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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM
10-Q
 
 
(MARK ONE)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission file number
0-26946
 
 
INTEVAC, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
94-3125814
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
3560 Bassett Street
Santa Clara, California 95054
(Address of principal executive office, including Zip Code)
 
 
Registrant’s telephone number, including area code: (408)
986-9888
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock ($0.001 par value)
 
IVAC
 
The Nasdaq Stock Market LLC (Nasdaq) Global Select
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act:
 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated
filer
 
  
Smaller reporting company
 
    
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act).    ☐  Yes      No
On October 27, 2020, 23,853,623 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.
 
 
 

INTEVAC, INC.
INDEX
 
No.
      
Page
 
PART I. FINANCIAL INFORMATION
  
Item 1.
    
       3  
       4  
       5  
       6  
       7  
Item 2.
       25  
Item 3.
       33  
Item 4.
       33  
PART II. OTHER INFORMATION
  
Item 1.
       34  
Item 1A.
       34  
Item 2.
       40  
Item 3.
       40  
Item 4.
       40  
Item 5.
       40  
Item 6.
       40  
     42  
 
2

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    
September 26,

2020
   
December 28,

2019
 
    
(Unaudited)
 
    
(In thousands, except
par value)
 
ASSETS
 
Current assets:
    
Cash and cash equivalents
   $ 27,245     $ 19,767  
Short-term investments
     18,342       16,720  
Trade and other accounts receivable, net of allowances of $0 at both September 26, 2020 and at December 28, 2019
     23,221       28,619  
Inventories
     23,638       24,907  
Prepaid expenses and other current assets
     2,031       1,504  
  
 
 
   
 
 
 
Total current assets
     94,477       91,517  
Long-term investments
     3,074       5,537  
Restricted cash
     787       787  
Property, plant and equipment, net
     11,552       11,598  
Operating lease
right-of-use-assets
     8,739       10,279  
Deferred income taxes and other long-term assets
     5,740       6,604  
  
 
 
   
 
 
 
Total assets
   $ 124,369     $ 126,322  
  
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
    
Current operating lease liabilities
   $ 2,776     $ 2,524  
Accounts payable
     4,463       4,199  
Accrued payroll and related liabilities
     6,478       6,488  
Other accrued liabilities
     2,289       3,593  
Customer advances
     1,051       4,007  
  
 
 
   
 
 
 
Total current liabilities
     17,057       20,811  
Noncurrent liabilities:
 
Noncurrent operating lease liabilities
     7,516       9,532  
Other long-term liabilities
     688       186  
  
 
 
   
 
 
 
Total noncurrent liabilities
     8,204       9,718  
Stockholders’ equity:
 
Common stock, $0.001 par value
     24       23  
Additional
paid-in
capital
     191,976       188,290  
Treasury stock, 5,087 shares at September 26, 2020 and 4,989 shares at December 28, 2019
     (29,551     (29,158
Accumulated other comprehensive income
     502       424  
Accumulated deficit
     (63,843     (63,786
  
 
 
   
 
 
 
Total stockholders’ equity
     99,108       95,793  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 124,369     $ 126,322  
  
 
 
   
 
 
 
Note: Amounts as of December 28, 2019 are derived from the December 28, 2019 audited consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
 
3

INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 26,

2020
   
September 28,

2019
   
September 26,

2020
   
September 28,

2019
 
    
(Unaudited)
 
    
(In thousands, except per share amounts)
 
Net revenues:
        
Systems and components
   $ 15,027     $ 21,090     $ 51,589     $ 59,965  
Technology development
     6,538       5,209       17,659       13,476  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net revenues
     21,565       26,299       69,248       73,441  
Cost of net revenues:
        
Systems and components
     8,389       14,180       29,969       39,741  
Technology development
     3,876       3,341       10,403       9,325  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cost of net revenues
     12,265       17,521       40,372       49,066  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     9,300       8,778       28,876       24,375  
Operating expenses:
        
Research and development
     3,603       3,596       10,594       11,013  
Selling, general and administrative
     5,845       5,615       17,426       16,720  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     9,448       9,211       28,020       27,733  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from operations
     (148     (433     856       (3,358
Interest income and other income (expense), net
     8       126       212       448  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) before provision for income taxes
     (140     (307     1,068       (2,910
Provision for income taxes
     217       173       1,125       1,144  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
   $ (357   $ (480   $ (57   $ (4,054
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss per share:
        
Basic and Diluted
   $ (0.02   $ (0.02   $ (0.00   $ (0.18
Weighted average common shares outstanding:
        
Basic and Diluted
     23,771       23,130       23,605       22,992  
See accompanying notes to the condensed consolidated financial statements.
 
