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 28, 2019

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 October 29, 2019, 23,232,006 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

 

 

 

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 Income (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			30
Item 4.		Controls and Procedures			30
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			31
Item 1A.		Risk Factors			31
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3.		Defaults upon Senior Securities			37
Item 4.		Mine Safety Disclosures			37
Item 5.		Other Information			37
Item 6.		Exhibits			37
SIGNATURES					38

 

2

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

INTEVAC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 28, 2019				December 29, 2018
		(Unaudited)
		(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents		$	14,997			$	18,715
Short-term investments			15,302				16,076
Trade and other accounts receivable, net of allowances of $0 at both September 28, 2019 and at December 29, 2018			24,884				27,717
Inventories			29,851				30,597
Prepaid expenses and other current assets			1,872				2,528
Total current assets			86,906				95,633
Long-term investments			5,447				4,372
Restricted cash			1,355				1,169
Property, plant and equipment, net			11,980				11,198
Operating lease right-of-use assets			9,920				—
Intangible assets, net of accumulated amortization of $7,959 at September 28, 2019 and $7,498 at December 29, 2018			428				889
Deferred income taxes and other long-term assets			8,248				8,809
Total assets		$	124,284			$	122,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current operating lease liabilities		$	2,394			$	—
Accounts payable			5,544				6,053
Accrued payroll and related liabilities			5,258				4,689
Other accrued liabilities			3,650				4,952
Customer advances			8,740				14,314
Total current liabilities			25,586				30,008
Noncurrent liabilities:
Noncurrent operating lease liabilities			9,354				—
Other long-term liabilities			158				2,438
Total noncurrent liabilities			9,512				2,438
Stockholders’ equity:
Common stock, $0.001 par value			23				23
Additional paid-in capital			186,938				183,204
Treasury stock, 4,989 shares September 28, 2019 and 4,965 shares December 29, 2018			(29,158	)			(29,047	)
Accumulated other comprehensive income			371				378
Accumulated deficit			(68,988	)			(64,934	)
			89,186				89,624
Total liabilities and stockholders’ equity		$	124,284			$	122,070

Note: Amounts as of December 29, 2018 are derived from the December 29, 2018 audited consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

 

3

INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(Unaudited)
		(In thousands, except per share amounts)
Net revenues:
Systems and components		$	21,090			$	17,140			$	59,965			$	55,947
Technology development			5,209				2,326				13,476				7,591
Total net revenues			26,299				19,466				73,441				63,538
Cost of net revenues:
Systems and components			14,180				9,765				39,741				34,362
Technology development			3,341				2,215				9,325				7,054
Total cost of net revenues			17,521				11,980				49,066				41,416
Gross profit			8,778				7,486				24,375				22,122
Operating expenses:
Research and development			3,596				3,737				11,013				12,889
Selling, general and administrative			5,615				4,842				16,720				15,382
Total operating expenses			9,211				8,579				27,733				28,271
Loss from operations			(433	)			(1,093	)			(3,358	)			(6,149	)
Interest income and other income (expense), net			126				186				448				464
Loss before income taxes			(307	)			(907	)			(2,910	)			(5,685	)
Provision for income taxes			173				192				1,144				717
Net loss		$	(480	)		$	(1,099	)		$	(4,054	)		$	(6,402	)
Net loss per share:
Basic and Diluted		$	(0.02	)		$	(0.05	)		$	(0.18	)		$	(0.29	)
Weighted average common shares outstanding:
Basic and Diluted			23,130				22,719				22,992				22,429

See accompanying notes to the condensed consolidated financial statements.

 

4

INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(Unaudited)
		(In thousands)
Net loss		$	(480	)		$	(1,099	)		$	(4,054	)		$	(6,402	)
Other comprehensive loss, before tax
Change in unrealized net loss on available-for-sale investments			3				13				80				7
Foreign currency translation losses			(87	)			(86	)			(87	)			(126	)
Other comprehensive loss, before tax			(84	)			(73	)			(7	)			(119	)
Income tax (expense) benefit related to items in other comprehensive loss			—				—				—				—
Other comprehensive loss, net of tax			(84	)			(73	)			(7	)			(119	)
Comprehensive loss		$	(564	)		$	(1,172	)		$	(4,061	)		$	(6,521	)

See accompanying notes to the condensed consolidated financial statements.

