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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K
(Mark One)
 
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2022
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)
  
(I.R.S. 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)
Securities registered pursuant to Section 12(g) of the Act:
None.
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes    ☒  No
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    ☐  Yes    ☒No
As of July 3, 2021, the aggregate market value of voting and
non-voting
stock held by
non-affiliates
of the registrant was approximately $155,279,012 (based on the closing price for shares of the registrant’s Common Stock as reported by the Nasdaq Stock Market for the last trading day prior to that date). Shares of Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On February 
14
, 2022, 24,849,818 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant’s Proxy Statement for the 2022 Annual Meeting of Stockholders are incorporated by reference into Part III. Such proxy statement will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form
10-K.
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this Annual Report on
Form 10-K
(“Annual Report” or
“Form 10-K”)
of Intevac, Inc. and its subsidiaries (“Intevac”, “we” or the “Company”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, is forward-looking in nature. All statements in this Annual Report, including those made by the management of Intevac, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Intevac’s future financial results, operating results, cash flows and cash deployment strategies, business strategies, costs, products, working capital, competitive positions, management’s plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customer contracts, investments, liquidity, declaration of dividends, and legal proceedings, as well as market conditions and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Item 1A, “Risk Factors,” below and elsewhere in this Annual Report. Other risks and uncertainties may be disclosed in Intevac’s prior Securities and Exchange Commission (“SEC”) filings. These and many other factors could affect Intevac’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this Annual Report or elsewhere by Intevac or on its behalf. Intevac undertakes no obligation to revise or update any forward-looking statements.
The following information should be read in conjunction with the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements included in this Annual Report.
PART I
 
Item 1.
Business
Overview
Information about Discontinued Operations
On December 30, 2021, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with EOTECH, LLC, a Michigan limited liability company (“EOTECH”), governing the sale of the Company’s Photonics business to EOTECH in exchange for (i) $70.0 million in cash consideration (as may be increased or decreased by certain closing net working capital adjustments), (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 has 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. The Company believes this disposition will allow it to benefit from a streamlined business model, simplified operating structure, and enhanced management focus.
As a result of this disposition, the results of operations from the Photonics reporting segment are reported as “net income (loss) from discontinued operations, net of taxes” in the consolidated financial statements in Item 8 of this Annual Report. The Company has recast prior period amounts presented within this Annual Report to provide visibility and comparability. 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 consolidated financial statements in Item 8 of this Annual Report.
Intevac is a leader in the design and development of high-productivity, thin-film processing systems. Our production-proven platforms are designed for high-volume manufacturing of substrates with precise thin-film properties, such as the hard disk drive (“HDD”) media, display cover panel (“DCP”), and solar photovoltaic (“PV”), and advanced semiconductor packaging (“ASP”) markets we serve currently.
 
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Hard Disk Drive (“HDD”) Equipment Market
Intevac designs, manufactures, markets and services complex capital equipment used to deposit thin films and lubricants onto substrates to produce magnetic disks that are used in HDDs. Disk and disk drive manufacturers produce magnetic disks in a sophisticated manufacturing process involving many steps, including plating, annealing, polishing, texturing, sputtering, etching, stripping and lubrication. Intevac believes its systems represent approximately 65% of the installed capacity for disk sputtering worldwide. Intevac’s systems are used by manufacturers of magnetic media such as Seagate Technology, Western Digital and its wholly-owned subsidiary HGST.
HDDs are a primary storage medium for digital data in enterprise nearline “cloud” applications and in enterprise performance, personal computers (“PCs”), and surveillance applications. Intevac believes that HDD media unit shipments will grow over time, driven by continued high growth rates in digitally-stored data, by the slowing of areal density improvements, by the increase in demand for nearline drives for cloud storage, an increasing tie ratio (the average number of disks per hard drive) and by new and emerging applications. The projected growth rates for digitally-stored data on HDDs exceed the rate of areal density improvements, at the same time as the tie ratio is increasing, which results in demand for magnetic disks outpacing HDD units.
In recent years HDD media units have been negatively impacted by declining desktop PC units, the adoption of solid state drives (“SSDs”) in laptops and the transition to centralized storage. Although the HDD industry continues to expect growth in the nearline data storage market segment, the transition to centralized storage combined with the negative growth in PC shipments has resulted in lower HDD shipments in recent years. However, Intevac continues to believe that long-term demand for hard disks required for high capacity HDDs will increase, driven by growth in demand for digital storage, a slowing growth rate in areal density improvements, and increased information technology spending to support the transition to cloud storage. The number of disk manufacturing systems needed to support this growth as well as future technology transitions and improvements is expected to vary from year to year depending on the factors noted above.
Intevac expects that HDD manufacturers will extend their utilization of planar perpendicular media with the introduction of new technologies such as Heat Assisted Magnetic Recording (“HAMR”) and Energy Assisted Magnetic Recording (“EAMR”). Initial volume shipments of both HAMR and EAMR-based HDDs began in 2020. Intevac believes that leading manufacturers of magnetic media that are using Intevac systems will continue to advance these new technologies and create a significant market opportunity for system upgrades that will be required by these new technologies.
Display Cover Panel (“DCP”) Market
Intevac develops equipment to deposit optically transparent thin films onto DCPs typically found on consumer and automotive electronic products.
DCPs are found in products including smartphones, foldable devices, smartwatches, wearable devices, tablet PCs, gaming systems, digital cameras, automotive infotainment systems and digital signage. In 2021, approximately 1.37 billion smartphones, 142 million smart watches, and 175 million tablet PCs were shipped to consumers worldwide. For smartphones alone, it is forecasted that nearly 1.54 billion units will ship in 2025, representing a compound annual growth rate of 3.0% for the 2021 – 2025 period.
The DCP is typically made of tempered glass, such as soda-lime or aluminosilicate, or other materials such as sapphire, ceramic and colorless polyimide. The primary function of the DCP is to provide a clear protective interface to the display it protects. In many cases, the DCP is treated with various coatings to enhance its protective performance as well as for clarity, readability and touch sensitivity.
The types of coatings typically found on DCPs of electronic devices include: Scratch Protection (“SP”) coatings, Anti-Reflection (“AR”) coatings, Anti-Fingerprint (“AF”) and
Non-Conductive
Vacuum Metallization (“NCVM”) coatings.
SP coatings generally consist of hard thin films deposited onto the surface of the DCP. Their primary function is to provide enhanced protection against the incidence of scratch, but they can also provide greater breakage resistance. Intevac has developed and is currently marketing a SP coating known as Optical Diamond-like-Carbon (“oDLC
®
”) utilizing its production-proven carbon film technology that is also used on HDD media. This coating provides a hard protective layer which significantly improves the DCP’s resistance to scratches and breakage. The oDLC coating has demonstrated scratch protection
 
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benefits reflecting a greater than 20 times improvement over current standard cover glass under stainless steel ball Taber scratch testing. Furthermore, using a
Ring-on-Ring
(“RoR”) test, cover glass with our oDLC coating provides a greater than 20 percent increase in breakage resistance strength over cover glass without the oDLC coating. Intevac expects that the adoption of AR and NCVM coatings on mobile devices will create an increased need for SP coatings and provide a significant demand opportunity for oDLC.
In 2019, Intevac released DiamondClad
®
protective coating. DiamondClad is a proprietary multi-step process that improves upon our original single film solution, oDLC. Developed
in-house
utilizing Intevac’s confined dense plasma source technology, DiamondClad performs similarly to sapphire in scratch testing at the Mohs scale of material hardness 8 standard, compared to the industry standard glass with AF coatings, which scratches at a Mohs 5 level. DiamondClad coating outperforms standard cover glass by a factor of 4 in Taber wear testing, and by a factor of 4 to 6 times in
use-case
AF durability testing with sand, denim, and perspiration.
AR coatings enable greater light transmission though the DCP by reducing the light reflected by the surface back to the user’s eye. This allows the user to more easily read the display and reduces the required power needed to display the image which results in extending the battery life. A significant drawback to using AR coatings is their susceptibility to scratch. AR coatings are typically soft and must be applied to the outer surface of the DCP. These coatings generally scratch easily, and as such, smartphone manufacturers have been reluctant to implement AR coatings on their products.
AF coatings provide water and oil protection for the surface of the DCP. This coating, which prevents fingerprints, provides greater aesthetics as well as improving readability. AF coatings allow for greater visual acuity when fingerprints are not visible. The drawback to AF coatings is their relatively low resistance to wear. The coating is soft and usually wears off within a few months of product purchase.
With increasing adoption of wireless charging and the 5G standard of wireless communication, smartphone manufacturers are significantly expanding use of DCPs on the backside of devices. This transition is essential to ensure that the backside cover, which previously was metallic, does not interfere with the wireless signals. NCVM coatings are applied for decorative purposes, to the backside DCP. When applied to the exterior, the NCVM coating provides a pleasing aesthetic and gives manufacturers flexibility with color customization. Decorative NCVM coatings have evolved from single color to multiple colors with complex transitions.
When applied to the exterior of the backside DCP, NCVM has a tendency to scratch easily and rub off over time, leading to a poor appearance. To preserve the color film on the backside DCP, manufacturers are reliant on SP coatings for scratch-resistance and a consistent appearance. Intevac expects the adoption of AR and NCVM coatings on mobile devices will create an increased need for SP coatings and provide a significant demand opportunity for oDLC and DiamondClad coatings.
Solar Market
Intevac designs, manufactures and markets capital equipment for the PV solar manufacturing industry.
A solar cell (also called a PV cell) is a solid state device that converts the energy of sunlight directly into electricity. Assemblies of cells are used to make solar modules, also known as solar panels. Solar panels have broad-based end market applications for utility-scale solar farms; integrated building PV arrays for commercial, retail, and offices; residential rooftop; and for portable devices.
The cost of electricity generated from solar energy, in many cases, remains higher than that of electricity generated from traditional energy sources. However, deployment of photovoltaics is gaining momentum on a worldwide scale, particularly in Asia, North America and other regions, where solar PV is now increasingly competitive with conventional energy sources. Grid parity, whereby solar PV generates power at a levelized cost of electricity (“LCOE”) less than or equal to the price of power purchased from the electrical grid, has already been reached in about thirty countries. In countries or areas where the cost of solar energy generation remains higher than traditional electricity generation sources, some governments have implemented various tax credits and other financial incentives to promote the growth in solar and other alternative energy sources. As a result of solar energy costs having favorably declined due to the increased scale and improved manufacturing efficiencies spurred by these incentive policies, many governments have reduced or are planning to reduce their incentives for solar, a trend which is likely to continue. Approximately 117 gigawatts of solar capacity was added globally in 2021, rising 9.3%
year-on-year,
but the rate is expected to taper off to a modest growth of 6.8% in 2022. Intevac expects that 2022 will continue to be challenging for the solar industry due to further declines in solar panel pricing.
 
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The PV industry continues to focus on the development of high-efficiency cell technologies aimed at simultaneously boosting PV efficiency and reducing solar energy production costs. New vacuum process technologies and integrated processing steps are expected to become increasingly important as companies search for lower-cost manufacturing solutions for PV cells.
Intevac offers products for wafer-based crystalline silicon
(“c-Si”)
solar cell manufacturing processes, the prevailing manufacturing process in the PV industry. Intevac’s products for the solar industry are specifically focused on cell designs with the highest energy conversion efficiency, which are within the
n-type
mono crystalline portion of the market.
Intevac offers thin-film vacuum process manufacturing solutions for
c-Si
cell fabrication applications. Intevac offers high-productivity process equipment solutions that enable
low-cost
solar cell manufacturing with high cell efficiency, consistent with the PV industry’s focus and requirements. Intevac has developed two vacuum process application technologies for solar cell manufacturing: one utilizes Physical Vapor Deposition (“PVD”) technology for the deposition of thin films onto
c-Si
wafers, and the other utilizes ion implantation, which selectively changes the electrical characteristics of the
c-Si
solar cell.
PVD is a process used in multiple ways in the manufacturing of solar cells such as for fabricating electrical contacts and conductor layers, depositing reflective layers of various types, and for growing transparent conductive oxide layers, all of which are critical to the efficiency of solar cells.
Ion implantation is a solar cell processing technology whereby an impurity is added to a PV structure to improve its conductivity. In ion implantation, a beam of ions of a desired dopant element such as phosphorus or boron is electrostatically accelerated and directed toward the target material, introducing the impurity. In a subsequent thermal annealing step, the dopant is electrically activated. The ion implant processes enable precision engineering of the dose and of the depth of dopant elements to form emitter structures in working solar cells. Ion implantation is a technique being introduced to solar cell lines as a means to lower the cost per watt to manufacture the cell. Ion implantation can replace existing diffusion processes in existing solar processing lines for
present-day
PV cell structures and is also extendable to new advanced cell structures. In both cases, ion implant-formed emitters are created with fewer processing steps, and therefore at lower cost, than the diffusion processes implant displaces.
Advanced Semiconductor Packaging (“ASP”) Market
Intevac is bringing to market capital equipment for
fan-out
packaging applications,
fan-out
packaging being a specialized part of the overall semiconductor device packaging market.
Semiconductor device packaging technology in general, and
fan-out
wafer level packaging
(“FOWLP”)/fan-out
panel level packaging (“FOPLP”) technology, in particular, is being driven by the strong cost advantages these technologies offer over the cost of further implementing continued Moore’s Law progress for 10nm and 7nm semiconductor device process nodes. Generally speaking,
fan-out
packaging provides for increased Input/Output (“I/O”) density for a given semiconductor device while simultaneously supporting continued progress in shrinking the individual semiconductor devices, resulting in decreased footprint per device and, by extension, decreases in the amount of space integrated circuit content occupies in handheld consumer electronic products, for example in smartphones, wearables, and in Internet of Things (“IoT”) devices.
Fan-out
packaging technology consists of a series of operations where known good semiconductor devices from silicon wafers fabricated by an Integrated Device Manufacturer (“IDM”), or by a semiconductor foundry, are singulated and then assembled onto a substrate or temporary carrier, which is then overmolded with epoxy mold compound and cured to create what is known as a reconstituted wafer. The reconstituted wafer then goes through another series of process steps (dielectric deposition, metallization, photolithography), to create a redistributed
“fan-out”
of the electrical interconnections from the original silicon device area to an expanded area that includes the device (die) surface itself, along with a generous amount of extra surface created from the mold compound area.
A redistribution layer (“RDL”) is the
“fanned-out”
metal layer on a packaged integrated circuit that makes the I/O pads of the integrated circuit available in other locations. PVD processes are essential to RDL fabrication; in
fan-out
packaging, our INTEVAC MATRIX®PVD system is used to deposit thin layers of Titanium (“Ti”), Titanium Tungsten (“TiW”) and Copper (“Cu”) to form the barrier/seed layer upon which the full RDL is constructed.
Applications driving the adoption of
fan-out
packaging include, among others: (1) baseband processors and application processors; (2) radio frequency transceivers and switches; (3) power management integrated circuits; (4) radar modules for automotive; (5) audio codec; and (6) microcontrollers.
 