4

INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 26,

2020
   
September 28,

2019
   
September 26,

2020
   
September 28,

2019
 
    
(Unaudited)
 
    
(In thousands)
 
Net loss
   $ (357   $ (480   $ (57   $ (4,054
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), before tax
Change in unrealized net gain on
available-for-sale
investments
     (24     3       29       80  
Foreign currency translation gains (losses)
     124       (87     49       (87
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), before tax
     100       (84     78       (7
Income tax (expense) benefit related to items in other comprehensive income (loss)
                                    
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), net of tax
     100       (84     78       (7
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income (loss)
   $ (257   $ (564   $ 21     $ (4,061
  
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
5

INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
Nine months ended
 
    
September 26,

2020
   
September 28,

2019
 
    
(Unaudited)
 
    
(In thousands)
 
Operating activities
    
Net loss
   $ (57   $ (4,054
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
    
Depreciation and amortization
     2,645       2,778  
Net amortization (accretion) of investment premiums and discounts
     (9     (55
Equity-based compensation
     2,186       2,260  
Straight-line rent adjustment and amortization of lease incentives
     (224     (238
Change in the fair value of acquisition-related contingent consideration
              7  
Deferred income taxes
     516       552  
Loss on disposal of equipment
              87  
Changes in operating assets and liabilities
     2,714       (2,470
  
 
 
   
 
 
 
Total adjustments
     7,828       2,921  
  
 
 
   
 
 
 
Net cash and cash equivalents provided by (used in) operating activities
     7,771       (1,133
Investing activities
    
Purchases of investments
     (17,071     (18,917
Proceeds from sales and maturities of investments
     17,950       18,751  
Purchases of leasehold improvements and equipment
     (2,329     (3,279
  
 
 
   
 
 
 
Net cash and cash equivalents used in investing activities
     (1,450     (3,445
Financing activities
    
Net proceeds from issuance of common stock
     1,865       1,770  
Common stock repurchases
     (393     (111
Taxes paid related to net share settlement
     (364     (296
Payment of acquisition-related contingent consideration
              (230
  
 
 
   
 
 
 
Net cash and cash equivalents provided by financing activities
     1,108       1,133  
Effect of exchange rate changes on cash
     49       (87
  
 
 
   
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
     7,478       (3,532
Cash, cash equivalents and restricted cash at beginning of period
     20,554       19,884  
  
 
 
   
 
 
 
Cash, cash equivalents and restricted cash at end of period
   $ 28,032     $ 16,352  
  
 
 
   
 
 
 
Non-cash
investing and financing activity
    
Additions to
right-of-use-assets
obtained from new operating lease liabilities
   $ 128     $     
  
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
6

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Description of Business, Basis of Presentation and Significant Accounting Policy
Description of Business
Intevac, Inc. (together with its subsidiaries “Intevac,” the “Company” or “we”) is a provider of vacuum deposition equipment for a wide variety of thin-film applications, and a leading provider of digital night-vision technologies and products to the defense industry. The Company leverages its core capabilities in high-volume manufacturing of small substrates to provide process manufacturing equipment solutions to the hard disk drive (“HDD”), display cover panel (“DCP”), and photovoltaic (“PV”) solar cell industries. Intevac also provides sensors, cameras and systems for government applications such as night vision. Intevac’s customers include manufacturers of hard disk media, DCPs and solar cells as well as the U.S. government and its agencies, allies and contractors. Intevac reports two segments: Thin-film Equipment (“TFE”) and Photonics.
COVID-19
Update
In March 2020, the World Health Organization characterized the coronavirus
(“COVID-19”)
a pandemic, and the President of the United States declared the
COVID-19
outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from
COVID-19,
we are currently unable to fully determine its future impact on our business. However, we are monitoring the progression of the pandemic and its potential effect on our financial position, results of operations, and cash flows. Our factory in Singapore was given notice by the Singapore government to suspend all
on-site
activities on April 27, 2020. We appealed this notice and were provided an exemption on April 28, 2020. Starting May 14, 2020, we were temporarily required to limit the number of employees on site at our Singapore factory but these restrictions were lifted on June 2, 2020.
Basis of Presentation
In the opinion of management, the unaudited interim condensed consolidated financial statements of Intevac included herein have been prepared on a basis consistent with the December 28, 2019 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. Intevac’s results of operations for the three and nine months ended September 26, 2020 are not necessarily indicative of future operating results.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
Significant Accounting Policy
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 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 the quarter ended September 26, 2020, the Company received $124,000 in JSS grants, of which $72,000 is reported as a reduction of cost of net revenues, $20,000 is reported as a reduction of research and development (“R&D”) expenses and $32,000 is reported as a reduction of selling, general and administrative expenses on the condensed consolidated statement of operations. During the nine months ended September 26, 2020, the Company received $434,000 in JSS grants, of which $252,000 is reported as a reduction of cost of net revenues, $68,000 is reported as a reduction of R&D expenses and $114,000 is reported as a reduction of selling, general and administrative expenses on the condensed consolidated statement of operations.
 