 

5

INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine months ended
		September 28, 2019				September 29, 2018
		(Unaudited)
		(In thousands)
Operating activities
Net loss		$	(4,054	)		$	(6,402	)
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
Depreciation and amortization			2,778				3,587
Net amortization (accretion) of investment premiums and discounts			(55	)			(67	)
Equity-based compensation			2,260				2,454
Straight-line rent adjustment and amortization of lease incentives			(238	)			(114	)
Change in the fair value of acquisition-related contingent consideration			7				8
Deferred income taxes			552				—
Loss on disposal of equipment			87				442
Changes in operating assets and liabilities			(2,470	)			2,156
Total adjustments			2,921				8,466
Net cash and cash equivalents provided by (used in) operating activities			(1,133	)			2,064
Investing activities
Purchases of investments			(18,917	)			(24,640	)
Proceeds from sales and maturities of investments			18,751				24,922
Purchases of leasehold improvements and equipment			(3,279	)			(2,219	)
Net cash and cash equivalents used in investing activities			(3,445	)			(1,937	)
Financing activities
Net proceeds from issuance of common stock			1,770				3,199
Common stock repurchases			(111	)			—
Taxes paid related to net share settlement			(296	)			(819	)
Payment of acquisition-related contingent consideration			(230	)			—
Net cash and cash equivalents provided by financing activities			1,133				2,380
Effect of exchange rate changes on cash			(87	)			(126	)
Net increase (decrease) in cash, cash equivalents and restricted cash			(3,532	)			2,381
Cash, cash equivalents and restricted cash at beginning of period			19,884				20,941
Cash, cash equivalents and restricted cash at end of period		$	16,352			$	23,322

See accompanying notes to the condensed consolidated financial statements.

 

6

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.	Description of Business and Basis of Presentation

Intevac, Inc. (together with its subsidiaries “Intevac,” the “Company” or “we”) is a provider of vacuum deposition equipment for a wide variety of thin-film applications, and a leading provider of digital night-vision technologies and products to the defense industry. 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”), display cover panel (“DCP”), and photovoltaic (“PV”) solar cell industries. Intevac also provides sensors, cameras and systems for government applications such as night vision. Intevac’s customers include manufacturers of hard disk media, DCPs and solar cells as well as the U.S. government and its agencies, allies and contractors. Intevac reports two segments: Thin-film Equipment (“TFE”) and Photonics.

In the opinion of management, except for the changes below, the unaudited interim condensed consolidated financial statements of Intevac included herein have been prepared on a basis consistent with the December 29, 2018 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. The Company adopted Accounting Standards Codification (“ASC”) 842, Leases, with a date of the initial application of December 30, 2018. As a result, the Company has changed its accounting policy for leases as detailed in Note 10. Leases. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Intevac’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (“2018 Form 10-K”). Intevac’s results of operations for the three and nine months ended September 28, 2019 are not necessarily indicative of future operating results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

2.	Recent Accounting Pronouncements

Adoption of New Accounting Standard

We adopted ASU No. 2016-02, Leases (Topic 842), as of December 30, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the beginning of the period of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification, and we elected the hindsight practical expedient to determine the lease term for existing leases. We determined that most renewal options would not be reasonably certain in determining the expected lease term. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Adoption of the new standard resulted in the recording of net lease assets of $11.6 million and lease liabilities of $13.7 million, as of December 30, 2018. The standard did not have an impact on our consolidated results of operations or cash flows.