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Smartphones from OEMs including Apple, Samsung, Xiaomi, OPPO and others incorporate
fan-out
packaged components, as do most
higher-end
automobiles. IoT applications in the future are expected to contribute additional significant volume in
fan-out
packaged devices.
The compelling advantages our INTEVAC MATRIX PVD system brings to
fan-out
packaging are a much-reduced cost of ownership over the current PVD process tools of record used for RDL barrier/seed layer applications, and also the flexibility to run round wafers, and square or rectangular panels, with no changes to the INTEVAC MATRIX PVD system beyond a simple substrate carrier substitution.
TFE Products
Intevac’s TFE product portfolio addressing each of these markets is based around common core technologies and competencies. Intevac believes its TFE product portfolio can be extended to support adjacent markets. Based on its history and market and technology leadership in the HDD industry, Intevac offers superior high-productivity vacuum handling of small substrates at the lowest cost of ownership. Lowest cost of ownership includes various advantages such as high target utilization, high throughput, small footprint, double-sided coating, and reduced materials costs.
The following table presents a representative list of our TFE products.
 
TFE Products
   
Applications and Features
HDD Equipment Market
200 Lean
®
Disk Sputtering System
   
•  Uses PVD and chemical vapor deposition (“CVD”) technologies.
•  Deposits magnetic films,
non-magnetic
films and protective carbon-based overcoats.
•  Provides high-throughput for small-substrate processing.
•  Over 164 units installed.
Upgrades, spares, consumables and services
(non-systems
business)
   
•  Upgrades to the installed base to support the continued growth in areal density or reduce the manufacturing cost per disk.
DCP Market
INTEVAC VERTEX
®
System
   
•  Utilizes vertical sputtering for multiple film types.
•  Provides high-throughput for small-substrate processing.
•  Uses patented carbon deposition source.
•  Modular design enables expandability.
•  Enables
low-temperature
processing.
INTEVAC VERTEX
®
Spectra System
   
•  Extension of the VERTEX system.
•  Incorporates multiple source technologies in a single system.
•  Uses proprietary ion beam processing for deposition and etching.
•  Enables unique patterned NCVM and hard AR coatings.
INTEVAC VERTEX
®
Marathon System
   
•  Versatile platform for high volume manufacturing of multi-step, multi-layer optical coatings.
•  Enables diverse coatings - DiamondClad, patterned NCVM and AR films.
Solar PV Market
INTEVAC MATRIX PVD System
   
•  Deposits electrical contacts and conductor layers, reflective layers, and transparent conductive oxide layers, all of which are critical to the efficiency of solar cells.
•  Includes patented Linear Scanning Magnetic Array (“LSMA”) magnetron source, with industry-leading target utilization rate of over 65 percent.
•  Provides high-throughput for small-substrate processing.
INTEVAC MATRIX Implant System
   
•  Utilizes the chambers and transport mechanism of the MATRIX platform while using the implant sources from the ENERG
i
system.
ENERG
i
®
Implant System
   
•  Supports both phosphorus and boron dopant technologies.
•  Extendable to new advanced solar cell structures.
 
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TFE Products
   
Applications and Features
ASP Market
INTEVAC MATRIX PVD System
   
•  Deposits barrier/seed layers for
fan-out
RDL.
•  Includes LSMA magnetron source, with industry-leading target utilization rate of over 65 percent.
•  Provides high-throughput and low cost of ownership for small-substrate or large panel processing.
•  Provides flexibility for handling round, square, or rectangular substrates for
fan-out
packaging.
Adjacent Markets
INTEVAC MATRIX System
   
•  Incorporates multiple thin-film deposition techniques such as PVD, CVD, Etch, Implant, heating and cooling.
•  Consists of high-speed linear transport.
•  Flexible design enables handling of various different small substrate sizes and shapes.
•  Performs double-sided coating within vacuum.
Customer Concentration
Historically, a significant portion of Intevac’s revenue in any particular period has been attributable to sales to a limited number of customers.
The following customers accounted for at least 10 percent of Intevac’s consolidated net revenues in fiscal 2021 and 2020.
 
    
2021
    
2020
  
Seagate Technology
      60 %      79 % 
Western Digital Corporation
      25 %      18 % 
Amkor Technology, Inc.
      10 %      *  
* Less than 10%
Our reliance on sales to relatively few customers has increased with the disposition of our Photonics business, and we expect that sales of our products to relatively few customers will continue to account for a high percentage of our revenues in the foreseeable future.
Foreign sales accounted for 90% of revenue in fiscal 2021 and 88% of revenue in fiscal 2020. The majority of Intevac’s foreign sales are to companies in Asia or to U.S. companies for use in their Asian manufacturing or development operations. Intevac anticipates that foreign sales will continue to be a significant portion of Intevac’s revenues, particularly in light of the disposition of our Photonics business. Intevac’s disk sputtering equipment customers include magnetic disk manufacturers, such as Showa Denko, and vertically integrated HDD manufacturers, such as Seagate, Western Digital and HGST. Intevac’s PV solar equipment customers include several major solar cell manufacturers. Intevac’s DCP equipment customers include DCP manufacturers, such as Truly Opto-electronics. Intevac’s customers’ manufacturing facilities are primarily located in California, China, Taiwan, Japan, Malaysia, Portugal and Singapore.
Competition
The principal competitive factors affecting the markets for Intevac’s products include price, product performance and functionality, ease of integration, customer support and service, reputation and reliability. Intevac has one major competitor, Canon Anelva, in the hard disk drive equipment market and has historically experienced intense worldwide competition for magnetic disk sputtering equipment. Intevac primarily faces competition from large established global competitors in the PV equipment market including Centrotherm Photovoltaics, Jusung, Kingstone, Von Ardenne and Belight Technology. Intevac faces competition in the DCP market from optical coating equipment manufacturers such as Optorun, Shincron and Hongda, glass manufacturers that may develop scratch resistant glass, touchscreen manufacturers that may adopt harder substrate materials, or other equipment companies, chemical companies or the display cover plate manufacturers themselves that may offer competing protective coatings including DLC, NCVM and AR. Intevac’s competitors for PVD processes in the
fan-out
 
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packaging market include the companies SPTS Technologies (a KLA company), Evatec AG, ULVAC Technologies, Inc., Tango Systems, Inc. (an Applied Materials company) and ASM NEXX, Inc. These competitors generally have substantially greater financial, technical, marketing, manufacturing and other resources as compared to Intevac. Furthermore, any of Intevac’s competitors may develop enhancements to, or future generations of, competitive products that offer superior price or performance features. In addition, new competitors, with enhanced products may enter the markets that Intevac currently serves.
Marketing and Sales
Sales are made primarily through Intevac’s direct sales force. Intevac also sells its products through distributors in Japan and China. The selling process for Intevac’s products is multi-level and lengthy, involving individuals from marketing, engineering, operations, customer service and senior management.
Installing and integrating new equipment requires a substantial investment by a customer. Sales of Intevac’s systems depend, in significant part, upon the decision of a prospective customer to replace obsolete equipment or to increase manufacturing capacity by upgrading or expanding existing manufacturing facilities or by constructing new manufacturing facilities, all of which typically involve a significant capital commitment. Intevac’s systems have a lengthy sales cycle, during which Intevac may expend substantial funds and management time and effort with no assurance that a sale will result.
The production of large complex systems requires Intevac to make significant investments in inventory both to fulfill customer orders and to maintain adequate supplies of spare parts to service previously shipped systems. Intevac maintains inventories of spare parts in the United States, Singapore, Malaysia and China to support its customers. Intevac often requires its customers to pay for systems 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 and any sales tax due upon completion of installation and acceptance of the system at the customer’s factory.
Intevac provides process and applications support, customer training, installation,
start-up
assistance and post-installation service support to Intevac’s customers. Intevac supports U.S. customers from Intevac headquarters in Santa Clara, California, and has field offices in Singapore, China, and Malaysia to support customers in Asia.
Warranties for Intevac’s products typically range between 12 and 24 months from customer acceptance. During the warranty period any necessary
non-consumable
parts are supplied and installed without charge.
Research and Development and Intellectual Property
Intevac’s long-term growth strategy requires continued development of new products. Intevac works closely with Intevac’s customers to design products that meet their planned technical and production requirements. Product development and engineering organizations are located primarily in the United States and Singapore.
Intevac’s competitive position significantly depends on Intevac’s research, development, engineering, manufacturing and marketing capabilities, and not just on Intevac’s patent position. However, protection of Intevac’s technological assets by obtaining and enforcing intellectual property rights, including patents, is important. Therefore, Intevac’s practice is to file patent applications in the United States and other countries for inventions that Intevac considers important. Although Intevac does not consider Intevac’s business materially dependent upon any one patent, the rights of Intevac and the products made and sold under Intevac’s patents along with other intellectual property, including trademarks,
know-how,
trade secrets and copyrights, taken as a whole, are a significant element of Intevac’s business.
Intevac enters into patent and technology licensing agreements with other companies when management determines that it is in Intevac’s best interest to do so. Intevac pays royalties under existing patent license agreements for use of certain patented technologies in several of Intevac’s products.
In the normal course of business, Intevac periodically receives and makes inquiries regarding possible patent infringements. In dealing with such inquiries, it may be necessary or useful for us to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to us on commercially reasonable terms, or at all. If Intevac is not able to resolve or settle claims, obtain necessary licenses and/or successfully prosecute or defend Intevac’s position, Intevac’s business, financial condition and results of operations could be materially and adversely affected.
 
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Manufacturing
Intevac manufactures its products at its facilities in California and Singapore. Intevac’s manufacturing operations include electromechanical assembly, vacuum processing, fabrication of sputter sources, and system assembly, alignment and testing.
Government Regulations
We are subject to various government regulations in the United States as well as various international locations where we operate. These regulations cover several diverse areas including environmental compliance, import and export controls, economic sanctions, data and privacy protection, transfer pricing rules, anti-bribery, anti-trafficking and anti-trust provisions. Our policies mandate compliance with applicable laws and regulations administered by various state, federal and international agencies. We instituted various training programs to educate our employees on compliance with governmental regulations, as well as applied legal and ethical practices in our everyday work. We are subject to international, federal, state, and local legislation, regulations, and other requirements relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or otherwise hazardous substances, chemicals, materials or waste; recycling and product packaging; worker health and safety; and other activities affecting the environment, our workforce, and the management of our manufacturing operations. We believe that our operations and facilities comply in all material respects with applicable environmental laws and worker health and safety laws. We treat the cost of complying with government regulations and operating a safe workplace as a normal cost of business and allocates the cost of these activities to all functions, except where the cost can be isolated and charged to a specific function. The environmental standards and regulations promulgated by government agencies in California and Singapore are particularly rigorous and set a high standard of compliance. In addition, climate change legislation is a significant topic of recent discussion and has generated and may continue to generate federal, international or other regulatory responses in the near future. We believe our costs of compliance with these regulations and standards are comparable to other companies operating similar facilities in these jurisdictions. We are also subject to import/export controls, tariffs, and other trade-related regulations and restrictions in the countries in which we have operations or otherwise do business. These controls, tariffs, regulations, and restrictions (including those related to, or affected by, United States-China relations) have had, and we believe may continue to have, a material impact on our business, including our ability to sell products and to manufacture or source components. The development of additional statutes and regulations and interpretation of existing statutes and regulations with respect to our industry can be expected to evolve over time. As with any commercial enterprise, we cannot predict with certainty the nature or direction of the development of federal statutes and regulations that will affect our business operations.
Human Capital Resources
General Information About Our Human Capital Resources
As of January 1, 2022, we had 151 employees, including 3 contract employees. Approximately 56% of our employees are located in the United States and 44% are located in Asia. Of our total workforce, 40 employees are involved in research and development; 62 employees are involved in operations, manufacturing, service and quality assurance; and 49 employees are involved in sales, order administration, marketing, finance, information technology, general management and other administrative functions.
Core Principles
Our core values are integral to our Company culture. We pride ourselves in providing a safe and positive work environment where mutual respect and ethical conduct is a core value. We believe in continuous learning and professional development and provide employees with opportunities to grow.
Community Involvement
Our employees are committed to making a difference in the community by actively volunteering and fundraising for many charities, including the American Cancer Society, Second Harvest, Humane Society, Make a Wish Foundation, and Salvation Army.
Health and Safety
The health and safety of our employees is of utmost importance to us. We conduct regular self-assessments and audits to ensure compliance with our health and safety guidelines and regulatory requirements. Our ultimate goal is to achieve a level of
 
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work-related injuries as close to zero as possible through continuous investment in our safety programs. We provide protective gear (e.g. eye protection, masks and gloves) as required by applicable standards and as appropriate given employee job duties. Annual participation in trainings related to ethics, environment, health and safety, and emergency responses are at or near 100%.
Refer to “Impact of
COVID-19”
included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on actions taken by the Company to support its employees in response to the
COVID-19
pandemic.
Talent Management
We regularly monitor and review with management human capital metrics that are key to our business, including hiring statistics, promotion rates, turnover rates, career growth and development, and diversity and inclusion.
Hiring Practices
It is our policy to hire and promote the best-qualified person for the job and comply fully with all domestic, foreign and local laws relating to discrimination in the workplace. Our good faith outreach efforts are designed to ensure that there are no barriers for members of any group and to encourage interest by all qualified persons. We believe our actions enhance diversity, including recruiting at venues representing women, minorities and U.S. military veterans.
Turnover
We continually monitor employee turnover rates, both regionally and as a whole, as our success depends upon retaining our highly trained engineering, manufacturing and operating personnel. The average tenure of our employees is 11.8 years in the United States and 10.9 years in Asia.
Diversity and Inclusion
Recognizing and respecting our global presence, we strive to maintain a diverse and inclusive workforce everywhere we operate. We believe that a diverse and motivated workforce is vital to our success. We strive to advance diversity and inclusion through various talent acquisition programs to attract, retain and develop a diverse, highly-skilled work force. We conduct employee surveys to provide
on-going
feedback on how we are doing against our commitment to treat all employees fairly and provide equal opportunity in an environment free of discrimination. Our diversity and inclusion principles are also reflected in our employee training, in particular by educating employees about our policies against harassment and bullying and about the elimination of bias in the workplace.
Management Team
We believe our management team has the experience necessary to effectively execute our strategy and advance our product and technology leadership. Our chief executive officer and the head of our TFE business average approximately 25 years of industry experience. They are supported by an experienced and talented professional team.
Training and Talent Development
We are committed to the continued development of our employees. Strategic talent reviews and succession planning occur on a planned cadence annually – globally and across all business areas. We are committed to identifying and developing the talents of our next generation leaders. We have a robust talent and succession planning process and have established specialized programs to support the development of our talent pipeline for critical roles in management, engineering, and operations. We also provide technical, professional and leadership training to our employees. We recognize and support the growth and development of our employees and offer opportunities to participate in internal as well as external learning opportunities.
Compensation and Benefits
We strive to offer employees regionally competitive compensation and benefits that are aligned to our values. All employees receive a base salary, incentive compensation and welfare benefits. Depending on the region, benefits may include medical, dental and vision coverage, short and long-term disability income protection, flexible spending plans (health, dependent and limited flexible spending) and basic and supplemental life insurance, accidental death and dismemberment insurance and retirement savings plan. Intevac pays the majority or all of the costs for these benefits.
 
