believes that its renewed focus on the DCP market will result in incremental equipment revenues for Intevac and decrease Intevac’s dependence on the HDD industry. Intevac’s equipment business is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for HDDs and cell phones as well as other factors such as global economic conditions and technological advances in fabrication processes.

In March 2022, the Company approved and implemented a restructuring program to realign the Company’s operational focus, scale the business and improve costs. The restructuring program included (i) reducing the Company’s headcount and (ii) eliminating several research and development (“R&D”) programs and product offerings. As part of this realignment effort, the Company ceased its efforts to develop and market several of its manufacturing platforms for the DCP, PV and ASP industries and ceased offering certain legacy products within these industries.

The following table presents certain significant measurements for the three and nine months ended September 30, 2023 and October 1, 2022:

 

     Three months ended      Nine months ended  
     September 30,
2023
    October 1,
2022
    Change over
prior period
     September 30,
2023
    October 1,
2022
    Change over
prior period
 
                                       
     (In thousands, except percentages and per share amounts)  

Net revenues

   $ 17,915     $ 10,750     $ 7,165      $ 39,758     $ 24,502     $ 15,256  

Gross profit

   $ 6,999     $ 4,890     $ 2,109      $ 14,287     $ 10,100     $ 4,187  

Gross margin percent

     39.1     45.5     (6.4) points        35.9     41.2     (5.3) points  

Loss from operations

   $ (1,428   $ (3,162   $ 1,734      $ (11,334   $ (13,246   $ 1,912  

Loss from continuing operations

   $ (1,624   $ (3,216   $ 1,592      $ (10,710   $ (13,515   $ 2,805  

Income (loss) from discontinued operations

   $ 48     $ (20   $ 68      $ 365     $ (394   $ 759  

Net loss

   $ (1,576   $ (3,236   $ 1,660      $ (10,345   $ (13,909   $ 3,564  

Net loss per diluted share

   $ (0.06   $ (0.13   $ 0.07      $ (0.40   $ (0.55   $ 0.15  

 

24


Table of Contents

Net revenues increased during the third quarter of fiscal 2023 compared to the same period in the prior year primarily due to higher equipment sales to HDD manufacturers. We did not recognize revenue on any system sales in both the third quarter of fiscal 2023 and the third quarter of fiscal 2022. Lower gross margin percent in the third quarter of fiscal 2023 reflected higher excess and obsolete inventory charges due to the obsolescence of inventory resulting from engineering change orders to the TRIO bill of material and severance costs associated with our 2023 Cost Reduction Plan, offset in part by the higher-margin contribution from HDD upgrades. The cost of employee severance associated with our 2023 Cost Reduction Plan of $2.0 million was offset in part by $462,000 of stock-based compensation forfeitures related to the employees affected by the reduction in workforce. In September 2022, Intevac entered into a settlement agreement and agreed to refund to EOTECH $200,000 in TSA fees as well as cancel $46,000 in outstanding invoices related to disputed TSA fees. These fees were reported in general and administrative expenses for the three months ended October 1, 2022. The Company reported a smaller net loss for the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022 due to higher revenues and higher gross profit, offset in part by higher operating costs primarily as a result of restructuring charges.

Net revenues increased during the nine months ended September 30, 2023 compared to the same period in the prior year primarily due to higher upgrade and systems sales. We recognized revenue on one 200 Lean HDD system and one refurbished 200 Lean HDD system in the first nine months of 2023. We did not recognize revenue on any system sales in the first nine months of fiscal 2022. Lower gross margin percent in the nine months ended September 30, 2023, versus the same period in the prior year, reflected higher inventory obsolescence charges, severance costs, the lower-margin contributions from the 200 Lean HDD system and the refurbished 200 Lean HDD system and lower factory utilization. Gross margins in the first nine months of fiscal 2022 reflected the impact of $755,000 in charges for excess and obsolete inventory as part of our 2022 Cost Reduction Plan. The cost of employee severance associated with our 2023 Cost Reduction Plan of $2.0 million was offset in part by $462,000 of stock-based compensation forfeitures related to the employees affected by the reduction in workforce. R&D expenses for the first nine months of fiscal 2022 include $1.5 million in expenditures related to the disposal of certain lab equipment as part of our 2022 Cost Reduction Plan. The cost of employee severance associated with our 2022 Cost Reduction Plan of $1.2 million was offset in full by stock-based compensation forfeitures related to the employees affected by the reduction in workforce. Fees earned pursuant to the TSA were $950,000 for the nine months ended October 1, 2022, of which $23,000 was reported as a reduction of cost of net revenues and $927,000 was reported as a reduction of selling, general and administrative expenses. The agreed-upon charges for such services were generally intended to allow the service provider to recover all costs and expenses of providing such services. The TSA concluded in June 2022, and the Company did not receive any TSA fees in the first nine months of fiscal 2023. The Company reported a smaller net loss for the nine months ended September 30, 2023 compared to same period in the prior year due to higher revenues and higher gross profit, offset in part by higher operating costs.