The effect of the changes made to our consolidated December 30, 2018 balance sheet for the adoption of the new lease standard was as follows (in thousands):

 

		Balance at December 29, 2018				Adjustments Due to ASC 842				Balance at December 30, 2018
Prepaid expenses and other current assets		$	2,528			$	(221	)1		$	2,307
Total current assets		$	95,633			$	(221	)1		$	95,412
Operating lease right-of-use assets		$	—			$	11,635	1,2,3		$	11,635
Total assets		$	122,070			$	11,414	1,2,3		$	133,484
Current operating lease liabilities		$	—			$	2,581	5		$	2,581
Accounts payable		$	6,053			$	(4	)4		$	6,049
Other accrued liabilities		$	4,952			$	(13	)3		$	4,939
Total current liabilities		$	30,008			$	2,564	3,4,5		$	32,572
Noncurrent operating lease liabilities		$	—			$	11,120	5		$	11,120
Other long-term liabilities		$	2,438			$	(2,270	)3		$	168
Total non-current liabilities		$	2,438			$	8,850	3,4,5		$	11,288
Total liabilities and stockholders’ equity		$	122,070			$	11,414	,4,5		$	133,484

 

1	Represents prepaid rent reclassified to operating lease right-of-use assets.

2	Represents capitalization of operating lease right-of-use assets and reclassification of straight-line rent accrual, and tenant incentives.

3	Represents reclassification of straight-line rent accrual to operating lease right-of-use assets.

4	Represents accrued rent reclassified to operating lease right-of-use assets.

5	Represents recognition of operating lease liabilities.

 

7

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

3.

Revenue

The following tables represent a disaggregation of revenue from contracts with customers for the three and nine months ended September 28, 2019 and September 29, 2018 along with the reportable segment for each category.

Major Products and Service Lines

 

TFE		Three Months Ended September 28, 2019																Three Months Ended September 29, 2018
		(In thousands)
		HDD				DCP				PV				Total				HDD				DCP				PV				Total
Systems, upgrades and spare parts		$	7,737			$	—			$	8,225			$	15,962			$	9,476			$	—			$	51			$	9,527
Field service			1,109				—				45				1,154				2,581				—				—				2,581
Total TFE net revenues		$	8,846			$	—			$	8,270			$	17,116			$	12,057			$	—			$	51			$	12,108
		Nine Months Ended September 28, 2019																Nine Months Ended September 29, 2018
		(In thousands)
		HDD				DCP				PV				Total				HDD				DCP				PV				Total
Systems, upgrades and spare parts		$	31,210			$	—			$	14,616			$	45,826			$	39,090			$	1			$	54			$	39,145
Field service			3,452				2				45				3,499				6,561				—				39				6,600
Total TFE net revenues		$	34,662			$	2			$	14,661			$	49,325			$	45,651			$	1			$	93			$	45,745

 

		Three Months Ended								Nine Months Ended
Photonics		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(In thousands)
Products:
Military products		$	3,320			$	4,202			$	8,115			$	8,601
Commercial products			81				84				581				138
Repair and other services			573				746				1,944				1,463
Total Photonics product net revenues			3,974				5,032				10,640				10,202
Technology development:
Firm Fixed Price (“FFP”)			3,218				494				7,995				1,726
Cost Plus Fixed Fee (“CPFF”)			1,991				1,819				5,479				5,829
Time and materials			—				13				2				36
Total technology development net revenues			5,209				2,326				13,476				7,591
Total Photonics net revenues		$	9,183			$	7,358			$	24,116			$	17,793

Primary Geographical Markets

 

		Three Months Ended												Three Months Ended
		September 28, 2019												September 29, 2018
		(In thousands)
		TFE				Photonics				Total				TFE				Photonics				Total
United States		$	478			$	9,050			$	9,528			$	287			$	6,868			$	7,155
Asia			16,638				—				16,638				11,821				—				11,821
Europe			—				133				133				—				457				457
Rest of World			—				—				—				—				33				33
Total net revenues		$	17,116			$	9,183			$	26,299			$	12,108			$	7,358			$	19,466

 