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We have various employee incentive plans. Our profit-sharing plan provides for the distribution of a percentage of
pre-tax
profits to substantially all of our employees not eligible for other performance-based incentive plans. Our executives and key contributors participate in bonus plans based on the achievement of profitability and other individual performance goals and objectives.
To foster a stronger sense of ownership and align the interests of employees with our stockholders we grant equity-based awards, including restricted stock units and performance-based restricted stock units to eligible employees. We also have an employee stock purchase plan, which provides employees with the opportunity to purchase Intevac common stock at a discount through payroll deductions. See Note 4 to the consolidated financial statements for a description of these plans.
Oversight and Management
As noted in its charter, our Compensation Committee is responsible for periodically reviewing our employee programs and initiatives, including healthcare and other benefits, as well as our management development and succession planning practices and strategies.
Information about our Executive Officers
Certain information about our executive officers as of February 17, 2022 is listed below:
 
Name
   
Age
     
Position
Executive Officers:
      
Nigel D. Hunton
      61     
President and Chief Executive Officer
James Moniz
      64     
Executive Vice President, Finance and Administration, Chief Financial Officer, Secretary and Treasurer
Jay Cho
      57     
Executive Vice President and General Manager, TFE
Other Key Officers:
      
Terry Bluck
      62     
Chief Technology Officer, TFE
Kimberly Burk
      56     
Senior Vice President, Global Human Resources
Mr.
 Hunton
joined Intevac in January 2022 as President and Chief Executive Officer and a member of the Board of Directors. Prior to joining Intevac, Mr. Hunton served as President and Chief Executive Officer at Photon Control Inc., a fiber optics equipment manufacturing company, from May 2019 to July 2021. From July 2017 to May 2019, he was the President and Chief Executive Officer at Ferrotec (USA) Corporation, an electronics component manufacturing company. From April 2017 to July 2017, Mr. Hunton served as Special Projects Manager at Ferrotec GmbH. Mr. Hunton served as Managing Director at Hunton Associates Ltd, a management consulting company, from January 2016 to July 2017. From 2012 to 2015, Mr. Hunton served as Chief Executive Officer of MBA Polymers, Inc., a recycling company. From 1985 to 2012, Mr. Hunton served in various management roles at the Edwards Group, a global vacuum technology company. Additionally, Mr. Hunton is a member of the advisory board of Arsenal Capital Partners, a private equity firm. Mr. Hunton holds a BS in mechanical engineering from University of Manchester Institute of Science and Technology.
Mr.
 Moniz
joined Intevac as Executive Vice President, Finance and Administration, Chief Financial Officer and Treasurer in November 2014. Mr. Moniz previously served as the Chief Financial Officer of Nanometrics, Inc. from 2009 until his retirement in 2011. During 2008, Mr. Moniz was the Chief Financial Officer at Photon Dynamics, Inc. From 2000 until 2008, Mr. Moniz served as the Chief Financial Officer at Nextest Systems Corporation. Prior to Nextest, Mr. Moniz held senior financial management positions at Millennia Vision Corporation, Lockheed Martin Corporation, Loral Corporation and Varian Associates. Mr. Moniz holds an MBA, a BS in accounting and a BS in marketing from San Jose State University.
Mr.
 Cho
joined Intevac in January 2014 and currently serves as Executive Vice President and General Manager, TFE. Prior to joining Intevac, Mr. Cho was President, Chief Executive Officer and
Co-Founder
of REEnewal Corporation. From 2006 to 2011, Mr. Cho served as Vice President / General Manager of the Tester and Repair Business Units of Orbotech LTD. From 2005 to 2006, Mr. Cho served as Vice President, Product Development at Metara Inc. From 1992 to 2005, Mr. Cho held various management positions at Novellus Systems, Inc. Prior to Novellus, Mr. Cho worked for Digital Equipment Corporation and Intermec Corporation. Mr. Cho holds a BS in electrical engineering from Washington State University and an MBA from University of Phoenix.
 
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Mr.
 Bluck
rejoined Intevac as Chief Technology Officer of TFE in August 2004. Mr. Bluck had previously worked at Intevac from December 1996 to November 2002 in various engineering positions. The business unit Mr. Bluck worked for was sold to Photon Dynamics in November 2002, and he was employed there as Vice President, Rapid Thermal Process Product Engineering until August 2004. Mr. Bluck holds a BS in physics from San Jose State University.
Ms.
 Burk
joined Intevac in May 2000 and currently serves as Senior Vice President of Global Human Resources. Prior to joining Intevac, Ms. Burk served as Human Resources Manager of Moen, Inc. from 1999 to 2000 and as Human Resources Manager of Lawson Mardon from 1994 to 1999. Ms. Burk holds a BS in sociology from Northern Illinois University.
Available Information
Intevac’s website is
http://www.intevac.com.
Intevac makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only and none of the information contained on Intevac’s website is part of this report or is incorporated by reference herein.
Trademarks
Intevac’s trademarks include the following: “200 Lean
®
,” “DiamondClad
®
,” “ENERG
i
®
,” “INTEVAC LSMA
®
,” “INTEVAC MATRIX
®
,” “oDLC
®
,” “INTEVAC VERTEX
®
,” “VERTEX Marathon
®
,” and “VERTEX SPECTRA
®
.”
 
Item 1A.
Risk Factors
The following factors could materially affect Intevac’s business, financial condition or results of operations and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this Annual Report.
Risks Related to Our Business
The industries we serve are cyclical, volatile and unpredictable.
A significant portion of our revenue is derived from the sale of equipment used to manufacture commodity technology products such as disk drives, PV solar cells and cell phones. This subjects us to business cycles, the timing, length and volatility of which can be difficult to predict. When demand for commodity technology products exceeds production capacity, then demand for new capital equipment such as ours tends to be amplified. Conversely, when supply of commodity technology products exceeds demand, then demand for new capital equipment such as ours tends to be depressed. We cannot predict with any certainty when these cycles will begin or end. For example, our sales of systems for magnetic disk production increased in 2016 as a customer began upgrading the technology level of its manufacturing capacity. Sales of systems and upgrades for magnetic disk production in 2017 and 2018 were higher than in 2016 as this customer’s technology upgrade continued. However, sales of systems and upgrades for magnetic disk production in 2019, 2020 and 2021 were down from the levels in 2018 as this customer took delivery of fewer or no (in the case of 2021) systems. Intevac expects sales of systems and upgrades for magnetic disk production in 2022 will be at levels similar to the levels in 2021.
Our equipment represents only a portion of the capital expenditure that our customers incur when they upgrade or add production capacity. Accordingly, our customers generally commit to making large capital expenditures far in excess of the cost of our systems alone when they decide to purchase our systems. The magnitude of these capital expenditures requires our customers to have access to large amounts of capital. Our customers generally reduce their level of capital investment during downturns in the overall economy or during a downturn in their industries.
In recent years the PV (solar) market has undergone a downturn, which is likely to continue to impact our sales of PV equipment. The solar industry from time to time experiences periods of structural imbalance between supply and demand, and such periods put intense pressure on our customers’ pricing. The solar industry is currently in such a period. Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time. During any such period, solar module manufacturers may reduce their sales prices in response to competition, even below their manufacturing costs, in order to generate sales and may do so for a sustained period of time. As a result, our customers may be
 
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unable to sell their solar modules or systems at attractive prices or for a profit during a period of excess supply of solar modules, which would adversely affect their results of operations and their ability to make capital investments such as purchasing our products.
We must effectively manage our resources and production capacity to meet rapidly changing demand. Our business experiences rapid growth and contraction, which stresses our infrastructure, internal systems and managerial resources. During periods of increasing demand for our products, we must have sufficient manufacturing capacity and inventory to meet customer demand; attract, retain and motivate a sufficient number of qualified individuals; and effectively manage our supply chain. During periods of decreasing demand for our products, we must be able to align our cost structure with prevailing market conditions; motivate and retain key employees and effectively manage our supply chain.
The impact of the
COVID-19
pandemic, or similar global health concerns, has negatively impacted and could continue to negatively impact our operations, supply chain and customer base.
The
COVID-19
pandemic has severely restricted the level of economic activity around the world, which may impact demand for our products. Our operations and supply chains for certain of our products or services have been and could continue to be negatively impacted by the regional or global outbreak of illnesses, including
COVID-19.
The impact of
COVID-19,
including changes in consumer behavior, pandemic fears, and market downturns as well as restrictions on business and individual activities has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by federal, state, and local public health and governmental authorities to contain the spread of
COVID-19
and although many restrictions that were in place have eased in many localities, some areas that had previously eased restrictions have reverted to more stringent limitations in light of the emergence of new strains of
COVID-19.
There remains significant uncertainty concerning the magnitude of the impact and the duration of the
COVID-19
pandemic. The extent that our operations will continue to be impacted by the
COVID-19
pandemic will depend on future developments, including any new potential waves of the virus, new strains of the virus, and the success of vaccination programs, all of which are highly uncertain and cannot be accurately predicted.
Sales of our equipment are primarily dependent on our customers’ upgrade and capacity expansion plans and whether our customers select our equipment.
We have no control over our customers’ upgrade and capacity expansion plans, and we cannot be sure they will select, or continue to select, our equipment when they upgrade or expand their capacity. The sales cycle for our equipment systems can be a year or longer, involving individuals from many different areas of Intevac and numerous product presentations and demonstrations for our prospective customers. Our sales process also commonly includes production of samples and customization of our products. We do not typically enter into long-term contracts with our customers, and until an order is actually submitted by a customer there is no binding commitment to purchase our systems. In some cases, orders are also subject to customer acceptance or other criteria even in the case of a binding agreement.
Sales of new manufacturing systems are also dependent on obsolescence and replacement of the installed base of our customers’ existing equipment with newer, more capable equipment. If upgrades are developed that extend the useful life of the installed base of systems, then we tend to sell more upgrade products and fewer new systems, which can significantly reduce total revenue.
Our 200 Lean HDD customers also experience competition from companies that produce alternative storage technologies like flash memory, which offer smaller size, lower power consumption and more rugged designs. These storage technologies are being used increasingly in enterprise applications and smaller form factors such as tablets, smart-phones, ultra-books, and notebook PCs instead of hard disk drives. Tablet computing devices and smart-phones have never contained, nor are they likely in the future to contain, a disk drive. Products using alternative technologies, such as flash memory, optical storage and other storage technologies are becoming increasingly common and could become a significant source of competition to particular applications of the products of our 200 Lean HDD customers, which could adversely affect our results of operations. If alternative technologies, such as flash memory, replace hard disk drives as a significant method of digital storage, then demand for our hard disk manufacturing products would decrease.
We operate in an intensely competitive marketplace, and our competitors have greater resources than we do.
In the market for our disk sputtering systems, we experience competition primarily from Canon Anelva, which has sold a substantial number of systems worldwide. In the PV equipment market, we face competition from large established competitors
 
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including Centrotherm Photovoltaics, Jusung, Kingstone, Von Ardenne and Belight Technology. Some of our competitors have substantially greater financial, technical, marketing, manufacturing and other resources than we do, especially in the DCP and PV equipment markets. Our competitors may develop enhancements to, or future generations of, competitive products that offer superior price or performance features, and new competitors may enter our markets and develop such enhanced products. Moreover, competition for our customers is intense, and our competitors have historically offered substantial pricing concessions and incentives to attract our customers or retain their existing customers.
We are exposed to risks associated with a highly concentrated customer base.
Historically, a significant portion of our revenue in any particular period has been attributable to sales of our disk sputtering systems to a limited number of customers. Our reliance on sales to relatively few customers has increased with the disposition of our Photonics business, and we expect that sales of our products to relatively few customers will continue to account for a high percentage of our revenues in the foreseeable future. This concentration of customers, when combined with changes in the customers’ specific capacity plans and market share shifts can lead to extreme variability in our revenue and financial results from period to period.
The concentration of our customer base may enable our customers to demand pricing and other terms unfavorable to Intevac and makes us more vulnerable to changes in demand by or issues with a given customer. Orders from a relatively limited number of manufacturers have accounted for, and will likely continue to account for, a substantial portion of our revenues. The loss of one of these large customers, or delays in purchasing by them, would have a material and adverse effect on our revenues.
Our operating results fluctuate significantly from quarter to quarter, which can lead to volatility in the price of our common stock.
Our quarterly revenues and common stock price have fluctuated significantly. We anticipate that our revenues, operating margins and common stock price will continue to fluctuate for a variety of reasons, including: (1) changes in the demand, due to seasonality, cyclicality and other factors in the markets for computer systems, storage subsystems and consumer electronics containing disks as well as cell phones and PV solar cells our customers produce with our systems; (2) delays or problems in the introduction and acceptance of our new products, or delivery of existing products; (3) timing of orders, acceptance of new systems by our customers or cancellation or delay of those orders; (4) new products, services or technological innovations by our competitors or us; (5) changes in our manufacturing costs and operating expense; (6) changes in general economic, political, stock market and industry conditions; and (7) any failure of our operating results to meet the expectations of investment research analysts or investors.
Any of these, or other factors, could lead to volatility and/or a rapid change in the trading price of our common shares. In the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities. Any such litigation, if instituted against Intevac, could result in substantial costs and diversion of management time and attention.
Our success depends on international sales and the management of global operations.
In previous years, the majority of our revenues have come from regions outside the United States. Most of our international sales are to customers in Asia, which includes products shipped to overseas operations of U.S. companies. We currently have manufacturing facilities in California and Singapore and international customer support offices in Singapore, China, and Malaysia. We expect that international sales will continue to account for a significant portion of our total revenue in future years. Certain of our suppliers are also located outside the United States.
Managing our global operations presents challenges including, but not limited to, those arising from: (1) global trade issues; (2) variations in protection of intellectual property and other legal rights in different countries; (3) concerns of U.S. governmental agencies regarding possible national commercial and/or security issues posed by growing manufacturing business in Asia; (4) fluctuation of interest rates, raw material costs, labor and operating costs, and exchange rates; (5) variations in the ability to develop relationships with suppliers and other local businesses; (6) changes in the laws and regulations of the United States, including export restrictions, and other countries, as well as their interpretation and application; (7) the need to provide technical and spares support in different locations; (8) political and economic instability; (9) cultural differences; (10) varying government incentives to promote development; (11) shipping costs and delays; (12) adverse conditions in credit markets; (13) variations in tariffs, quotas, tax codes and other market barriers; and (14) barriers to movement of cash.
 