7

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
2.
Revenue
The following tables represent a disaggregation of revenue from contracts with customers for the three and nine months ended September 26, 2020 and September 28, 2019 along with the reportable segment for each category.
Major Products and Service Lines
 
TFE
  
Three Months Ended
September 26, 2020
    
Three Months Ended
September 28, 2019
 
    
(In thousands)
 
    
HDD
    
DCP
    
PV
    
Total
    
HDD
    
DCP
    
PV
    
Total
 
Systems, upgrades and spare parts
   $ 7,601      $ —        $ 131      $ 7,732      $ 7,737      $ —        $ 8,225      $ 15,962  
Field service
     1,635        —          —          1,635        1,109        —          45        1,154  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total TFE net revenues
   $ 9,236      $ —        $ 131      $ 9,367      $ 8,846      $ —        $ 8,270      $ 17,116  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
    
Nine Months Ended
September 26, 2020
    
Nine Months Ended
September 28, 2019
 
    
(In thousands)
 
    
HDD
    
DCP
    
PV
    
Total
    
HDD
    
DCP
    
PV
    
Total
 
Systems, upgrades and spare parts
   $ 29,189      $ —        $ 400      $ 29,589      $ 31,210      $ —        $ 14,616      $ 45,826  
Field service
     4,334        —          2        4,336        3,452        2        45        3,499  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total TFE net revenues
   $ 33,523      $ —        $ 402      $ 33,925      $ 34,662      $ 2      $ 14,661      $ 49,325  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
    
Three Months Ended
   
Nine Months Ended
 
Photonics
  
September 26,

2020
    
September 28,

2019
   
September 26,

2020
    
September 28,

2019
 
    
(In thousands)
 
Products:
          
Military products
   $ 4,947      $ 3,320     $ 15,758      $ 8,115  
Commercial products
     139        81       257        581  
Repair and other services
     574        573       1,649        1,944  
  
 
 
    
 
 
   
 
 
    
 
 
 
Total Photonics product net revenues
     5,660        3,974       17,664        10,640  
Technology development:
          
Firm Fixed Price (“FFP”)
     5,482        3,218       15,374        7,995  
Cost Plus Fixed Fee (“CPFF”)
     1,056        1,991       2,285        5,479  
Time and materials
     —          —         —          2  
  
 
 
    
 
 
   
 
 
    
 
 
 
Total technology development net revenues
     6,538        5,209       17,659        13,476  
  
 
 
    
 
 
   
 
 
    
 
 
 
Total Photonics net revenues
   $ 12,198      $ 9,183     $ 35,323      $ 24,116  
  
 
 
    
 
 
   
 
 
    
 
 
 
Primary Geographical Markets
 
    
Three Months Ended
    
Three Months Ended
 
    
September 26, 2020
    
September 28, 2019
 
    
(In thousands)
 
    
TFE
    
Photonics
    
Total
    
TFE
    
Photonics
    
Total
 
United States
   $ 1,764      $ 12,079      $ 13,843      $ 478      $ 9,050      $ 9,528  
Asia
     7,536        —          7,536        16,638               16,638  
Europe
     67        119        186        —          133        133  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total net revenues
   $ 9,367      $ 12,198      $ 21,565      $ 17,116      $ 9,183      $ 26,299  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
8

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
    
Nine Months Ended
    
Nine Months Ended
 
    
September 26, 2020
    
September 28, 2019
 
    
(In thousands)
 
    
TFE
    
Photonics
    
Total
    
TFE
    
Photonics
    
Total
 
United States
   $ 2,596      $ 35,060      $ 37,656      $ 995      $ 23,578      $ 24,573  
Asia
     31,262        —          31,262        48,330               48,330  
Europe
     67        263        330        —          538        538  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total net revenues
   $ 33,925      $ 35,323      $ 69,248      $ 49,325      $ 24,116      $ 73,441  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Timing of Revenue Recognition
 