8

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

		Nine Months Ended												Nine Months Ended
		September 28, 2019												September 29, 2018
		(In thousands)
		TFE				Photonics				Total				TFE				Photonics				Total
United States		$	995			$	23,578			$	24,573			$	3,549			$	16,628			$	20,177
Asia			48,330				—				48,330				42,196				31				42,227
Europe			—				538				538				—				937				937
Rest of World			—				—				—				—				197				197
Total net revenues		$	49,325			$	24,116			$	73,441			$	45,745			$	17,793			$	63,538

Timing of Revenue Recognition

 

		Three Months Ended												Three Months Ended
		September 28, 2019												September 29, 2018
		(In thousands)
		TFE				Photonics				Total				TFE				Photonics				Total
Products transferred at a point in time		$	17,116			$	573			$	17,689			$	12,108			$	746			$	12,854
Products and services transferred over time			—				8,610				8,610				—				6,612				6,612
		$	17,116			$	9,183			$	26,299			$	12,108			$	7,358			$	19,466

 

		Nine Months Ended												Nine Months Ended
		September 28, 2019												September 29, 2018
		(In thousands)
		TFE				Photonics				Total				TFE				Photonics				Total
Products transferred at a point in time		$	49,325			$	1,944			$	51,269			$	45,745			$	1,463			$	47,208
Products and services transferred over time			—				22,172				22,172				—				16,330				16,330
		$	49,325			$	24,116			$	73,441			$	45,745			$	17,793			$	63,538

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 28, 2019:

 

		September 28, 2019				December 29, 2018				Nine Months Change
						(In thousands)
TFE:
Contract assets:
Accounts receivable, unbilled		$	919			$	514			$	405
Contract liabilities:
Deferred revenue		$	778			$	633			$	145
Customer advances			8,740				14,314				(5,574	)
		$	9,518			$	14,947			$	(5,429	)
Photonics:
Contract assets:
Accounts receivable, unbilled		$	2,525			$	1,493			$	1,032
Retainage			95				157				(62	)
		$	2,620			$	1,650			$	970
Contract liabilities:
Deferred revenue		$	221			$	1,101			$	(880	)

 

9

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Accounts receivable, unbilled in our TFE segment represents a contract asset for revenue that has been recognized in advance of billing the customer. For our system and certain upgrade sales, our TFE 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 in our TFE segment 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 28, 2019, contract assets in our TFE segment increased by $405,000 primarily due to: (i) the accrual of the final billing for one HDD system delivered and accepted in the nine months ending September 28, 2019; (ii) the accrual of revenue for one HDD system delivered in the nine months ending September 28, 2019 that was pending acceptance as of September 28, 2019; (iii) and the accrual of revenue for three ENERGi systems delivered in the nine months ending September 28, 2019 that were pending acceptance as of September 28, 2019; offset in part due to the final billing on two HDD systems that were pending acceptance as of December 29, 2018.

Customer advances in our TFE segment generally represent a contract liability for amounts billed to the customer prior to transferring goods. The Company has elected to use the practical expedient of disregarding the effect of the time value of money in a significant financing component when its payment terms are less than one year. These contract advances are liquidated when revenue is recognized. Deferred revenue in our TFE segment 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 28, 2019, we recognized revenue in our TFE segment of $12.0 million and $500,000 that was included in customer advances and deferred revenue, respectively, at the beginning of the period.

Accounts receivable, unbilled in our Photonics segment represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for contracts in the defense industry. In our Photonics segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contracts with the U.S. government may also contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed, but held for payment by the U.S. government as a form of security until satisfactory completion of the contract. The retainage is billable upon completion of the contract performance and approval of final indirect expense rates by the government. During the nine months ended September 28, 2019, contract assets in our Photonics segment increased by $970,000 primarily due to the accrual of revenue for incurred costs under FFP and CPFF contracts.