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We must regularly assess the size, capability and location of our global infrastructure and make appropriate changes to address these issues.
Our success is dependent on recruiting and retaining a highly talented work force.
Our employees are vital to our success, and our key management, engineering and other employees are difficult to replace. We do not maintain key person life insurance on any of our employees. The expansion of high technology companies worldwide has increased demand and competition for qualified personnel and has made companies increasingly protective of prior employees. It may be difficult for us to locate employees who are not subject to
non-competition
agreements and other restrictions.
The majority of our U.S. operations are located in California where the cost of living and of recruiting employees is high. Our operating results depend, in large part, upon our ability to retain and attract qualified management, engineering, marketing, manufacturing, customer support, sales and administrative personnel. Furthermore, we compete with industries such as the hard disk drive, semiconductor, and solar industries for skilled employees. Failure to retain existing key personnel, or to attract, assimilate or retain additional highly qualified employees to meet our needs in the future, could have a material and adverse effect on our business, financial condition and results of operations.
We are dependent on certain suppliers for parts used in our products.
We are a manufacturing business. Purchased parts constitute the largest component of our product cost. Our ability to manufacture depends on the timely delivery of parts, components and subassemblies from suppliers. We obtain some of the key components and subassemblies used in our products from a single supplier or a limited group of suppliers. If any of our suppliers fail to deliver quality parts on a timely basis, we may experience delays in manufacturing, which could result in delayed product deliveries, increased costs to expedite deliveries or develop alternative suppliers, or require redesign of our products to accommodate alternative suppliers. Some of our suppliers are thinly capitalized and may be vulnerable to failure.
Risks Related to Our Intellectual Property
Our growth depends on development of technically advanced new products and processes.
We have invested heavily, and continue to invest, in the development of new products, such as our 200 Lean HDD and other PVD systems, our coating systems for DCP, our solar systems for PV applications, our digital night-vision products and our
near-eye
display products. Our success in developing and selling new products depends upon a variety of factors, including our ability to: predict future customer requirements; make technological advances; achieve a low total cost of ownership for our products; introduce new products on schedule; manufacture products cost-effectively including transitioning production to volume manufacturing; commercialize and attain customer acceptance of our products; and achieve acceptable and reliable performance of our new products in the field. Our new product decisions and development commitments must anticipate continuously evolving industry requirements significantly in advance of sales. In addition, we are attempting to expand into new or related markets, including the PV, display cover glass, and ASP markets. Our expansion into the PV, cover glass and ASP markets is dependent upon the success of our customers’ development plans. To date we have not recognized material revenue from such products. Failure to correctly assess the size of the markets, to successfully develop cost effective products to address the markets or to establish effective sales and support of the new products would have a material adverse effect on future revenues and profits. In addition, if we invest in products for which the market does not develop as anticipated, we may incur significant charges related to such investments.
Rapid technological change in our served markets requires us to rapidly develop new technically advanced products. Our future success depends in part on our ability to develop and offer new products with improved capabilities and to continue to enhance our existing products. If new products have reliability or quality problems, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance and payment for new products and additional service and warranty expenses.
Our business depends on the integrity of our intellectual property rights.
The success of our business depends upon the integrity of our intellectual property rights, and we cannot ensure that: (1) any of our pending or future patent applications will be allowed or that any of the allowed applications will be issued as patents or will issue with claims of the scope we sought; (2) any of our patents will not be invalidated, deemed unenforceable,
 
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circumvented or challenged; (3) the rights granted under our patents will provide competitive advantages to us; (4) other parties will not develop similar products, duplicate our products or design around our patents; or (5) our patent rights, intellectual property laws or our agreements will adequately protect our intellectual property or competitive position.
From time to time, we have received claims that we are infringing third parties’ intellectual property rights or seeking to invalidate our rights. We cannot ensure that third parties will not in the future claim that we have infringed current or future patents, trademarks or other proprietary rights relating to our products. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us.
Risks Related to Government Regulation
We may not be able to obtain export licenses from the U.S. government permitting delivery of our products to international customers.
Many of our products, require export licenses from U.S. government agencies under the Export Administration Act. These regulations limit the potential market for some of our products. We can give no assurance that we will be successful in obtaining all the licenses necessary to export our products. Heightened government scrutiny of export licenses for defense related products has resulted in lengthened review periods for our license applications. Failure to comply with export control laws, including identification and reporting of all exports and
re-exports
of controlled technology or exports made without correct license approval or improper license use could result in severe penalties and revocation of licenses. Failure to obtain export licenses, delays in obtaining licenses, or revocation of previously issued licenses would prevent us from selling the affected products outside the United States and could negatively impact our results of operations.
We are subject to risks of
non-compliance
with environmental and other governmental regulations.
We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or otherwise hazardous substances, chemicals, materials or waste. If we fail to comply with current or future regulations, such failure could result in suspension of our operations, alteration of our manufacturing process, remediation costs or substantial civil penalties or criminal fines against us or our officers, directors or employees. Additionally, these regulations could require us to acquire expensive remediation or abatement equipment and incur substantial expenses to comply with them.
In addition, climate change legislation is a significant topic of recent discussion and has generated and may continue to generate federal, international or other regulatory responses in the near future. If we or our suppliers, customers or partners fail to timely comply with applicable legislation, certain customers may refuse to purchase our products or we may face increased operating costs as a result of taxes, fines or penalties, or incur legal liability and reputational damage, which could harm our business, financial condition and results of operations.
General Risk Factors
Our business could be negatively impacted by cyber and other security threats or disruptions.
We face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information and networks. Although we utilize various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. These threats could lead to losses of sensitive information or capabilities; financial liabilities and damage to our reputation. If we are unable to maintain compliance with security standards applicable to defense contractors, we could lose business or suffer reputational harm. Cyber threats to businesses in general are evolving and include, but are not limited to, malicious software, destructive malware, attempts to gain unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches that could lead to disruptions in our systems, unauthorized release of confidential, personal or otherwise protected information (ours or that of our employees, customers or partners), and corruption of data, networks or systems. We have experienced cybersecurity threats and incidents involving our systems and expect these incidents to continue. While none of the cybersecurity events have been material to date, a successful breach or attack could have a material adverse effect on our results of operations, financial condition or business, harm our reputation and relationships with our customers, business partners, employees or other third parties, and subject us to consequences such as litigation and direct costs associated with incident response. In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’ systems that are used in connection with our business. These events, if not prevented or effectively mitigated, could damage our reputation, require remedial actions and lead to loss of business, regulatory actions, potential liability and other financial losses.
 
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Changes to our effective tax rate affect our results of operations.
As a global company, we are subject to taxation in the United States, Singapore and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future effective tax rate could be affected by: (1) changes in tax laws; (2) the allocation of earnings to countries with differing tax rates; (3) changes in worldwide projected annual earnings in current and future years: (4) accounting pronouncements; or (5) changes in the valuation of our deferred tax assets and liabilities. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be different from the treatment reflected in our historical income tax provisions and accruals, which could result in additional payments by Intevac.
Difficulties in integrating past or future acquisitions or implementing strategic divestitures could adversely affect our business.
We have completed a number of acquisitions and dispositions during our operating history. We have spent and may continue to spend significant resources identifying and pursuing future acquisition opportunities. Acquisitions involve numerous risks including: (1) difficulties in integrating the operations, technologies and products of the acquired companies; (2) the diversion of our management’s attention from other business concerns; and (3) the potential loss of key employees of the acquired companies. Failure to achieve the anticipated benefits of the prior and any future acquisitions or to successfully integrate the operations of the companies we acquire could have a material and adverse effect on our business, financial condition and results of operations. Any future acquisitions could also result in potentially dilutive issuance of equity securities, acquisition or divestiture-related write-offs or the assumption of debt and contingent liabilities. In addition, we have made and will continue to consider making strategic divestitures, such as the disposition of our Photonics business. With any divestiture, there are risks that future operating results could be unfavorably impacted if targeted objectives, such as cost savings or earnout payments associated with the financial performance of the divested business, are not achieved or if other business disruptions occur as a result of the divestiture or activities related to the divestiture.
We could be involved in litigation.
From time to time, we may be involved in litigation of various types, including litigation alleging infringement of intellectual property rights and other claims and customer disputes. For example, we recently settled an action against us under the Private Attorneys General Act for $1.0 million, pending approval by the court. Litigation is expensive, subjects us to the risk of significant damages and requires significant management time and attention and could have a material and adverse effect on our business, financial condition and results of operations.
Business interruptions could adversely affect our operations.
Our operations are vulnerable to interruption by fire, earthquake, floods or other natural disaster, quarantines or other disruptions associated with infectious diseases, national catastrophe, terrorist activities, war, disruptions in our computing and communications infrastructure due to power loss, telecommunications failure, human error, physical or electronic security breaches and computer viruses, and other events beyond our control. We do not have a detailed disaster recovery plan. Despite our implementation of network security measures, our tools and servers may be vulnerable to computer viruses,
break-ins
and similar disruptions from unauthorized tampering with our computer systems and tools located at customer sites. Political instability could cause us to incur increased costs in transportation, make such transportation unreliable, increase our insurance costs or cause international currency markets to fluctuate. All these unforeseen disruptions and instabilities could have the same effects on our suppliers and their ability to timely deliver their products. In addition, we do not carry sufficient business interruption insurance to compensate us for all losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business and results of operations. For example, we self-insure earthquake risks because we believe this is the prudent financial decision based on the high cost of the limited coverage available in the earthquake insurance market. An earthquake could significantly disrupt our operations, most of which are conducted in California. It could also significantly delay our research and engineering effort on new products, most of which is also conducted in California. We take steps to minimize the damage that would be caused by business interruptions, but there is no certainty that our efforts will prove successful.
We could be negatively affected as a result of a proxy contest and the actions of activist stockholders.
A proxy contest with respect to election of our directors, or other activist stockholder activities, could adversely affect our business because: (1) responding to a proxy contest and other actions by activist stockholders can be costly and time-
 
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consuming, disruptive to our operations and divert the attention of management and our employees; (2) perceived uncertainties as to our future direction caused by activist activities may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and (3) if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans.
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management must perform evaluations of our internal control over financial reporting. Although our assessment, testing, and evaluation resulted in our conclusion that as of January 1, 2022, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. Ongoing compliance with this requirement is complex, costly and time-consuming. If Intevac fails to maintain effective internal control over financial reporting; our management does not timely assess the adequacy of such internal control; or our independent registered public accounting firm does not deliver an unqualified opinion as to the effectiveness of our internal control over financial reporting, then we could be subject to restatement of previously reported financial results, regulatory sanctions and a decline in the public’s perception of Intevac, which could have a material and adverse effect on our business, financial condition and results of operations.
 
Item 1B.
Unresolved Staff Comments
None.
 
Item 2.
Properties
Intevac maintains its corporate headquarters in Santa Clara, California. The location, approximate size and type of facility of the principal properties are listed below. Intevac leases all of its properties and does not own any real estate.
 
Location
   
Square Footage
    
Principal Use
Santa Clara, California
      169,583 *   
Corporate Headquarters;
Marketing, Manufacturing, Engineering and Customer Support
Singapore
      31,947     Manufacturing and Customer Support
Malaysia
      1,291     Customer Support
Shenzhen, China
      2,568     Customer Support
 
*
In connection with the disposition of our Photonics business, we entered into a lease assignment agreement with EOTECH that assigns the lease obligation for two buildings in our California campus consisting of 94,890 square feet of rentable space to EOTECH. As part of the assignment, we agreed to subsidize a portion of EOTECH’s lease payments through the remainder of the lease term which expires in March 2024.
Intevac considers these properties adequate to meet its current and future requirements. Intevac regularly assesses the size, capability and location of its global infrastructure and periodically makes adjustments based on these assessments.
 
Item 3.
Legal Proceedings
From time to time, Intevac is involved in claims and legal proceedings that arise in the ordinary course of business. Intevac expects that the number and significance of these matters will increase as Intevac’s business expands. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all. Intevac is not presently a party to any lawsuit or proceeding that, in Intevac’s opinion, is likely to seriously harm Intevac’s business. For a description of our material pending legal proceedings, see Note 12 “Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report. See also “Risk Factors” in Part I, Item 1A of this Annual Report.
 
Item 4.
Mine Safety Disclosures
Not applicable.
 
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PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Intevac common stock is traded on The Nasdaq Stock Market (NASDAQ Global Select) under the symbol “IVAC.” As of February 17, 2022, there were 72 holders of record.
Recent Sales of Unregistered Securities
None.
Dividend Policy
We currently anticipate that we will retain our earnings, if any, for use in the operation of our business and do not expect to pay cash dividends on our capital stock in the foreseeable future.
Repurchases of Intevac Common Stock
On November 21, 2013, Intevac’s Board of Directors approved a stock repurchase program authorizing up to $30.0 million in repurchases. On August 15, 2018, Intevac’s Board of Directors approved a $10.0 million increase to the original stock repurchase program authorizing up to $40.0 million. There is no expiration date on this authorization, and we may suspend, amend or discontinue the repurchase program at any time. Intevac did not make any common stock repurchases during the three months ended January 1, 2022. At January 1, 2022, $10.4 million remains available for future stock repurchases under the repurchase program.
 
Item 6.
[Reserved]
 
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis (MD&A) is intended to facilitate an understanding of Intevac’s business and results of operations. This MD&A should be read in conjunction with Intevac’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this
Form 10- K.
The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this
Form 10-K.
MD&A includes the following sections:
 
  •  
Overview:
a summary of Intevac’s business, measurements and opportunities.
 
  •  
Results of Operations:
a discussion of operating results.
 
  •  
Liquidity and Capital Resources:
an analysis of cash flows, sources and uses of cash, and financial position.
 
  •  
Critical Accounting Policies and Estimates:
a discussion of estimates that that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.
Discontinued Operations
On December 30, 2021, the Company completed the sale of its Photonics business to EOTECH. As a result of the disposition, the results of operations from the Photonics reporting segment are reported as “Net income from discontinued operations, net of taxes” in the consolidated financial statements in Item 8 of this Annual Report. The Company has recast prior period amounts presented within this Annual Report to provide visibility and comparability.
Overview
Intevac 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”), photovoltaic (“PV”) solar cell, and advanced semiconductor packaging (“ASP”) industries. Intevac’s customers include manufacturers of hard disk media, DCPs and solar cells, and semiconductor outsourced assembly and test companies. Intevac operates in a single segment: Thin-film Equipment (“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, solar and ASP markets 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 equipment diversification into new markets by introducing new products, such as for a thin-film physical vapor deposition (“PVD”) application for protective coating for DCP manufacturing, a thin-film PVD application for PV solar cell manufacturing, and a PVD
fan-out
application for ASP. Intevac believes that expansion into these markets 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, cell phones, PV cells, and semiconductor chips as well as other factors such as global economic conditions and technological advances in fabrication processes.
 
Fiscal Year
   
        2021        
    
        2020        
    
Change

        2021 vs. 2020        
  
    
(in thousands, except percentages and per share amounts)
  
Net revenues
    $ 38,524     $ 52,128     $ (13,604 ) 
Gross profit
    $ 7,067     $ 22,417     $ (15,350 ) 
Gross margin percent
      18.3 %      43.0 %      (24.7) points  
Operating loss
    $ (22,476 )    $ (8,880 )    $ (13,596 ) 
Net loss from continuing operations
    $ (23,057 )    $ (10,435 )    $ (12,622 ) 
Net income from discontinued operations, net of tax
    $ 49,677     $ 11,491     $ 38,186  
Net income
    $ 26,620     $ 1,056     $ 25,564  
Net income per basic and diluted share
    $ 1.09     $ 0.04     $ 1.05  
 