    
Three Months Ended
    
Three Months Ended
 
    
September 26, 2020
    
September 28, 2019
 
    
(In thousands)
 
    
TFE
    
Photonics
    
Total
    
TFE
    
Photonics
    
Total
 
Products transferred at a point in time
   $ 9,367      $ 574      $ 9,941      $ 17,116      $ 573      $ 17,689  
Products and services transferred over time
     —          11,624        11,624        —          8,610        8,610  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
   $ 9,367      $ 12,198      $ 21,565      $ 17,116      $ 9,183      $ 26,299  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
    
Nine Months Ended
    
Nine Months Ended
 
    
September 26, 2020
    
September 28, 2019
 
    
(In thousands)
 
    
TFE
    
Photonics
    
Total
    
TFE
    
Photonics
    
Total
 
Products transferred at a point in time
   $ 33,925      $ 1,649      $ 35,574      $ 49,325      $ 1,944      $ 51,269  
Products and services transferred over time
     —          33,674        33,674        —          22,172        22,172  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
   $ 33,925      $ 35,323      $ 69,248      $ 49,325      $ 24,116      $ 73,441  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
The following table reflects the changes in our contract assets, which we classify as accounts receivable, unbilled or retainage, and our contract liabilities, which we classify as deferred revenue and customer advances, for the nine months ended September 26, 2020:
 
   
September 26,
2020
   
December 28,
2019
   
Nine Months

Change
 
   
(In thousands)
 
TFE:
     
Contract assets:
     
Accounts receivable, unbilled
  $ 560     $ 760     $ (200
 
 
 
   
 
 
   
 
 
 
Contract liabilities:
     
Deferred revenue
  $ 399     $ 320     $ 79  
Customer advances
    1,051       4,007       (2,956
 
 
 
   
 
 
   
 
 
 
  $ 1,450     $ 4,327     $ (2,877
 
 
 
   
 
 
   
 
 
 
Photonics:
     
Contract assets:
     
Accounts receivable, unbilled
  $ 3,238     $ 3,210     $ 28  
Retainage
    123       99       24  
 
 
 
   
 
 
   
 
 
 
  $ 3,361     $ 3,309     $ 52  
 
 
 
   
 
 
   
 
 
 
Contract liabilities:
     
Deferred revenue
  $ 31     $ —       $ 31  
 
 
 
   
 
 
   
 
 
 
 
9

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
Accounts receivable, unbilled in our TFE segment represents a contract asset for revenue that has been recognized in advance of billing the customer. For our system and certain upgrade sales, our TFE customers generally pay in three installments, with a portion of the system price billed upon receipt of an order, a portion of the price billed upon shipment, and the balance of the price due upon completion of installation and acceptance of the system at the customer’s factory. Accounts receivable, unbilled in our TFE segment generally represents the balance of the system price that is due upon completion of installation and acceptance, less the amount that has been deferred as revenue for the performance of the installation tasks. During the nine months ended September 26, 2020, contract assets in our TFE segment decreased by $200,000 primarily due to the subsequent invoicing of certain unbilled spare parts revenue at December 28, 2019.
Customer advances in our TFE segment generally represent a contract liability for amounts billed to the customer prior to transferring goods. The Company has elected to use the practical expedient 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 a contract liability for amounts billed to a customer for completed systems at the customer site that are undergoing installation and acceptance testing where transfer of control has not yet occurred, as Intevac does not yet have a demonstrated history of meeting the acceptance criteria upon the customer’s receipt of product. During the nine months ended September 26, 2020, we recognized revenue in our TFE segment of $4.0 million and $119,000 that was included in customer advances and deferred revenue, respectively, at the beginning of the period.
Accounts receivable, unbilled in our Photonics segment represents a contract asset for revenue that has been recognized in advance of billing the customer, which is common for contracts in the defense industry. In our Photonics segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contracts with the U.S. government may also contain retainage provisions. Retainage represents a contract asset for the portion of the contract price earned by us for work performed but held for payment by the U.S. government as a form of security until satisfactory completion of the contract. The retainage is billable upon completion of the contract performance and approval of final indirect expense rates by the government. During the nine months ended September 26, 2020, contract assets in our Photonics segment increased by $52,000 primarily due to the accrual of revenue for incurred costs under FFP and CPFF contracts.
Deferred revenue in our Photonics segment generally represents a contract liability for amounts billed to the customer upon achievement of contractual milestones. These amounts are liquidated when revenue is recognized.
On September 26, 2020, we had $63.3 million of remaining performance obligations, which we also refer to as backlog. Backlog at September 26, 2020 consisted of $18.1 million of TFE backlog and $45.2 million of Photonics backlog. We expect to recognize approximately 42% of our remaining performance obligations as revenue in 2020, 30% in 2021, 18% in 2022, 9% in 2023 and 1% in 2024 and thereafter.
 