Deferred revenue in our Photonics segment includes $221,000 deferred for the impact of the allocation and the timing of the recognition of revenue for a military product agreement with a tiered pricing structure. During the nine months ended September 28, 2019, we recognized revenue in our Photonics segment of $880,000 that was included in deferred revenue at the beginning of the period.

On September 28, 2019 we had $115.4 million of remaining performance obligations, which we also refer to as total backlog. Backlog at September 28, 2019 consisted of $39.3 million of TFE backlog and $76.1 million of Photonics backlog. We expect to recognize approximately 29% of our remaining performance obligations as revenue in 2019, 42% in 2020, 15% in 2021, 10% in 2022 and 4% in 2023.

 

4.	Inventories

Inventories are stated at the lower of average cost or market and consist of the following:

 

		September 28, 2019				December 29, 2018
		(In thousands)
Raw materials		$	15,700			$	16,354
Work-in-progress			11,843				9,134
Finished goods			2,308				5,109
		$	29,851			$	30,597

Finished goods inventory at September 28, 2019 included one system under evaluation at a customer’s factory. Finished goods inventory at December 29, 2018 included three completed systems at Intevac’s factory that were subsequently shipped to the customer in January 2019.

 

10

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

5.	Equity-Based Compensation

At September 28, 2019, Intevac had equity-based awards outstanding under the 2012 Equity Incentive Plan and the 2004 Equity Incentive Plan (together, the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans. The Plans permit the grant of incentive or non-statutory stock options, performance stock options (“PSOs”), restricted stock, stock appreciation rights, restricted stock units (“RSUs”) and performance shares.

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 15% of their base earnings withheld to purchase Intevac common stock.

Equity-based Compensation Expense

The effect of recording equity-based compensation for the three and nine months ended September 28, 2019 and September 29, 2018 was as follows:

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(In thousands)
Equity-based compensation by type of award:
Stock options		$	213			$	213			$	610			$	563
RSUs			375				309				1,018				945
ESPP awards			163				330				632				946
Total equity-based compensation		$	751			$	852			$	2,260			$	2,454

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 28, 2019 and changes during the nine months ended September 28, 2019 were as follows:

 

		Shares				Weighted-Average Exercise Price
Options outstanding at December 29, 2018			2,070,749			$	6.76
Options granted			354,000			$	5.43
Options cancelled and forfeited			(130,892	)		$	7.52
Options exercised			(72,122	)		$	4.22
Options outstanding at September 28, 2019			2,221,735			$	6.58
Options exercisable at September 28, 2019			1,414,115			$	6.67

Intevac issued 369,967 shares under the ESPP during the nine months ended September 28, 2019.

Intevac estimated the weighted-average fair value of stock options and employee stock purchase rights using the following weighted-average assumptions:

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
Stock Options:
Weighted-average fair value of grants per share		$	1.84			$	1.81			$	2.05			$	1.98
Expected volatility			43.87	%			44.10	%			43.22	%			43.83	%
Risk-free interest rate			1.57	%			2.87	%			1.86	%			2.58	%
Expected term of options (in years)			4.32				3.90				4.56				4.41
Dividend yield			None				None				None				None

 

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
Stock Purchase Rights:
Weighted-average fair value of grants per share		$	1.45			$	1.87			$	1.73			$	2.24
Expected volatility			38.27	%			50.64	%			45.81	%			47.64	%
Risk-free interest rate			1.85	%			2.58	%			2.28	%			2.01	%
Expected term of purchase rights (in years)			0.75				1.58				0.91				1.33
Dividend yield			None				None				None				None

The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option grants and employee stock purchase rights is based on the historical volatility of Intevac’s stock price, measured over a period equal to the expected term of the stock option grant or 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 employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the equity-based awards and vesting schedules. 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.