We believe fiscal 2023 will continue to be a challenging year, and Intevac does not expect to be profitable in fiscal 2023. While we expect that HDD equipment sales will be higher in 2023 than 2022 levels, we expect that HDD equipment sales in 2024 will be lower than 2023 levels. We expect to begin recognizing revenue from our TRIO platform in fiscal 2024. In May 2023, a customer cancelled an order for eight 200 Lean HDD systems and we recorded a backlog reduction of $54.6 million. Additionally, in the remainder of 2023 and throughout 2024, we expect to recognize cancellation charges associated with the cancelled order as the associated customer contract requires the customer to pay us a prorated price based upon the percentage of work completed on the order.

Our results of operations and growth prospects could be impacted by macroeconomic conditions such as a global economic slowdown, global economic instability and political conflicts, wars, and public health crises. Rising inflation and interest rates may impact demand for our products and services and our cost to provide products and services. Further, the impacts of inflation and interest rate fluctuations on our business and the broader economy may impact our financial condition and results of operations. Our customers may delay or cancel orders due to reduced demand and supply chain disruptions.

Results of Operations

Net revenues

 

     Three months ended      Nine months ended  
     September 30,
2023
     October 1,
2022
     Change over
prior period
     September 30,
2023
     October 1,
2022
     Change over
prior period
 
                                           
     (In thousands)  

Net revenues

   $ 17,915      $ 10,750      $ 7,165      $ 39,758      $ 24,502      $ 15,256  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

Revenue for the three months ended September 30, 2023 increased compared to the same period in the prior year as a result of higher sales of technology upgrades, offset in part by lower sales of spare parts and field service. Revenue for the nine months ended September 30, 2023 increased compared to the same period in the prior year as a result of higher sales of systems and technology upgrades, offset in part by lower sales of spare parts and field service. Revenue for the three and nine months ended September 30, 2023 includes $444,000 of cancellation fees, when the Company applied $444,000 of billings against customer advances in connection with inventory scrapped at the customer’s direction associated with a cancelled order. We recognized revenue on one 200 Lean HDD system and one refurbished 200 Lean HDD system for the nine months ended September 30, 2023. Revenue for the three months ended September 30, 2023 and three and nine months ended October 1, 2022 did not include revenue recognized for any systems.

Backlog

 

     September 30,
2023
     December 31,
2022
     October 1,
2022
 
                      
     (In thousands)  

Backlog

   $ 46,497      $ 121,743      $ 110,397  
  

 

 

    

 

 

    

 

 

 

Backlog at September 30, 2023 included 2 200 Lean HDD systems. Backlog at both December 31, 2022 and October 1, 2022 included eleven 200 Lean HDD systems. In May 2023, a customer cancelled an order for eight 200 Lean HDD systems and we recorded a backlog reduction of $54.6 million. Our HDD revenues through the remainder of 2023 are expected to consist primarily of HDD upgrade sales, spare parts sales and field service sales. On September 30, 2023, we had $46.5 million of backlog and expect to recognize as revenue: 25.3% in 2023, 50.2% in 2024 and 24.5% in 2025. However, our customers may cancel their contracts with us prior to contract completion. In the case of a termination for convenience, we would not receive anticipated future revenues, but would generally be permitted to recover all or a portion of our incurred costs and fees for work performed.

Revenue by geographic region

 

     Three months ended      Nine months ended  
     September 30,
2023
     October 1,
2022
     September 30,
2023
     October 1,
2022
 
                             
     (In thousands)  

United States

   $ 784      $ 1,377      $ 3,060      $ 3,327  

Asia

     17,034        9,273        36,590        21,075  

Europe

     97        100        108        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 17,915      $ 10,750      $ 39,758      $ 24,502  
  

 

 

    

 

 

    

 

 

    

 

 

 

International sales include products shipped to overseas operations of U.S. companies. The decrease in sales to the U.S. region in the three months ended September 30, 2023 versus the three months ended October 1, 2022, reflected lower HDD upgrade sales, lower spare parts and lower field service sales. The decrease in sales to the U.S. region in the nine months ended September 30, 2023 versus the nine months ended October 1, 2022, reflected lower spare parts and lower field service sales, offset in part by higher HDD upgrade sales. The increase in sales to the Asia region in the three months ended September 30, 2023 versus the three months ended October 1, 2022, reflected higher HDD upgrade sales, offset in part by lower spare parts and lower field service sales. The increase in sales to the Asia region in the nine months ended September 30, 2023 versus the nine months ended October 1, 2022, reflected higher HDD system and higher HDD upgrade sales, offset in part by lower spare parts and field service sales. Sales to the Asia region for the nine months ended September 30, 2023 included one 200 Lean HDD system and one refurbished 200 Lean HDD system. Sales to the Asia region for the three months ended September 30, 2023 and three and nine months ended October 1, 2022, did not include any systems.