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Fiscal 2020 financial results reflected a challenging environment, partially as a result of the
COVID-19
pandemic. In fiscal 2020, we recognized revenue on two 200 Lean HDD systems. Fiscal 2020 net income reflected lower net revenues and higher operating expenses, offset in part by higher contributions from gross margins. Higher selling general and administrative expenses resulted primarily from higher variable compensation expenses and incremental
e-commerce
costs to launch our Diamond Dog
e-commerce
website, which we subsequently discontinued in fiscal 2021. During fiscal 2020, we received $567,000 in government assistance related to
COVID-19
from the government of Singapore, of which $328,000 was reported as a reduction of cost of net revenues, $90,000 was reported as a reduction of research and development (“R&D”) expenses and $149,000 was reported as a reduction of selling, general and administrative expenses. During fiscal 2020, we did not recognize an income tax benefit on its U.S. net operating loss.
Fiscal 2021 financial results reflected a continued challenging environment. In fiscal 2021, we recognized revenue on our first MATRIX PVD system for ASP and sold the Photonics division and recognized a gain of $54.3 million and received cash of $70 million upon the closing of the transaction. Fiscal 2021 financial results for our continuing operations reflect a challenging environment as HDD equipment sales were lower than fiscal 2020 levels and we did not recognize revenue on any 200 Lean HDD systems compared to two 200 Lean HDD systems in fiscal 2020. During fiscal 2021, we recorded an $8.4 million inventory valuation write-down primarily related to our solar and Vertex inventory due to business conditions and lack of demand and $1.0 million accrual for settlement of the Private Attorneys General Act (“PAGA”) lawsuit. During fiscal 2021, we received $83,000 in government assistance related to
COVID-19
from the government of Singapore, of which $56,000 was reported as a reduction of cost of net revenues, $10,000 was reported as a reduction of R&D expenses and $17,000 was reported as a reduction of selling, general and administrative expenses. During fiscal 2021, we did not recognize an income tax benefit on its U.S. net operating loss.
Intevac expects that fiscal 2022 HDD equipment sales will be similar to fiscal 2021 levels as a customer is expected to take delivery of one 200 Lean HDD system in backlog during the fiscal year. During the first half of fiscal 2022, the Company plans to streamline its organization and is embarking on a corporate restructuring process that reflects our new single segment structure, which no longer will include the complexity of managing two substantially different business units within one company. We believe that these changes will position the Company for profitability and positive cash flow generation.
The Impact
of COVID-19
The impact of
COVID-19,
including changes in consumer behavior, pandemic fears, and market downturns, as well as restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. Although
COVID-19
vaccines are now broadly distributed and administered, there remains significant uncertainty concerning the magnitude of the impact and the duration of the
COVID-19
pandemic. As new strains of
COVID-19
develop, the continued impacts to our business could be material to our fiscal 2022 results. Further, the impacts of inflation on our business and the broader economy, which may be exacerbated by the economic recovery from the
COVID-19
pandemic, may also impact our financial condition and results of operations. Our customers may delay or cancel orders due to reduced demand, supply chain disruptions, and/or travel restrictions and border closures. We have experienced pandemic-related delays in our evaluation and development work. In response to
COVID-19,
we implemented initiatives to safeguard our employees, including work-from-home protocols. In June 2021, we began reopening our offices on a regional basis in accordance with local authority guidelines while ensuring that our return to work is thoughtful, prudent, and handled with a safety-first approach. All employees in the United States who could work from home did so through the middle of June 2021, when we fully reopened our offices as restrictions were lifted by the applicable authorities. All employees in Singapore that can do so continue to work remotely and will do so until restrictions are lifted by the applicable authorities in Singapore. Our employees’ health and safety is our top priority, and we will continue to monitor local restrictions across the world, the administration and efficacy of vaccines and the number of new cases.
In Singapore, Intevac received government assistance under the Job Support Scheme (“JSS”). The purpose of the JSS was to provide wage support to employers to help them retain their local employees. Under the JSS, Intevac received $83,000 and $567,000 in JSS grants in fiscal 2021 and fiscal 2020, respectively. Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we deferred the payment of the employer portion of payroll taxes in fiscal 2020 and received tax benefits from the employee retention tax credit. We repaid the first installment of the deferred payroll taxes at the end of fiscal 2021.
During both fiscal 2021 and fiscal 2020, the Company’s expenses included approximately $159,000, due to costs related to actions taken in response
to COVID-19.
 
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Results of Operations
Net revenues
 
    
2021
     
2020
     
Change

2021 vs. 2020
  
    
(in thousands)
  
Total net revenues
    $ 38,524      $ 52,128      $ (13,604 ) 
  
 
 
     
 
 
     
 
 
  
Net revenues consist primarily of sales of equipment used to manufacture thin-film disks, PV cells, DCPs, and advanced semiconductor packaging and related equipment.
The decrease in revenues in fiscal 2021 versus fiscal 2020 was due primarily to lower systems sales, as we only recognized revenue on one MATRIX PVD system for ASP and no 200 Lean HDD systems, offset in part by increases in revenue recognized on technology upgrades, service and spare parts. In fiscal 2020, we recognized revenue on two 200 Lean HDD systems, technology upgrades, service and spare parts.
Backlog
 
    
January 1, 2022
     
January 2, 2021
  
    
(in thousands)
  
Total backlog
    $ 24,725      $ 5,623  
  
 
 
     
 
 
  
Backlog at January 1, 2022 included one 200 Lean HDD system. Backlog at January 2, 2021 did not include any 200 Lean HDD systems.
Significant portions of Intevac’s revenues in any particular period have been attributable to sales to a limited number of customers. The following customers accounted for at least 10 percent of Intevac’s consolidated net revenues in fiscal 2021 and 2020.
 
    
2021
    
2020
  
Seagate Technology
      60 %      79 % 
Western Digital Corporation
      25 %      18 % 
Amkor Technology, Inc.
      10 %      *  
* Less than 10%
Revenue by geographic region
 
    
2021
     
2020
  
    
(in thousands)
  
United States
    $ 3,670      $ 6,450  
Asia
      31,004        45,611  
Europe
      3,850        67  
  
 
 
     
 
 
  
Total net revenues
    $ 38,524      $ 52,128  
  
 
 
     
 
 
  
International sales include products shipped to overseas operations of U.S. companies. The decrease in sales to the U.S. region in 2021 versus 2020 reflected lower HDD upgrade, spare and service sales to U.S. customers. Sales to the Asia region in 2021 did not include any systems, as compared to two 200 Lean HDD systems in 2020. Sales to the Europe region in 2021 included one MATRIX PVD system for ASP. Sales to the Europe region in 2020 were not significant.
 
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Gross margin
 
    
Fiscal Year
    
Change

2021 vs. 2020
  
    
2021
    
2020
  
    
(in thousands, except percentages)
  
Total gross profit
    $ 7,067     $ 22,417     $ (15,350 ) 
% of net revenues
      18.3 %      43.0 %   
Cost of net revenues consists primarily of purchased materials and also includes assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, provisions for inventory reserves and scrap.
Gross margin was 18.3% in fiscal 2021 compared to 43.0% in fiscal 2020. Fiscal 2021 gross margins declined over fiscal 2020 as a result of lower revenues and lower factory utilization. Fiscal 2021 gross margin reflected an $8.4 million inventory valuation write-down primarily related to our solar and Vertex inventory, as well as a lower margin on the first MATRIX PVD system for ASP that we have sold thus far. Gross margins will continue to vary depending on a number of factors, including product mix, product cost, system configuration and pricing, factory utilization, and provisions for excess and obsolete inventory.
Research and development
 
    
Fiscal Year
     
Change

2021 vs. 2020
  
    
2021
     
2020
  
    
(in thousands)
  
Research and development expense
    $ 12,176      $ 13,205      $ (1,029 ) 
Research and development expense consists primarily of salaries and related costs of employees engaged in, and prototype materials used in ongoing research, design and development activities for PV cell manufacturing equipment, DCP manufacturing equipment, HDD disk sputtering equipment, and semiconductor
Fan-out
equipment.
Research and development spending in fiscal 2021 decreased compared to fiscal 2020 due to lower spending on semiconductor
Fan-out,
DCP and PV development, offset in part by higher spending on HDD development.
Selling, general and administrative
 
    
Fiscal Year
     
Change

2021 vs. 2020
  
    
2021
     
2020
  
    
(in thousands)
  
Selling, general and administrative expense
    $ 17,367      $ 18,092      $ (725 ) 
Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. All domestic sales and the majority of international sales of HDD disk sputtering products in Asia are made through Intevac’s direct sales force. Intevac has offices in Singapore, Malaysia and China to support Intevac’s customers in Asia.
Selling, general and administrative expenses decreased in fiscal 2021 over the amount spent in fiscal 2020 due to lower variable compensation expenses and lower
e-commerce
costs but were offset in part by the $1.0 million accrual for settlement of the PAGA lawsuit, higher stock compensation expenses, higher legal expenses, and higher consulting expenses related to network security.
Cost reduction plans
During the third quarter of fiscal 2021, Intevac substantially completed implementation of the 2021 cost reduction plan (the “2021 Cost Reduction Plan”), which was intended to reduce expenses and reduce its workforce by 5.2 percent. The total cost of implementing the 2021 Cost Reduction Plan was $319,000, of which $224,000 was reported under cost of net revenues and
 
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Table of Contents
$95,000 was reported under operating expenses. Substantially all cash outlays in connection with the 2021 Cost Reduction Plan were completed in fiscal 2021. Implementation of the 2021 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses by approximately $2.0 million on an annual basis.
During the third quarter of fiscal 2020, Intevac substantially completed implementation of the 2020 cost reduction plan (the “2020 Cost Reduction Plan”), which was intended to reduce expenses and reduce its workforce by 1.0 percent. The total cost of implementing the 2020 Cost Reduction Plan was $103,000, of which $16,000 was reported under cost of net revenues and $87,000 was reported under operating expenses. Substantially all cash outlays in connection with the 2020 Cost Reduction Plan were completed in fiscal 2020. Implementation of the 2020 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses by approximately $864,000 on an annual basis.
Interest income and other income (expense), net
 
    
Fiscal Year
     
Change

2021 vs. 2020
  
    
2021
    
2020
  
    
(in thousands)
  
Interest income and other income (expense), net
    $ (6 )    $ 156      $ (162 ) 
Interest income and other income (expense), net in fiscal 2021 included $29,000 of interest income on investments, other income of $30,000 offset in part by $65,000 of foreign currency losses. Interest income and other income (expense), net in fiscal 2020 included $284,000 of interest income on investments offset in part by $139,000 of foreign currency losses. The decrease in interest income in 2021 over 2020 reflected lower interest rates on Intevac’s investments and lower invested balances.
Provision for income taxes
 
    
Fiscal Year
     
Change

2021 vs. 2020
  
    
2021
     
2020
  
    
(in thousands)
  
Provision for income taxes
    $ 575      $ 1,711      $ (1,136 ) 
Intevac’s effective tax rate from continuing operations was (2.6%) for fiscal 2021 and (19.6%) for fiscal 2020 and we recorded an income tax expense of $575,000 in fiscal 2021 and $1.7 million in fiscal 2020. 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 carryforwards and certain domestic tax credits. Intevac’s effective tax rate differs from the U.S. statutory rate in both fiscal 2021 and fiscal 2020 primarily due to the Company not recognizing an income tax benefit on the domestic loss.
The income tax expense for fiscal 2021 and fiscal 2020 was largely the result of foreign withholding taxes and income taxes in foreign jurisdictions. We did not recognize income tax expense on the gain from the sale of Photonics. The gain for federal purposes was offset by net operating losses. In California we used tax credits to offset the tax due on the gain.
During 2019 the Company received an unfavorable decision on its appeal to a tax audit in Singapore. Management determined that the Company could no longer support a more likely than not position. Accordingly, the Company recorded a charge of $732,000 in provision for income taxes. During 2020 the Company appealed the decision to the Singapore High Court, which was denied. Management decided not to pursue additional appeals and the matter is fully settled. Presently, there are no other active income tax examinations in the jurisdictions where Intevac operates.
We assess the likelihood that our deferred tax assets will be recovered based upon our consideration of many factors, including the current economic climate, our expectations of future taxable income, and our ability to project such income. We maintain a full valuation allowance for our U.S. deferred tax assets due to uncertainty regarding their realization as of January 1, 2022.
 
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Discontinued operations
 
    
Fiscal Year
     
Change

2021 vs. 2020
  
    
2021
     
2020
  
    
(in thousands)
  
Income from discontinued operations, net of tax
    $ 49,677      $ 11,491      $ 38,186  
Income from discontinued operations consists primarily of the results of operations of the Photonics business which was sold to EOTECH on December 30, 2021. Income from discontinued operations in fiscal 2021 increased to $49.7 million as compared to net income of $11.5 million in fiscal 2020 primarily due to the gain on the sale of the Photonics business of $54.3 million, partially offset by the loss from the Photonics division, net of tax, which includes $2.6 million of asset impairment and restructuring charges related to impairment on the
right-of-use
(“ROU”) asset, lease exit costs associated with a rent subsidy provided to EOTECH and employee termination costs.
Revenues declined 39% as compared to the prior year primarily as a result of lower product sales revenues and lower contract R&D work. Development work on the multi-year IVAS contract award for the development and production of digital night-vision cameras to support the U.S. Army’s Integrated Visual Augmentation System (“IVAS”) program completed in early 2021. Gross margins declined from 39.7% in fiscal 2020 to 23.6% in fiscal 2021 due to lower revenue levels, incremental
start-up
costs for
non-recurring
engineering associated with the first shipments of the IVAS product and lower margins on contract R&D work primarily due to additional development costs on the IVAS program. R&D spending increased from $888,000 in fiscal 2020 to $2.7 million in fiscal 2021, primarily related to incremental
start-up
non-recurring
engineering costs associated with the IVAS product and higher spending on the development of the next generation of the low light level CMOS camera. Selling, general and administrative expense increased from $5.8 million in fiscal 2020 to $5.9 million in fiscal 2021, primarily related to higher bid and proposal costs, offset in part by lower variable compensation costs.
Upon the closing of the sale of the Photonics business on December 30, 2021, we received initial gross proceeds of $70.0 million. In January 2022, we delivered to EOTECH a draft closing statement that would reduce the working capital portion of the purchase price by $74,000. As a result, we have recognized a gain on the sale of $54.3 million computed as $70 million initial gross proceeds less (i) the potential $74,000 post closing adjustment, (ii) the carrying value of the assets and liabilities of $12.4 million transferred in the transaction and (iii) $3.2 million in transaction-related costs.
Liquidity and Capital Resources
At January 1, 2022, Intevac had $121.2 million in cash, cash equivalents, restricted cash and investments compared to $50.4 million at January 2, 2021. During fiscal 2021, cash, cash equivalents, restricted cash and investments increased by $70.8 million due primarily to the sale of the Photonics division, cash generated by operating activities and cash received from the sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans, offset in part by cash used for purchases of fixed assets and tax payments related to the net share settlement of restricted stock units.
Cash, cash equivalents, restricted cash and investments consist of the following:
 
    
January 1, 2022
     
January 2, 2021
  
    
(in thousands)
  
Cash and cash equivalents
    $ 102,728      $ 29,341  
Restricted cash
      786        787  
Short-term investments
      10,221        14,839  
Long-term investments
      7,427        5,388  
  
 
 
     
 
 
  
Total cash, cash-equivalents, restricted cash and investments
    $  121,162      $  50,355  
  
 
 
     
 
 
  
Cash generated by operating activities totaled $278,000 in fiscal 2021 compared to $8.9 million in fiscal 2020. Lower operating cash flow in fiscal 2021 was a result of a larger loss recognized from continuing operations.
Accounts receivable totaled $14.3 million at January 1, 2022 and $28.6 million at January 2, 2021. The number of days outstanding for Intevac’s accounts receivable was 90 at January 1, 2022 compared to 83 at January 2, 2021. Net inventories totaled $5.8 million at January 1, 2022 compared to $21.7 million at January 2, 2021. During fiscal 2021, we recorded an
 