PSOs vest upon the achievement of certain market conditions (our stock performance) during a set performance period (typically 4 years) subject to the grantee’s continued service with Intevac through the date the applicable market condition is achieved. The fair value is based on the values calculated under the Monte Carlo simulation model on the grant date. Compensation cost is not adjusted in future periods for subsequent changes in the expected outcome of market related conditions. The compensation expense is recognized over the derived service period. We granted 37,500 of such stock options to the chief executive officer in the nine months ended September 28, 2019. These PSOs have a derived service period of 1.1 years. Intevac estimated the weighted-average fair value of PSO’s using the following weighted-average assumptions:

 

		Nine Months Ended September 28, 2019
Weighted-average fair value of grants per share		$	1.75
Expected volatility			43.43	%
Risk free interest rate			1.96	%
Expected term (in years)			4.60
Dividend yield			None

RSUs

RSU activity as of September 28, 2019 and changes during the nine months ended September 28, 2019 were as follows:

 

		Shares				Weighted-Average Grant Date Fair Value
Non-vested RSUs at December 29, 2018			462,409			$	6.92
Granted			256,703			$	5.62
Vested			(136,366	)		$	7.88
Cancelled and forfeited			(21,482	)		$	6.23
Non-vested RSUs at September 28, 2019			561,264			$	6.12

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.

 

6.	Purchased Intangible Assets

Details of finite-lived intangible assets by segment as of September 28, 2019 are as follows.

 

		September 28, 2019
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
		(In thousands)
TFE		$	7,172			$	(6,791	)		$	381
Photonics			1,215				(1,168	)			47
		$	8,387			$	(7,959	)		$	428

 

12

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Total amortization expense of finite-lived intangibles for the three and nine months ended September 28, 2019 was $154,000 and $461,000, respectively.

As of September 28, 2019, future amortization expense is expected to be as follows.

 

(In thousands)
2019		$	154
2020			274
		$	428

 

7.	Acquisition-Related Contingent Consideration

In connection with the acquisition of Solar Implant Technologies, Inc. (“SIT”), Intevac also agreed to pay to the selling shareholders in cash a revenue earnout on Intevac’s net revenue from commercial sales of certain products over a specified period up to an aggregate of $9.0 million. The earnout period terminated on June 30, 2019. The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the three and nine months ended September 28, 2019 and September 29, 2018:

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(In thousands)
Opening balance		$	—			$	370			$	223			$	362
Changes in fair value			—				—				7				8
Cash payments made			—				—				(230	)			—
Closing balance		$	—			$	370			$	—			$	370

The contingent consideration liability of $223,000 at December 29, 2018 is included in other accrued liabilities on the condensed consolidated balance sheets.

 

8.

Warranty

For HDD manufacturing, DCP manufacturing and solar cell manufacturing 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.

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 is included in other long-term 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 28, 2019 and September 29, 2018:

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(In thousands)
Opening balance		$	948			$	911			$	997			$	994
Expenditures incurred under warranties			(167	)			(51	)			(592	)			(469	)
Accruals for product warranties issued during the reporting period			427				68				829				347
Adjustments to previously existing warranty accruals			(72	)			(139	)			(98	)			(83	)
Closing balance		$	1,136			$	789			$	1,136			$	789

 

13

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table displays the balance sheet classification of the warranty provision account at September 28, 2019 and at December 29, 2018:

 

		September 28, 2019				December 29, 2018
		(In thousands)
Other accrued liabilities		$	988			$	839
Other long-term liabilities			148				158
Total warranty provision		$	1,136			$	997

 

9.	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 28, 2019, we had letters of credit and bank guarantees outstanding totaling $1.4 million, including a 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 $1.4 million of restricted cash.

 

10.

Leases

Intevac leases certain manufacturing facilities, warehouses, office space, and equipment under non-cancelable operating leases that expire at various times up to March 2024 and has options to renew most leases, with rentals to be negotiated. Certain of Intevac’s leases contain provisions for rental adjustments. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date we take possession of the property. At lease inception, we determine the lease term by assuming the exercise of those renewal options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. The lease term is used to determine whether a lease is financing or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of leasehold improvements is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

 

14

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table reflects our lease assets and our lease liabilities at September 28, 2019 and December 30, 2018.