Gross profit

 

     Three months ended      Nine months ended  
     September 30,
2023
    October 1,
2022
    Change over
prior period
     September 30,
2023
    October 1,
2022
    Change over
prior period
 
                                       
     (In thousands, except percentages)  

Gross profit

   $ 6,999     $ 4,890     $ 2,109      $ 14,287     $ 10,100     $ 4,187  

% of net revenues

     39.1     45.5        35.9     41.2  

Cost of net revenues consists primarily of purchased materials and also includes fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for inventory reserves and scrap.

 

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Gross margin was 39.1% in the three months ended September 30, 2023 compared to 45.5% in the three months ended October 1, 2022 and was 35.9% in the nine months ended September 30, 2023 compared to 41.2% in the nine months ended October 1, 2022. The decrease in the gross margin percentage for the three months ended September 30, 2023 compared to the same period in the prior year was due primarily to inventory obsolescence charges, severance charges associated with the 2023 Cost Reduction Plan and lower factory utilization. The decrease in the gross margin percentage for the nine months ended September 30, 2023 compared to the same period in the prior year was due primarily to the inventory obsolescence charges, severance charges associated with the 2023 Cost Reduction Plan, lower-margin contributions from the 200 Lean HDD system and the refurbished 200 Lean HDD system, and lower factory utilization. Excess and obsolete inventory charges during the three and nine months ended September 30, 2023 included $1.4 million in expenditures primarily related to certain TRIO inventory that become obsolete resulting from engineering change orders. Gross margins will vary depending on a number of factors, including revenue levels, product mix, product cost, system configuration and pricing, factory utilization, and provisions for excess and obsolete inventory.

Research and development expense

 

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Research and development expense

   $ 3,720      $ 3,311      $ 409      $ 11,340      $ 10,339      $ 1,001  

Research and development spending during the three months ended September 30, 2023 increased compared to the same period in the prior year primarily due to higher spending on TRIO, offset in part by lower spending on HDD R&D programs. R&D spending during the nine months ended September 30, 2023 increased compared to the same period in the prior year primarily due to higher spending on TRIO and HDD R&D programs. R&D spending during the nine months ended October 1, 2022 included $1.5 million in expenditures related to the disposal of certain lab equipment as part of the 2022 Cost Reduction Plan.

Selling, general and administrative expense

 

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Selling, general and administrative expense

   $ 4,707      $ 4,741      $ (34   $ 14,281      $ 13,007      $ 1,274  

Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. Selling, general and administrative expense for the three months ended September 30, 2023 decreased compared to the same period in the prior year as lower stock compensation and lower variable compensation expenses were offset in part by severance charges associated with the 2023 Cost Reduction Plan, higher legal fees, higher consulting fees and higher travel expenses. Selling, general and administrative expense for the three months ended October 1, 2022 included a $200,000 refund to EOTECH in TSA fees as well the cancelation in $46,000 in outstanding invoices related to disputed TSA fees. Selling, general and administrative expense for the nine months ended September, 2023 increased compared to the same period in the prior year as higher severance charges, higher stock compensation expenses, higher variable compensation expenses, higher consulting fees, higher training expenses and higher travel expenses were offset in part by lower legal fees. Selling, general and administrative expense for the nine months ended October 1, 2022 included severance charges associated with the 2022 Cost Reduction Plan. Selling, general and administrative expense for the nine months ended October 1, 2022, is net of $950,000 in TSA fees earned since the Photonics divestiture. The agreed-upon charges for such services were generally intended to allow the service provider to recover all costs and expenses of providing such services.

Cost reduction plans

During the third quarter of fiscal 2023, Intevac substantially completed implementation of the 2023 Cost Reduction Plan, which is intended to reduce expenses by reducing our workforce by 23 percent including employees and contractors. Intevac incurred restructuring costs of $1.9 million in severance, $2,000 in stock-based compensation associated with the modification of certain stock-based awards and other employee-related expenses associated with the 2023 Cost Reduction Plan. Additionally as part of the 2023 Cost Reduction Plan the Company incurred a benefit of $462,000 related to the stock-based compensation forfeitures related to the employees affected by the reduction in workforce. Substantially all cash outlays in connection with the 2023 Cost Reduction Plan occurred in the third quarter of fiscal 2023. The cost of implementing the 2023 Cost Reduction Plan was reported under cost of net revenues ($490,000) and operating expenses ($1.3 million in selling, general and administrative expense and $117,000 in R&D expense) in the condensed consolidated statements of operations. Implementation of the 2023 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses and contractor payments by approximately $4.6 million on an annual basis.