3.
Inventories
Inventories are stated at the lower of average cost or net realizable value and consist of the following:
 
    
September 26,
2020
    
December 28,
2019
 
    
(In thousands)
 
Raw materials
   $ 11,166      $ 15,286  
Work-in-progress
     5,732        4,748  
Finished goods
     6,740        4,873  
  
 
 
    
 
 
 
   $ 23,638      $ 24,907  
  
 
 
    
 
 
 
Net inventories at September 26, 2020 and December 28, 2019 included one VERTEX SPECTRA system for DCP under evaluation in a customer’s factory and one MATRIX PVD system for advance semiconductor packaging under evaluation in a customer’s factory. Net inventories at September 26, 2020 also included one VERTEX SPECTRA system for DCP at Intevac’s factory.
 
10

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
4.
Equity-Based Compensation
At September 26, 2020, Intevac had equity-based awards outstanding under the 2020 Equity Incentive Plan, the 2012 Equity Incentive Plan and the 2004 Equity Incentive Plan (together, the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans. The Plans permit the grant of incentive or
non-statutory
stock options, performance-based stock options (“PSOs”), restricted stock, stock appreciation rights, restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”) and performance shares.
The ESPP provides that eligible employees may purchase Intevac’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the entry date of the applicable offering period or at the end of each applicable purchase interval. Offering periods are generally two years in length, and consist of a series of
six-month
purchase intervals. Eligible employees may join the ESPP at the beginning of any
six-month
purchase interval. Under the terms of the ESPP, employees can choose to have up to 50% of their base earnings withheld to purchase Intevac common stock (not to exceed $25,000 per year).
Equity-based Compensation Expense
The effect of recording equity-based compensation for the three and nine months ended September 26, 2020 and September 28, 2019 was as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
   
(In thousands)
 
Equity-based compensation by type of award:
       
Stock options
  $ 47     $ 213     $ 411     $ 610  
RSUs
    495       375       1,311       1,018  
ESPP awards
    316       163       464       632  
 
 
 
   
 
 
   
 
 
   
 
 
 
Total equity-based compensation
  $ 858     $ 751     $ 2,186     $ 2,260  
 
 
 
   
 
 
   
 
 
   
 
 
 
Stock Options and ESPP
The fair value of stock options and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The determination of fair value of stock options and ESPP awards on the date of grant using an option-pricing model is affected by Intevac’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual employee stock option exercise behavior. Intevac accounts for forfeitures as they occur, rather than estimating expected forfeitures. Option activity as of September 26, 2020 and changes during the nine months ended September 26, 2020 were as follows:
 
    
Shares
   
Weighted-Average

Exercise Price
 
Options outstanding at December 28, 2019
     2,096,610     $ 6.63  
Options granted
     6,000     $ 4.88  
Options cancelled and forfeited
     (193,461   $ 6.68  
Options exercised
     (61,722   $ 4.77  
  
 
 
   
Options outstanding at September 26, 2020
     1,847,427     $ 6.68  
  
 
 
   
Options exercisable at September 26, 2020
     1,395,582     $ 6.80  
Intevac issued 392,088 shares of common stock under the ESPP during the nine months ended September 26, 2020.
 
11

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
Intevac estimated the weighted-average fair value of stock options and employee stock purchase rights using the following weighted-average assumptions:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Stock Options:
       
Weighted-average fair value of grants per share
  $        $ 1.84     $ 1.82     $ 2.05  
Expected volatility
             43.87     46.04     43.22
Risk-free interest rate
             1.57     0.44     1.86
Expected term of options (in years)
    —         4.32       4.39       4.56  
Dividend yield
             None       None       None  
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Stock Purchase Rights:
       