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$8.4 million inventory valuation write-down primarily on our solar and Vertex inventory due to business conditions and lack of demand. Inventory turns were 0.8 in fiscal 2021 and were 0.4 in fiscal 2020. Accounts payable increased to $5.3 million at January 1, 2022 compared to $4.3 million at January 2, 2021 and included a payable of $2.0 million as a commission to the investment banker for the Photonics sale. Other accrued liabilities were $3.7 million at January 1, 2022 and $3.6 million at January 2, 2021 and included a $1.0 million accrual for the settlement of the PAGA lawsuit. Accrued payroll and related liabilities decreased to $5.5 million at January 1, 2022 compared to $7.7 million at January 2, 2021 as a result of lower variable compensation accruals. Customer advances increased from $33,000 at January 2, 2021 to $2.1 million at January 1, 2022 as a result of recognition of new orders. Other long term liabilities decreased to $363,000 at January 1, 2022 compared to $457,000 at January 2, 2021 as a result of the payment of the first installment of the deferred payroll tax liabilities under the CARES Act.
Investing activities generated cash of $71.2 million in fiscal 2021 and $599,000 in fiscal 2020. Proceeds from the sale of the assets that comprised the Photonics business totaled $70.0 million in fiscal 2021. Proceeds from sales and maturities of investments net of purchases of investments, totaled $2.4 million in fiscal 2021 and $2.0 million in fiscal 2020, respectively. Capital expenditures were $1.2 million in fiscal 2021, and $2.6 million in fiscal 2020.
Financing activities generated cash of $1.9 million in fiscal 2021 and $1.1 million in fiscal 2020. The sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans provided $2.6 million in fiscal 2021 and $1.9 million in fiscal 2020. Tax payments related to the net share settlement of restricted stock units were $734,000 in fiscal 2021 and $402,000 in fiscal 2020. In November 2013, Intevac’s Board of Directors approved a stock repurchase program authorizing up to $30 million in repurchases. On August 15, 2018, Intevac’s Board of Directors approved a $10.0 million increase to the original stock repurchase program authorizing up to $40.0 million in repurchases. Cash used to repurchase common stock totaled $0 and $393,000 in fiscal 2021 and fiscal 2020, respectively.
Intevac’s investment portfolio consists principally of investment grade money market mutual funds, U.S. treasury and agency securities, asset backed securities, certificates of deposit, commercial paper, municipal bonds and corporate bonds. Intevac regularly monitors the credit risk in its investment portfolio and takes measures, which may include the sale of certain securities, to manage such risks in accordance with its investment policies.
As of January 1, 2022, approximately $25.0 million of cash and cash equivalents and $3.4 million of investments were domiciled in foreign tax jurisdictions. Intevac expects a significant portion of these funds to remain offshore in the short term. If the Company chose to repatriate these funds to the United States, it would be required to accrue and pay additional taxes on any portion of the repatriation subject to foreign withholding taxes.
We believe that our existing cash, cash equivalents and investments and cash flows from operating activities will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. Our significant funding requirements include procurement of manufacturing inventories, operating expenses,
non-cancelable
operating lease obligations, capital expenditures and variable compensation. We have flexibility over some of these uses of cash, including capital expenditures and discretionary operating expenses, to preserve our liquidity position. Capital expenditures for fiscal 2022 are projected to be approximately $4.4 million related to network infrastructure and security, and laboratory and test equipment to support our R&D programs.
Off-Balance
Sheet Arrangements
Off-balance
sheet firm commitments relating to outstanding letters of credit amounted to approximately $786,000 as of January 1, 2022. These letters of credit and bank guarantees are collateralized by $786,000 of restricted cash. We do not maintain any other
off-balance
sheet arrangements, transactions, obligations, or other relationships that would be expected to have a material current or future effect on the consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies. Note that these critical accounting policies and estimates relate solely to our continuing operations. The accounting policies related to our discontinued operations are discussed in Note 2, “Divestiture and Discontinued Operations,” to our consolidated financial statements.
 
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A critical accounting policy is defined as one that is both material to the presentation of Intevac’s consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Intevac’s financial condition or results of operations. Specifically, these policies have the following attributes: (1) Intevac is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Intevac could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Intevac’s financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. Intevac bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Intevac’s operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in the section above entitled “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Intevac’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America and provide a meaningful presentation of Intevac’s financial condition and results of operations.
Management believes that the following are critical accounting policies:
Revenue Recognition
A majority of our equipment sales revenue, which includes systems, technology upgrades, service and spare parts is recognized when products are shipped from our manufacturing facilities. We recognize revenue for equipment sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Intevac recognizes revenue in certain circumstances before delivery has occurred (commonly referred to as bill and hold transactions). In such circumstances, among other things, risk of ownership has passed to the customer, the customer has made a written fixed commitment to purchase the finished goods, the customer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by Intevac. For these transactions, the finished goods are segregated from inventory and normal billing and credit terms granted. Our contracts with customers may include multiple performance obligations. Under the revenue standard we allocate revenue for such arrangements to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or by using expected cost plus margin. The expected costs associated with our base warranties are recognized as expense when the equipment is sold.
Inventories
Inventories are valued using average actual costs and are stated at the lower of cost or net realizable value. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the net realizable value based upon assumptions about future demand. Intevac evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material adverse effect on Intevac’s business, financial condition and results of operations.
Warranty
Intevac estimates the costs that may be incurred under the warranty it provides and records a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Intevac’s warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. As Intevac’s customer service engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.
 
27
Table of Contents
Income Taxes
Intevac accounts for income taxes by recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that its future taxable income will not be sufficient to realize its entire deferred tax assets.
In determining whether to establish or maintain a valuation allowance against a deferred tax asset, the Company reviews available evidence to determine whether it is more likely than not that all or a portion of the Company’s net deferred tax assets will be realized in future periods. Consideration is given to various positive and negative factors that could affect the realization of the net deferred tax assets. In making such a determination, the Company considers, among other things, future reversals of existing taxable temporary differences, projected future taxable income,
tax-planning
strategies, historical financial performance, the length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region,
non-tax
deductible expenses and availability of tax credits. Management carefully monitors the changes in many factors and adjusts the effective income tax rate as required. If actual results differ from these estimates, Intevac could be required to record additional valuation allowances on deferred tax assets or adjust its effective income tax rate, which could have a material adverse effect on Intevac’s business, financial condition and results of operations.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Intevac’s expectations could have a material impact on Intevac’s results of operations and financial condition.
Equity-Based Compensation
Intevac records compensation expense for equity-based awards using the Black-Scholes option pricing model. This model requires Intevac to estimate the expected volatility of the price of Intevac’s common stock and the expected life of the equity-based awards. Estimating volatility and expected life requires significant judgment and an analysis of historical data. Intevac accounts for forfeitures as they occur rather than estimating expected forfeitures. Intevac may have to increase or decrease compensation expense for equity-based awards if actual results differ significantly from Intevac’s estimates.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
 
28
Table of Contents
Item 8.
Financial Statements and Supplementary Data
INTEVAC, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
Contents
 
    
Page
  
     30  
     32  
     33  
     34  
     35  
     36  
     37  
 
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Intevac, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Intevac, Inc. (a Delaware corporation) and its subsidiaries (the “Company”) as of January 1, 2022 and January 2, 2021, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended January 1, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for each of the two years in the period ended January 1, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of January 1, 2022, based on criteria established in
Internal Control—Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 17, 2022, expressed an unqualified opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory Valuation—Adjustments for Excess or Obsolete Inventories
As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated inventories balance was $5.8 million as of January 1, 2022. The Company’s inventories are valued using average actual costs and are stated at the lower of cost or net realizable value. The Company adjusts the carrying value of inventories for estimated excess quantities and obsolescence equal to the difference between the costs of inventories and the net realizable value based upon assumptions about future demand, market conditions and product life expectancy. If actual demand were to be substantially lower than estimated, there could be a significant adverse impact on the carrying value of inventories and results of operations.
The principal considerations for our determination that performing procedures relating to net realizable value adjustments to inventories is a critical audit matter are the significant amount of judgement by management in developing the assumptions of the forecasted product demand, which in turn led to significant auditor judgement, subjectivity, and effort in performing audit procedures and evaluating audit evidence relating to the forecasted product demand. Additionally, for certain new product launches there may be limited historical data with which to evaluate forecasts.
 
30
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of internal controls relating to management’s adjustments for excess or obsolete inventories, including internal controls over the development of assumptions related to forecasted product demand. The procedures also included, among others, testing management’s process for developing the estimate of the adjustments for excess or obsolete inventories, testing the completeness and accuracy of the underlying data used in the estimate, and evaluating management’s assumptions of forecasted product demand. Evaluating management’s demand forecast for reasonableness involved considering historical sales by product, comparing prior period estimates to actual results of the same period, and determining whether the demand forecast used was consistent with evidence obtained in other areas of the audit.
Revenue Recognition—Determination of Total Estimated Contract Costs for Fixed-price Contracts
As described in Notes 1 and 2 to the consolidated financial statements, $11.7 million of the Company’s total consolidated net revenues for the year ended January 1, 2022 was generated from fixed-price contracts (also known as cost plus
fixed-fee
and firm fixed-price contracts), as reported in discontinued operations for technology development revenues. The Company recognizes revenue for these fixed-price contracts over time under the
cost-to-cost
measure of progress method as it best depicts the transfer of control of assets to the customer, which occurs as it incurs costs. Accounting for these contracts involves the use of various techniques to estimate total contract costs. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include the complexity of the work to be performed; the cost and availability of materials; and the performance of engineers and subcontractors. As a significant change in one or more of these estimates could affect the profitability of the contracts, the Company reviews and updates its contract-related estimates regularly.
The principal considerations for our determination that performing procedures relating to the determination of the total estimated contract costs for fixed-price contracts is a critical audit matter are the significant amount of judgement required by management in determining the total estimated contract costs for fixed-price contracts, which in turn led to significant auditor judgement, subjectivity, and effort in performing audit procedures and in evaluating audit evidence relating the total estimated contract costs for fixed-price contracts used to calculate the
cost-to-cost
measure of progress.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of internal controls relating to the revenue recognition process, including internal controls over the determination of total estimated contract costs for fixed-price contracts. These procedures also included, among others, testing management’s process for developing the estimate of total estimated contract costs for a sample of contracts, which included evaluating the contract terms and other documents that support those estimates, performing inquiries with the project managers and others directly involved with the contracts to evaluate project status and project needs which may affect total estimated cost to complete, and testing of the underlying contract costs; assessing management’s ability to reasonably estimate total contract costs by performing a comparison of the actual total estimated contract costs as compared with prior period estimates, including the timely identification of circumstances that may warrant a modification to the total estimated contract costs; and evaluating, for certain contracts, management’s methodologies and assessing the consistency of management’s approach over the life of the contract.
 
/s/ BPM LLP
We have served as the Company’s auditor since 2015.
San Jose, California
February 17, 2022
 
31
INTEVAC, INC.
CONSOLIDATED BALANCE SHEETS
 
    
January 1,
2022
    
January 2,
2021
  
    
(In thousands, except
par value)
  
ASSETS
             
Current assets:
                 
Cash and cash equivalents
    $ 102,728     $ 29,341  
Short-term investments
      10,221       14,839  
Trade and other accounts receivable, net of allowances of $0 at both January 1, 2022 and January 2, 2021
      14,261       28,646  
Inventories
      5,791       21,689  
Prepaid expenses and other current assets
      1,827       1,893  
    
 
 
    
 
 
  
Total current assets
      134,828       96,408  
Property, plant and equipment, net
      4,759       11,004  
Operating lease
right-of-use
assets
      4,520       8,165  
Long-term investments
      7,427       5,388  
Restricted cash
      786       787  
Deferred income taxes and other long-term assets
      5,449       5,486  
    
 
 
    
 
 
  
Total assets
    $ 157,769     $ 127,238  
    
 
 
    
 
 
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Current liabilities:
                 
Current operating lease liabilities
    $ 3,119     $ 2,853  
Accounts payable
      5,320       4,259  
Accrued payroll and related liabilities
      5,505       7,679  
Other accrued liabilities
      3,665       3,598  
Customer advances
      2,107       33  
    
 
 
    
 
 
  
Total current liabilities
      19,716       18,422  
Noncurrent liabilities:
                 
Noncurrent operating lease liabilities
      3,675       6,803  
Other long-term liabilities
      363       457  
    
 
 
    
 
 
  
Total noncurrent liabilities
      4,038       7,260  
Commitments and contingencies
                 
Stockholders’ equity:
                 
Undesignated preferred stock, $0.001 par value, 10,000 shares authorized,
no
shares issued and outstanding
      —       —  
Common stock, $0.001 par value:
                 
Authorized shares — 50,000 issued and outstanding shares — 24,636 and 23,874 at January 1, 2022 and January 2, 2021, respectively
      25       24  
Additional
paid-in
capital
      199,073       193,173  
Treasury stock, 5,087 shares at both January 1, 2022 and January 2, 2021
      (29,551 )      (29,551 ) 
Accumulated other comprehensive income
      578       640  
Accumulated deficit
      (36,110 )      (62,730 ) 
    
 
 
    
 
 
  
Total stockholders’ equity
      134,015       101,556  
    
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 157,769     $ 127,238  
    
 
 
    
 
 
  
See accompanying notes.
 
32
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
    
Year Ended,
  
    
January 1,
2022
    
January 2,
2021
  
    
(In thousands, except per share
amounts)
  
Net revenues
    $ 38,524     $ 52,128  
Cost of net revenues
      31,457       29,711  
    
 
 
    
 
 
  
Gross profit
      7,067       22,417  
Operating expenses:
                 
Research and development
      12,176       13,205  
Selling, general and administrative
      17,367       18,092  
    
 
 
    
 
 
  
Total operating expenses
      29,543       31,297  
    
 
 
    
 
 
  
Operating loss
      (22,476 )      (8,880 ) 
    
 
 
    
 
 
  
Interest income
      29       284  
Other income (expense), net
      (35 )      (128 ) 
    
 
 
    
 
 
  
Loss from continuing operations before provision for income taxes
      (22,482 )      (8,724 ) 
Provision for income taxes
      575       1,711  
    
 
 
    
 
 
  
Net loss from continuing operations
      (23,057 )      (10,435 ) 
    
 
 
    
 
 
  
Income from discontinued operations:
                 
Income (loss) from Photonics division, net of tax
      (4,664 )      11,491  
Gain on sale of Photonics division, net of tax
      54,341       —    
    
 
 
    
 
 
  
Total income from discontinued operations, net of tax
      49,677       11,491  
    
 
 
    
 
 
  
Net income
    $ 26,620     $ 1,056  
    
 
 
    
 
 
  
Net income (loss) per share:
                 
Basic and diluted—continuing operations
    $ (0.95 )    $ (0.44 ) 
Basic and diluted—discontinued operations
    $ 2.04     $ 0.49  
Basic and diluted—net income
    $ 1.09     $ 0.04  
Weighted average shares outstanding:
                 
Basic and diluted
      24,348       23,669  
 
See accompanying notes.
 
33
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
    
Year Ended,
  
    
January 1,
2022
    
January 2,
2021
  
    
(In thousands)
  
Net income
    $ 26,620     $ 1,056  
Other comprehensive income (loss), before tax
                 
Change in unrealized net gain on
available-for-sale
investments
      (68 )      (5 ) 
Foreign currency translation gains
      6       221  
    
 
 
    
 
 
  
Other comprehensive income (loss), before tax
      (62 )      216  
Income tax expense related to items in other comprehensive income (loss)
      —         —    
    
 
 
    
 
 
  
Other comprehensive income (loss), net of tax
      (62 )      216  
    
 
 
    
 
 
  
Comprehensive income
    $ 26,558     $ 1,272  
    
 
 
    
 
 
  
 
 
 
See accompanying notes.
 