 

		September 28, 2019				December 30, 2018
		(In thousands)
Assets:
Operating lease right-of-use assets		$	9,920			$	11,635
Liabilities:
Current operating lease liabilities		$	2,394			$	2,581
Noncurrent operating lease liabilities			9,354				11,120
		$	11,748			$	13,701

Lease Costs:

The components of lease costs were as follows:

 

		Three Months Ended								Nine Months Ended
		September 28, 2019				September 29, 2018				September 28, 2019				September 29, 2018
		(In thousands)
Operating lease cost		$	780			$	755			$	2,344			$	2,270
Short-term lease cost			20				20				57				62
Total lease cost		$	800			$	775			$	2,401			$	2,332

As of September 28, 2019, the maturity of operating lease liabilities was as follows:

 

(In thousands)
2019		$	830
2020			2,991
2021			2,989
2022			3,074
2023			3,161
2024			528
Total lease payments			13,573
Less: Interest			(1,825	)
Present value of lease liabilities		$	11,748

Lease Term and Discount Rate:

 

		September 28, 2019
Weighted-average remaining lease term (in years)			4.35
Weighted-average discount rate			6.52	%

Other information:

Supplemental cash flow information related to leases was as follows (in thousands):

 

		Nine Months Ended
		September 28, 2019
Operating cash outflows from operating leases		$	2,622
Right-of-use assets obtained in exchange for new operating lease liabilities		$	—

 

15

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

11.	Cash, Cash Equivalents and Investments

Cash and cash equivalents, short-term investments and long-term investments consist of:

 

		September 28, 2019
		Amortized Cost				Unrealized Holding Gains				Unrealized Holding Losses				Fair Value
		(In thousands)
Cash and cash equivalents:
Cash		$	10,371			$	—			$	—			$	10,371
Money market funds			3,028				—				—				3,028
Certificates of deposit			600				—				—				600
Commercial paper			499				—				—				499
U.S. treasury and agency securities			499				—				—				499
Total cash and cash equivalents		$	14,997			$	—			$	—			$	14,997
Short-term investments:
Certificates of deposit		$	3,000			$	3			$	—			$	3,003
Commercial paper			1,392				2				—				1,394
Corporate bonds and medium-term notes			5,971				27				—				5,998
U.S. treasury and agency securities			4,905				2				—				4,907
Total short-term investments		$	15,268			$	34			$	—			$	15,302
Long-term investments:
Certificates of deposit		$	499			$	1			$	—			$	500
Corporate bonds and medium-term notes			2,436				18				—				2,454
U.S. treasury and agency securities			2,493				1				1				2,493
Total long-term investments		$	5,428			$	20			$	1			$	5,447
Total cash, cash equivalents, and investments		$	35,693			$	54			$	1			$	35,746

 

		December 29, 2018
		Amortized Cost				Unrealized Holding Gains				Unrealized Holding Losses				Fair Value
		(in thousands)
Cash and cash equivalents:
Cash		$	13,334			$	—			$	—			$	13,334
Money market funds			3,335				—				—				3,335
U.S. treasury and agency securities			2,046				—				—				2,046
Total cash and cash equivalents		$	18,715			$	—			$	—			$	18,715
Short-term investments:
Certificates of deposit		$	5,299			$	1			$	1			$	5,299
Commercial paper			2,242				—				1				2,241
Corporate bonds and medium-term notes			4,759				—				13				4,746
Municipal bonds			500				—				2				498
U.S. treasury and agency securities			3,297				—				5				3,292
Total short-term investments		$	16,097			$	1			$	22			$	16,076
Long-term investments:
Certificates of deposit		$	500			$	—			$	—			$	500
Corporate bonds and medium-term notes			2,879				4				4				2,879
U.S. treasury and agency securities			999				—				6				993
Total long-term investments		$	4,378			$	4			$	10			$	4,372
Total cash, cash equivalents, and investments		$	39,190			$	5			$	32			$	39,163

 

16