 

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In March 2022, the Company’s management approved 2022 Cost Reduction Plan, which reduced the Company’s headcount and eliminated several R&D programs and product offerings. As part of this re-alignment effort, the Company will no longer be pursuing several DCP projects including the coating of the backside covers of smartphones, solar ion implantation (also known as ENERGi®), and advanced packaging for semiconductor manufacturing. We incurred restructuring costs of $1.2 million for estimated severance and the related modification of certain stock-based awards. Other costs incurred as part of the 2022 Cost Reduction Plan include: (i) a benefit of $1.3 million related to the stock-based compensation forfeitures related to the employees affected by the reduction in workforce, (ii) $1.5 million for fixed asset disposals and (iii) $755,000 for write-offs of excess inventory. The 2022 Cost Reduction Plan reduced the workforce by 6 percent. The cost of implementing the 2022 Cost Reduction Plan was reported under cost of net revenues and operating expenses in the condensed consolidated statements of operations. Implementation of the 2022 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses by approximately $2.1 million on an annual basis and reduce depreciation expense by $720,000 on an annual basis.

Interest income and other income (expense), net

 

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Interest income and other income (expense), net

   $ 600      $ 413      $ 187      $ 1,922      $ 723      $ 1,199  

Interest income and other income (expense), net is comprised of interest income, foreign currency gains and losses, and other income and expense.

Interest income and other income (expense), net in the three months ended September 30, 2023 included $600,000 of interest income on investments, various other income of $51,000, offset in part by $51,000 of foreign currency losses. Interest income and other income (expense), net in the nine months ended September 30, 2023 included $1.9 million of interest income on investments, various other income of $115,000 offset in part by $70,000 of foreign currency losses. Interest income and other income (expense), net in the three months ended October 1, 2022 included $398,000 of interest income on investments, various other income of $2,000, and $13,000 of foreign currency gains. Interest income and other income (expense), net in the nine months ended October 1, 2022 included $573,000 of interest income on investments, various other income of $30,000 and $120,000 of foreign currency gains. The increase in interest income in the three and nine months ended September 30, 2023 compared to the same periods in the prior year resulted from higher interest rates, offset in part by lower invested balances.

Provision for income taxes

 

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Provision for income taxes

   $ 796      $ 467      $ 329      $ 1,298      $ 992      $ 306  

Intevac recorded income tax provisions of $796,000 and $1.3 million for the three and nine months ended September 30, 2023, respectively, and income tax provisions of $467,000 and $992,000 for the three and nine months ended October 1, 2022, respectively. The income tax provisions for these three and nine month periods are based upon estimates of annual income (loss), annual permanent differences and statutory tax rates in the various jurisdictions in which Intevac operates. For the three and nine months ended September 30, 2023, Intevac recorded an income tax provision on earnings of $505,000 and $685,000, respectively, of its international subsidiaries. For the three and nine months ended September 30, 2023, Intevac recorded $288,000 and $608,000, respectively, for withholding taxes on royalties paid into the United States from Intevac’s Singapore subsidiary as discrete items.

For the three and nine months ended October 1, 2022 Intevac recorded an income tax provision on earnings of $392,000 and $756,000, respectively, of its international subsidiaries. The tax provisions for the three and nine months ended October 1, 2022 are net of a tax benefit recorded for the partial release of the U.S. valuation allowance in the amount of $52,000 due to the acquired intangibles of Hia. The decrease in the valuation allowance, which was recorded as a discrete income tax benefit, was due to such acquired intangible assets having no tax basis. This required the Company to record a deferred tax liability, which served as a source of taxable income to realize the existing deferred tax assets of the Company. For the three and nine months ended October 1, 2022, Intevac recorded $127,000 and $285,000, respectively, for withholding taxes on royalties paid into the United States from Intevac’s Singapore subsidiary as discrete items. For all periods presented, Intevac utilized net operating loss carry-forwards to offset the impact of the global intangible low-taxed income. Intevac’s tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences. Intevac’s future effective income tax rate depends on various factors, including the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carry-forwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate.

 

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The income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business and foreign withholding taxes. We maintain a full valuation allowance for domestic deferred tax assets, including net operating loss carry-forwards and certain domestic tax credits. Intevac’s effective tax rate differs from the U.S. statutory rate in both fiscal 2023 and fiscal 2022 primarily due to the Company not recognizing an income tax benefit on the domestic loss.

Income (loss) from discontinued operations, net of taxes

 

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Income (loss) from discontinued operations, net of taxes

   $ 48      $ (20   $ 68      $ 365      $ (394   $ 759