34
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
 
   
Common Stock
    
Additional
Paid-In

Capital
    
Treasury Stock
    
Accumulated
Other
Comprehensive

Income
    
Accumulated

Deficit
    
Total
Stockholders’

Equity
  
   
Shares
    
Amount
    
Shares
    
Amount
  
Balance at December 28, 2019
     23,346     $ 23     $ 188,290       4,989     $ (29,158 )    $ 424     $ (63,786 )    $ 95,793  
Shares issued in connection with:
                                                                
Exercise of stock options
     67       —         326       —         —         —         —         326  
Settlement of RSUs
     244       —         —         —         —         —         —         —    
Employee stock purchase plan
     392       1       1,570       —         —         —         —         1,571  
Shares withheld in connection with net share settlement of RSUs
     (77 )      —         (402 )      —         —         —         —         (402 ) 
Equity-based compensation expense
     —         —         3,389       —         —         —         —         3,389  
Net income
     —         —         —         —         —         —         1,056       1,056  
Other comprehensive income
     —         —         —         —         —         216       —         216  
Common stock repurchases
     (98 )      —         —         98       (393 )      —         —         (393 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at January 2, 2021
     23,874     $ 24     $ 193,173       5,087     $ (29,551 )    $ 640     $ (62,730 )    $ 101,556  
Shares issued in connection with:
                                                                
Exercise of stock options
     76       —         440       —         —         —         —         440  
Settlement of RSUs
     383       —         —         —         —         —         —         —    
Employee stock purchase plan
     435       1       2,191       —         —         —         —         2,192  
Shares withheld in connection with net share settlement of RSUs
     (132 )      —         (734 )      —         —         —         —         (734 ) 
Equity-based compensation expense
     —         —         4,003       —         —         —         —         4,003  
Net income
     —         —         —         —         —         —         26,620       26,620  
Other comprehensive loss
     —         —         —         —         —         (62 )      —         (62 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at January 1 2022
     24,636     $ 25     $ 199,073       5,087     $ (29,551 )    $ 578     $ (36,110 )    $ 134,015  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
See accompanying notes.
 
35
INTEVAC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
Year Ended
  
    
January 1
2022
    
January 2,
2021
  
    
(In thousands)
  
Operating activities
                 
Net income
    $ 26,620     $ 1,056  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
                 
Depreciation and amortization
      3,456       3,206  
Net amortization (accretion) of investment premiums and discounts
      109       12  
Amortization of intangible assets
      —         274  
Gain on sale of Photonics division
      (54,341 )      —    
Asset impairment charges
      1,246       —    
Equity-based compensation
      4,003       3,389  
Straight-line rent adjustment and amortization of lease incentives
      (463 )      (286 ) 
Deferred income taxes
      25       917  
Changes in assets and liabilities:
                 
Accounts receivable
      10,850       (27 ) 
Inventories
      9,597       3,218  
Prepaid expenses and other assets
      6       (462 ) 
Accounts payable
      (932 )      60  
Accrued payroll and other accrued liabilities
      (1,972 )      1,467  
Customer advances
      2,074       (3,974 ) 
    
 
 
    
 
 
  
Total adjustments
      (26,342 )      7,794  
    
 
 
    
 
 
  
Net cash and cash equivalents provided by operating activities
      278       8,850  
Investing activities
                 
Purchase of investments
      (17,148 )      (23,342 ) 
Proceeds from sales and maturities of investments
      19,550       25,355  
Proceeds from sale of Photonics division
      70,000       —    
Purchase of leasehold improvements and equipment
      (1,198 )      (2,612 ) 
    
 
 
    
 
 
  
Net cash and cash equivalents provided by (used in) investing activities
      71,204       (599 ) 
Financing activities
                 
Proceeds from issuance of common stock
      2,632       1,897  
Common stock repurchases
      —         (393 ) 
Taxes paid related to net share settlement
      (734 )      (402 ) 
    
 
 
    
 
 
  
Net cash and cash equivalents provided by financing activities
      1,898       1,102  
Effect of exchange rate changes on cash
      6       221  
    
 
 
    
 
 
  
Net increase in cash, cash equivalents and restricted cash
      73,386       9,574  
Cash, cash equivalents and restricted cash at beginning of period
      30,128       20,554  
    
 
 
    
 
 
  
Cash, cash equivalents and restricted cash at end of period
    $ 103,514     $ 30,128  
    
 
 
    
 
 
  
Cash paid (received) for:
                 
Income taxes
    $ 559     $ 850  
Income tax refund
    $ (18 )    $ (157 ) 
See accompanying notes.
 
36
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Intevac, Inc. and its subsidiaries (Intevac, the Company or we) after elimination of inter-company balances and transactions.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Fiscal Year End Date
Intevac operates under a
52-53
week fiscal year ending on the Saturday nearest to December 31 of each year in order to improve the alignment of financial and business processes and to streamline financial reporting. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to December 31. The Company’s fiscal 2021 and fiscal 2020 years ended on January 1, 2022 and January 2, 2021, respectively.
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”) segment, designs, develops and markets vacuum process equipment solutions for high-volume manufacturing of small substrates with precise thin-film properties, such as for the hard drive, solar cell, display cover panel (“DCP”) and advanced semiconductor packaging (“ASP”) industries, as well as other adjacent thin-film markets.
Reclassification of Prior Periods
On December 30, 2021, the Company completed the sale of its Photonics business to EOTECH, LLC, a Michigan limited liability company (“EOTECH”), in exchange for (i) $70.0 million in cash consideration (as may be increased or decreased by certain closing net working capital adjustments), (ii) up to $30.0 million in earnout payments and (iii) the assumption by EOTECH of certain liabilities of the Photonics business.
Due to the sale of the Photonics business during the fourth quarter of 2021, we have classified the results of the Photonics business as discontinued operations in our consolidated statements of income for all periods presented. All amounts included in the Notes to Consolidated Financial Statements relate to continuing operations unless otherwise noted.
Cash, Cash Equivalents and Investments
Intevac considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Available-for-sale
securities, comprised of certificates of deposit, commercial paper, obligations of the U.S. government and its agencies, corporate debt securities, asset backed securities and municipal bonds, are carried at fair value, with unrealized gains and losses recorded within other comprehensive income (loss) as a separate component of stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary, if any, on
available-for-sale
securities are included in earnings. Purchases and sales of investment securities are recognized on a trade date basis. The cost of investment securities sold is determined by the specific identification method.
Restricted Cash
Restricted cash of $600,000 as of January 1, 2022 secures a standby letter of credit obligation associated with a lease obligation and the restriction on the cash will be removed when the letter of credit expires. In addition, Intevac pledged $186,000 as collateral for various guarantees with its bank.
 
37
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
Derivative Instruments and Hedging Arrangements
Foreign Exchange Exposure Management
 — Intevac enters into forward foreign currency contracts that economically hedge the gains and losses generated by the
re-measurement
of certain recorded assets and liabilities in a
non-functional
currency and to offset certain operational exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Singapore dollar. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Changes in the fair value of these undesignated hedges are recognized in other income (expense), net immediately as an offset to the changes in the fair value of the asset or liability being hedged.
Fair Value Measurement—Definition and Hierarchy
Intevac reports certain financial assets and liabilities at fair value. Intevac defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1
—Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2
—Valuations based on other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
—Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
Trade Accounts Receivables and Doubtful Accounts
Intevac evaluates the collectibility of trade accounts receivable on an ongoing basis and provides reserves against potential losses when appropriate. Management analyzes historical bad debts, customer concentrations, customer creditworthiness, changes in customer payment tendencies and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Customer accounts are written off against the allowance when the amount is deemed uncollectible.
Inventories
Inventories are generally stated at the lower of cost or net realizable value, with cost determined on an average cost basis.
Property, Plant and Equipment
Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: computers and software, 3 years; machinery and equipment, 5 years; furniture, 7 years; vehicles, 4 years; and leasehold improvements, remaining lease term.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable finite-lived intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value.
 
38
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Income Taxes
Intevac accounts for income taxes by recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.
In determining whether to establish or maintain a valuation allowance against a deferred tax asset, the Company reviews available evidence to determine whether it is more likely than not that all or a portion of the Company’s net deferred tax assets will be realized in future periods. Consideration is given to various positive and negative factors that could affect the realization of the net deferred tax assets. In making such a determination, the Company considers, among other things, future reversals of existing taxable temporary differences, projected future taxable income,
tax-planning
strategies, historical financial performance, the length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The effective tax rate is highly dependent upon the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carryforwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Intevac carefully monitors the changes in many factors and adjust its effective income tax rate on a timely basis. If actual results differ from the estimates, this could have a material effect on Intevac’s business, financial condition and results of operations.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Intevac’s expectations could have a material effect on Intevac’s business, financial condition and results of operations.
Intevac recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes.
Sales and Value Added Taxes
Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.
Revenue Recognition
A majority of our equipment sales revenue, which includes systems, technology upgrades, service and spare parts is recognized when products are shipped from our manufacturing facilities. We recognize revenue for equipment sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Intevac recognizes revenue in certain circumstances before delivery has occurred (commonly referred to as bill and hold transactions). In such circumstances, among other things, risk of ownership has passed to the customer, the customer has made a written fixed commitment to purchase the finished goods, the customer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by Intevac. For these transactions, the finished goods are segregated from inventory and normal billing and credit terms granted. Our contracts with customers may include multiple performance obligations. For such arrangements, under the revenue standard we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or by using expected cost plus margin. Under the revenue standard, the expected costs associated with our base warranties are recognized as expense when the equipment is sold.
Government Grants and Credits
The Company generally records grants from governmental agencies related to income as a reduction in operating expense. Grants are recognized when there is reasonable assurance that the Company will comply with the conditions attached to the
 
39
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
grant arrangement and the grant will be received. Reimbursements of eligible expenditures pursuant to government assistance programs are recorded as reductions of operating costs when the related costs have been incurred and there is reasonable assurance regarding collection of the claim. Grant claims not settled by the balance sheet date are recorded as receivables, provided their receipt is reasonably assured. The
determination
of the amount of the claim, and accordingly the receivable amount, requires management to make calculations based on its interpretation of eligible expenditures in accordance with the terms of the programs. The reimbursement claims submitted by the Company are subject to review by the relevant government agencies. In Singapore, Intevac receives government assistance under the Job Support Scheme (“JSS”). During fiscal 2021, the Company received $83,000 in JSS grants, of which $56,000 is reported as a reduction of cost of net revenues, $10,000 is reported as a reduction of research and development (“R&D”) expenses and $17,000 is reported as a reduction of selling, general and administrative expenses on the consolidated statements of income. During fiscal 2020, the Company received $567,000 in JSS grants of which $328,000 is reported as a reduction of cost of net revenues, $90,000 is reported as a reduction of R&D expenses and $149,000 is reported as a reduction of selling, general and administrative expenses on the consolidated statements of income.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were not material for all periods presented.
Foreign Currency Translation
The functional currency of Intevac’s foreign subsidiaries in Singapore and Hong Kong and the Taiwan branch is the U.S. dollar. The functional currency of Intevac’s foreign subsidiaries in China, Malaysia and Korea is the local currency of the country in which the respective subsidiary operates. Assets and liabilities recorded in foreign currencies are translated at
year-end
exchange rates; revenues and expenses are translated at average exchange rates during the year. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. The effects of foreign currency transactions are included in other income (expense), net in the determination of net income. Losses from foreign currency transactions were $65,000 and $139,000 in 2021 and 2020, respectively.
Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, were as follows for the years ended January 1, 2022 and January 2, 2021:
 
    
Foreign
    currency    
     
Unrealized holding
gains (losses) on
available-for-sale

investments
    
    Total    
  
    
(in thousands)
  
Balance at December 28, 2019
    $             381      $                     43     $             424  
    
 
 
     
 
 
    
 
 
  
Other comprehensive income (loss) before reclassification
      221        (5 )      216  
Amounts reclassified from other comprehensive income (loss)
      —          —         —    
    
 
 
     
 
 
    
 
 
  
Net current-period other comprehensive income (loss)
      221        (5 )      216  
    
 
 
     
 
 
    
 
 
  
Balance at January 2, 2021
      602        38       640  
    
 
 
     
 
 
    
 
 
  
Other comprehensive income (loss) before reclassification
      6        (68 )      (62 ) 
Amounts reclassified from other comprehensive income (loss)
      —            —       —    
    
 
 
     
 
 
    
 
 
  
Net current-period other comprehensive income (loss)
      6        (68 )      (62 ) 
    
 
 
     
 
 
    
 
 
  
Balance at January 1, 2022
    $ 608      $ (30 )    $ 578  
    
 
 
     
 
 
    
 
 
  
 
40
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Employee Stock Plans
Intevac has equity-based compensation plans that provide for the grant to employees of equity-based awards, including 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. In addition, these plans provide for the grant of
non-statutory
stock options and RSUs to
non-employee
directors and consultants. Intevac also has an employee stock purchase plan, which provides Intevac’s employees with the opportunity to purchase Intevac common stock at a discount through payroll deductions. See Note 4 for a complete description of these plans and their accounting treatment.
Recent Accounting Pronouncements Not Yet Adopted
In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2021-10,
Disclosures by Business Entities about Government Assistance
, which requires business entities to disclose information about certain government assistance they receive. Such disclosure requirements include the nature of the transactions and the related accounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item and significant terms and conditions of the transactions. This update becomes effective in the first quarter of fiscal 2023. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU
2021-08,
Business Combinations (Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers
, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. This update becomes effective in the first quarter of fiscal 2023. Early adoption is permitted. We are currently assessing how the adoption of this standard will impact our consolidated financial statements.
In March 2020, the FASB issued ASU
2020-04,
Reference Rate Reform (Topic 848)
. This ASU provides optional expedients and exceptions for applying U.S. generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. Adoption of the expedients and exceptions is permitted upon issuance of this update through December 31, 2022. The FASB also issued ASU
2021-01,
Reference Rate Reform (Topic 848): Scope
in January 2021. It clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition. The amendments in this ASU affect the guidance in ASU
2020-04
and are effective in the same timeframe as ASU
2020-04.
We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments—Credit Losses (Topic 326).
This ASU amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more-timely recognition of losses. This update becomes effective and will be adopted by Intevac in the first quarter of fiscal 2023. We are currently assessing how the adoption of this standard will impact our consolidated financial statements.
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, governing the sale of the Company’s Photonics business to EOTECH in exchange for (i) $70.0 million in cash consideration (as may be increased or decreased by certain closing net working capital adjustments), (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 has 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. 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 this disposition will allow it to benefit from a streamlined business model, simplified operating structure, and enhanced management focus.
 
41
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
In connection with the Photonics sale, the Company and EOTECH have entered into a Transition Service Agreement (“TSA”) and a Lease Assignment Agreement. The TSA outlines the information technology, people, and facility support the parties will provide to each other for a period anticipated to be up to six months 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 the EOTECH’s lease payments through the remainder of the lease term which expires in March 2024.
The following table summarizes the components of the gain on sale of the Photonics segment (in thousands):
 
Cash proceeds
    $ 70,000  
Working capital adjustment
      (74 ) 
    
 
 
  
       69,926  
Assets sold:
         
Accounts receivable
      3,535  
Inventories
      6,301  
Other current assets
      72  
Property, plant and equipment
      3,987  
    
 
 
  
Total assets sold
      13,895  
Liabilities divested:
         
Accounts payable
      888  
Other accrued expenses
      594  
    
 
 
  
Total liabilities divested
      1,482  
Transaction and other costs
      (3,172 ) 
    
 
 
  
Gain on sale
    $ 54,341  
    
 
 
  
Discontinued operations
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 consolidated statements of income for the years ended January 1, 2022 and January 2, 2021.
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 (in thousands):
 
    
Year Ended,
  
    
January 1,
2022
     
January 2,
2021
  
    
(In thousands, except per share amounts)
  
Net revenues:
                  
Systems and components
    $ 15,932      $ 22,751  
Technology development
      11,735        22,945  
    
 
 
     
 
 
  
Total net revenues
      27,667        45,696  
Cost of net revenues:
                  
Systems and components
      12,252        12,520  
Technology development
      8,885        15,048  
    
 
 
     
 
 
  
Total cost of net revenues
      21,137        27,568  
Gross profit
      6,530        18,128  
 
42
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
    
Year Ended,
  
    
January 1,
2022
    
January 2,
2021
  
    
(In thousands, except per share amounts)
  
Operating expenses:
                 
Research and development
      2,653       888  
Selling, general and administrative
      5,937       5,805  
Asset impairment and restructuring charges
      2,604       —    
    
 
 
    
 
 
  
Total operating expenses
      11,194       6,693  
    
 
 
    
 
 
  
Operating income (loss)—discontinued operations
      (4,664 )      11,435  
Other income (expense)—discontinued operations
      —         56  
    
 
 
    
 
 
  
Income (loss) discontinued operations before provision for (benefit from) income taxes
      (4,664 )      11,491  
Gain on disposal of discontinued operations before income taxes
      54,341       —    
    
 
 
    
 
 
  
Total income from discontinued operations, before tax
      49,677       11,491  
Provision for (benefit from) income taxes
      —         —    
    
 
 
    
 
 
  
Net income from discontinued operations net of tax
    $ 49,677     $ 11,491  
    
 
 
    
 
 
  
The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. The following table presents cash flow and
non-cash
information related to discontinued operations for the years ended January 1, 2022 and January 2, 2021, respectively (in thousands):
 
    
          2021          
     
          2020          
  
    
(in thousands)
  
Depreciation and amortization
    $ 1,366      $ 1,123  
Amortization of intangible assets
    $ —        $ 36  
Asset impairment charges
    $ 1,246      $ —    
Equity-based compensation
    $ 1,167      $ 959  
Purchase of leasehold improvements and equipment
    $ 429      $ 636  
Revenue recognition
The Photonics segment recognized revenues for cost plus fixed fee (“CPFF”) and firm fixed price (“FFP”) government contracts over time under the
cost-to-cost
method for the majority of government contracts. Revenue on the majority of government contracts was recognized over time because of the continuous transfer of control to the customer. For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Similarly, for
non-U.S.
government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by the rights to payment for work performed to date to deliver products or services that do not have an alternative use to the Company. The
cost-to-cost
measure of progress best depicts the transfer of control of assets to the customer, which occurs as costs are incurred.
The majority of the contracts in the Photonics segment had a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some of the contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development and production). For contracts with multiple performance obligations, the contract’s transaction price was allocated to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the expected costs of satisfying a performance obligation is forecasted and then an appropriate margin is added for that distinct good or service.
In the Photonics segment, revenue for homogenous manufactured military products sold to the U.S. government and its contractors was recognized over time under the
units-of-delivery
method because of the continuous transfer of control to the customer. The
units-of-delivery
method measures progress for the manufactured units as an equal amount of value is individually transferred to the customer upon delivery.
 
43
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
The nature of the contracts in the Photonics segment gave rise to several types of variable consideration including tiered pricing. Allocation of contract revenues among Photonics military products, and the timing of the recognition of those revenues, was impacted by agreements with tiered pricing or variable rate structures. Variable consideration was included in the estimated transaction price when there was a basis to reasonably estimate the amount of the consideration. These estimates were based on historical experience, anticipated performance and our best judgment at the time. Because of the certainty in estimating these amounts, they were included in the transaction price of our contracts and the associated remaining performance obligations.
Accounting for CPFF and FFP contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For these contracts, the profit on a contract was estimated as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates were based on various assumptions to project the outcome of future events. These assumptions included the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
As a significant change in one or more of these estimates could affect the profitability of the contracts, the contract-related estimates were reviewed and updated regularly. Adjustments in estimated profit on contracts were recognized under the cumulative
catch-up
method. Under this method, the impact of the adjustment on profit recorded to date on a contract was recognized in the period the adjustment was identified. Revenue and profit in future periods of contract performance was recognized using the adjusted estimate. If at any time the estimate of contract profitability indicated an anticipated loss on the contract, the total loss was recognized in the quarter it was identified.
Impairment of Long-Lived Assets
In the fourth fiscal quarter of 2021, as a result of and in consideration of the Photonics sale, the assignment of leased space to EOTECH and the agreement to subsidize EOTECH for spaces that will no longer be utilized, the Company evaluated its lease
right-of-use
asset (“ROU”) related to the unused space for impairment. As a result of the analysis, the Company recognized an impairment loss during the fourth quarter of fiscal 2021 of $1.2 million.
3.    Revenue
The following tables represent a disaggregation of revenue from contracts with customers for fiscal 2021 and 2020.
Major Products and Service Lines
 
    
 
2021
 
   
 
2020
 
    
(in thousands)
  
    
HDD
     
DCP
     
PV
     
ASP
     
Total
     
HDD
     
PV
     
Total
  
Systems, upgrades and spare parts    $
28,300
       $
3
      $
258
      $
3,850
      $
32,411
      $
45,620
        $
426
      $
46,046
  
Field service    6,031       14        68      —        6,113      6,080        2      6,082  
    
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
  
Total TFE net revenues
    $ 34,331      $ 17      $ 326      $ 3,850      $ 38,524      $ 51,700      $ 428      $ 52,128  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Primary Geography Markets
 
    
 
2021
 
   
 
2020
 
    
(in thousands)
  
United States
    $ 3,670      $ 6,450  
Asia
      31,004        45,611  
Europe
      3,850        67  
    
 
 
     
 
 
  
Total net revenues
    $ 38,524      $ 52,128  
    
 
 
     
 
 
  
 
44
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Timing of Revenue Recognition
 
    
 
2021
 
   
 
2020
 
    
(in thousands)
  
Products transferred at a point in time    $38,524      $52,128  
Products and services transferred over time    —        —    
    
 
 
     
 
 
  
Total net revenues
    $ 38,524      $ 52,128  
    
 
 
     
 
 
  
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 fiscal 2020:
 
    
January 1,
2022
     
January 2,
2021
     
Change
  
    
(In thousands)
  
TFE:
                           
Contract assets:
                           
Accounts receivable, unbilled
    $ 99      $ 369      $ (270 ) 
    
 
 
     
 
 
     
 
 
  
Contract liabilities:
                           
Deferred revenue
    $ 65      $ 482      $ (417 ) 
Customer advances
      2,107        33        2,074  
    
 
 
     
 
 
     
 
 
  
     $ 2,172      $ 515      $ 1,657  
    
 
 
     
 
 
     
 
 
  
Photonics (included in discontinued operations):
                           
Contract assets:
                           
Accounts receivable, unbilled
    $ —        $ 5,439      $ (5,439 ) 
Retainage
      —          126        (126 ) 
    
 
 
     
 
 
     
 
 
  
     $ —        $ 5,565      $ (5,565 ) 
    
 
 
     
 
 
     
 
 
  
Contract liabilities:
                           
Deferred revenue
    $ —        $ 779      $ (779 ) 
    
 
 
     
 
 
     
 
 
  
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 fiscal 2021, contract assets in our TFE segment decreased by $270,000 primarily due to the final billing on one system that was pending acceptance as of January 2, 2021 that completed installation and was accepted by the customer.
Customer advances in our TFE segment generally represent amounts billed to the customer prior to transferring goods which represents a contract liability. 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 contract advances are liquidated when revenue is recognized. Deferred revenue in our TFE segment generally represents 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 and represents a contract liability. During fiscal 2021, we recognized revenue in our TFE segment of $33,000 and $427,000 that was included in customer advances and deferred revenue, respectively, at the beginning of the period.
On January 1, 2022, we had $24.7 million of remaining performance obligations, which we also refer to as backlog and expect to recognize as revenue in 2022.
 
45
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
On December 30, 2021, we sold assets comprising our Photonics business and we have separately reported the results of our Photonics segment as discontinued operations in our consolidated statements of income for the years ended January 1, 2022 and January 2, 2021, respectively. Accounts receivable, unbilled in our Photonics segment represented a contract asset for revenue that had been recognized in advance of billing the customer, which is common for contracts in the defense industry. In the Photonics segment, amounts were billed as work progressed in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. Generally, billing occurred subsequent to revenue recognition, resulting in contract assets. These contracts with the U.S. government also contained retainage provisions. Retainage represents a contract asset for the portion of the contract price earned 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 was billable upon completion of the contract performance and approval of final indirect expense rates by the government. During fiscal 2021, contract assets in the Photonics segment decreased by $5.6 million primarily due to invoicing upon the achievement of contractual milestones, offset in part to the revenue recognized reported in discontinued operations on FFP contracts in advance of billing and the accrual of revenue reported in discontinued operations incurred costs under CPFF contracts.
Deferred revenue in the Photonics segment generally represented a contract liability for amounts billed to the customer upon achievement of contractual milestones. These amounts are liquidated when revenue was recognized. During fiscal 2021, the Photonics segment recognized revenue of $779,000 reported in discontinued operations that was included in deferred revenue at the beginning of the period.
4. Equity-Based Compensation
Intevac accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants and directors based upon the grant-date fair value of those awards. The estimated fair value of Intevac’s equity-based awards is amortized over the awards’ service periods using the graded vesting attribution method.
Descriptions of Plans
Equity Incentive Plans
At January 1, 2022, Intevac had equity-based awards outstanding under the 2020 Equity Incentive Plan and the 2012 Equity Incentive Plan (the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans.
The Plans are a broad-based, long-term retention program intended to attract and retain qualified management and employees, and align stockholder and employee interests. 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. Option price, vesting period, and other terms are determined by the administrator of the Plans, but the option price shall generally not be less than 100% of the fair market value per share on the date of grant. As of January 1, 2022, 2.9 million shares of common stock were authorized for future issuance under the Plans. The 2020 Equity Incentive Plan expires no later than May 13, 2030.
On January 19, 2022, the Board of Directors adopted the 2022 Inducement Equity Incentive Plan (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.
 
46
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
2003 Employee Stock Purchase Plan
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. Beginning August 1, 2020, 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). As of January 1, 2022, 729,000 shares remained available for issuance under the ESPP.
The effect of recording equity-based compensation for fiscal 2021 and 2020 was as follows (in thousands):
 
    
2021
     
2020
  
Equity-based compensation by type of award:
                  
Stock options    $198      $504  
RSUs
      2,819        1,936  
Employee stock purchase plan
      986        949  
    
 
 
     
 
 
  
Total equity-based compensation *
    $ 4,003      $ 3,389  
    
 
 
     
 
 
  
*Included in the table above, equity based compensation reported in discontinued operations of $1.2 million and $1.0 million for fiscal years 2021 and 2020, respectively.
Equity-based compensation expense is based on awards which vest. Intevac accounts for forfeitures as they occur, rather than estimating expected forfeitures.
Stock Options
The exercise price of each stock option equals the market price of Intevac’s stock on the date of grant. Most options are scheduled to vest over three and/or four years and expire no later than ten years after the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Intevac’s employee stock options have characteristics significantly different from those of publicly traded options. The weighted-average assumptions used in the model are outlined in the following table:
 
    
2021
     
2020
  
Stock Options:
                  
Weighted-average fair value of grants per share
      —        $ 1.82  
Expected volatility
      —          46.06 % 
Risk free interest rate    —        0.44%  
Expected term of options (in years)
      —          4.39  
Dividend yield
      —          None  
The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on historical volatility of Intevac’s stock price. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected life 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 stock-based awards and vesting schedules. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.
 
47
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
A summary of the stock option activity is as follows:
 
    
Shares
    
Weighted
Average

Exercise
Price
     
Weighted

Average
Remaining
Contractual
Term
(years)
     
Aggregate

Intrinsic

Value
  
Options outstanding at January 2, 2021
      1,814,467     $ 6.66        3.08      $ 2,520,722  
Options cancelled and forfeited
      (280,261 )    $ 7.44                    
Options exercised
      (76,619 )    $ 5.74                    
    
 
 
    
 
 
     
 
 
     
 
 
  
Options outstanding at January 1, 2022
      1,457,587     $ 6.55        2.31      $ 7,622  
    
 
 
    
 
 
     
 
 
     
 
 
  
Options exercisable at January 1, 2022
      1,267,664     $ 6.74        2.08      $ 3,513  
The total intrinsic value of options exercised during fiscal years 2021 and 2020 was $101,000 and $110,000, respectively. At January 1, 2022, Intevac had $78,000 of total unrecognized compensation expense related to stock option plans that will be recognized over the weighted-average period of 0.72 years.
RSUs
A summary of the RSU activity is as follows:
 
    
Shares
    
Weighted
Average
Grant Date
Fair Value
     
Weighted

Average
Remaining
Contractual
Term (years)
     
Aggregate
Intrinsic
Value
  
Non-vested
RSUs at January 2, 2021
      901,634     $ 5.30        1.50      $ 6,500,781  
Granted
      606,705     $ 6.03                    
Vested
      (382,747 )    $ 5.71                    
Cancelled
      (92,156 )    $ 4.79                    
    
 
 
    
 
 
     
 
 
     
 
 
  
Non-vested
RSUs at January 1, 2022
      1,033,436     $ 5.59        1.39      $ 4,867,484  
    
 
 
    
 
 
     
 
 
     
 
 
  
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 and/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. At January 1, 2022, Intevac had $3.0 million of total unrecognized compensation expense related to RSUs that will be recognized over the weighted-average period of 1.39 years.
In May 2021, we granted 126,320 performance-based restricted stock units (“PRSUs”) to members of our senior management. The number of PRSUs that will vest is determined by our common stock achieving a certain Total Shareholder Return (“TSR”) for the Company, relative to the TSR of a specified peer group over a measurement period of two years from the time of grant. The fair value of each PRSU award was estimated on the date of grant using a Monte Carlo simulation. PRSU activity is included in the above RSU table. At the end of the performance measurement period, the Compensation Committee of the Board of Directors (the “Compensation Committee”) will determine the achievement against the performance objectives. Depending on the Company’s TSR relative to the peer group TSR, the actual number of shares that will be vested for each PRSU grant can range from zero to 200% of the initial grant.
 
48
 
INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Intevac estimated the weighted-average fair value of PRSUs using the following weighted-average assumptions:
 
    
2021
  
Weighted-average fair value of grants per share
    $ 7.65  
Expected volatility
      56.26 % 
Risk-free interest rate
      0.15 % 
Dividend yield
      None  
In May 2020, we granted 109,465 PRSUs to members of our senior management. The PRSUs were issued collectively in four separate tranches with individual
one-year
performance periods beginning in May 2020, 2021, 2022 and 2023, respectively. Vesting of the PRSUs is based on the performance of our common stock relative to the performance of a specified peer group. The fair value of each PRSU award was estimated on the date of grant using a Monte Carlo simulation. PRSU activity is included in the above RSU tables. At the end of each performance measurement period, the Compensation Committee will determine the achievement against the performance objectives. Any earned PRSU awards will vest 100% after the end of the applicable performance measurement period. The first performance measurement period ended in May 2021 and the metric was not achieved.
Intevac estimated the weighted-average fair value of PRSUs using the following weighted-average assumptions:
 
    
2020
  
Weighted-average fair value of grants per share
    $ 3.16  
Expected volatility
      46.7 % 
Risk-free interest rate
      0.25 % 
Dividend yield
      None  
ESPP
The fair value of the employee stock purchase right is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
    
          2021          
     
          2020          
  
Stock Purchase Rights:
                  
Weighted-average fair value of grants per share
    $ 2.59      $ 2.20  
Expected volatility
      60.88 %       51.49 % 
Risk free interest rate
      0.08 %       0.14 % 
Expected term of purchase rights (in years)
      0.91        1.24  
Dividend yield
      None        None  
The expected life of purchase rights is the period of time remaining in the current offering period.
The ESPP activity during fiscal 2021 and 2020 is as follows:
 
    
2021
     
2020