Weighted-average fair value of grants per share
  $ 2.20     $ 1.45     $ 2.20     $ 1.73  
Expected volatility
    51.72     38.27     51.49     45.81
Risk-free interest rate
    0.12     1.85     0.14     2.28
Expected term of purchase rights (in years)
    1.26       0.75       1.24       0.91  
Dividend yield
    None       None       None       None  
The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option grants and ESPP purchase rights is based on the historical volatility of Intevac’s stock price, measured over a period equal to the expected term of the stock option grant or purchase right. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the equity-based awards and vesting schedules. The expected term of purchase rights represents the period of time remaining in the current offering period. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.
Performance-based stock options (“PSOs”) vest upon the achievement of certain market conditions (our stock performance) during a set performance period (typically 4 years) subject to the grantee’s continued service with Intevac through the date the applicable market condition is achieved. The fair value is based on the values calculated using a Monte Carlo simulation model on the grant date. Compensation cost is not adjusted in future periods for subsequent changes in the expected outcome of market related conditions. The compensation expense is recognized over the derived service period. We granted 37,500 of such stock options to the Chief Executive Officer in the three months ended June 29, 2019. These PSOs have a derived service period of 1.1 years.
Intevac estimated the weighted-average fair value of PSOs using the following weighted-average assumptions:
 
    
Nine Months Ended
September 28, 2019
 
Weighted-average fair value of grants per share
   $ 1.75  
Expected volatility
     43.43
Risk free interest rate
     1.96
Expected term (in years)
     4.60  
Dividend yield
     None  
 
12

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
RSUs
RSU activity as of September 26, 2020 and changes during the nine months ended September 26, 2020 were as follows:
 
    
Shares
   
Weighted-Average

Grant Date

Fair Value
 
Non-vested
RSUs at December 28, 2019
     553,355     $ 6.15  
Granted
     658,090     $ 4.85  
Vested
     (221,483   $ 6.51  
Cancelled and forfeited
     (35,815   $ 6.05  
  
 
 
   
Non-vested
RSUs at September 26, 2020
     954,147     $ 5.17  
  
 
 
   
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 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.
In May 2020, we granted 109,465 performance-based restricted stock units (“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 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.
Intevac estimated the weighted-average fair value of PRSUs using the following weighted-average assumptions:
 
    
Nine Months Ended
 
    
September 26, 2020
 
Weighted-average fair value of grants per share
   $ 3.16  
Expected volatility
     46.7
Risk-free interest rate
     0.25
Dividend yield
     None  
 
5.
Purchased Intangible Assets
Details of finite-lived intangible assets by segment as of September 26, 2020 are as follows.
 
    
September 26, 2020
 
    
Gross
Carrying
Amount
    
Accumulated
Amortization
   
Net
Carrying
Amount
 
    
(In thousands)
 
TFE
   $ 7,172      $ (7,172   $     
Photonics
     1,215        (1,211     4  
  
 
 
    
 
 
   
 
 
 
   $ 8,387      $ (8,383   $ 4  
  
 
 
    
 
 
   
 
 
 
Total amortization expense of finite-lived intangibles for the three and nine months ended September 26, 2020 was $11,000 and $270,000, respectively. On the condensed consolidated balance sheets, purchased intangible assets is included in deferred income taxes and other long-term assets. As of September 26, 2020, future amortization expense of $4,000 is expected to be recorded in 2020.
 
13

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
6.
Acquisition-Related Contingent Consideration
In connection with the acquisition of Solar Implant Technologies, Inc. (“SIT”), Intevac agreed to pay to the selling shareholders in cash a revenue earnout on Intevac’s net revenues from commercial sales of certain products over a specified period up to an aggregate of $9.0 million. The earnout period terminated on June 30, 2019. There is no remaining contingent consideration obligation associated with the earnout agreement at September 26, 2020. The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the nine months ended September 28, 2019 (in thousands):
 
    
Nine Months Ended
 
    
September 28, 2019
 
Opening balance
   $ 223  
Changes in fair value
     7  
Cash payments made
     (230
  
 
 
 
Closing balance
   $ —    
  
 
 
 
 
7.
Warranty
Intevac provides for the estimated cost of warranty when revenue is recognized. Intevac’s warranty is subject to contract terms and, for its HDD manufacturing, DCP manufacturing and solar cell manufacturing systems, the warranty typically ranges between 12 and 24 months from customer acceptance. During this warranty period any defective
non-consumable
parts are replaced and installed at no charge to the customer. Intevac uses estimated repair or replacement costs along with its historical warranty experience to determine its warranty obligation. The provision for the estimated future costs of warranty is based upon historical cost and product performance experience. Intevac exercises judgment in determining the underlying estimates.
On the condensed consolidated balance sheets, the short-term portion of the warranty provision is included in other accrued liabilities, while the long-term portion is included in other long-term liabilities. The expense associated with product warranties issued or adjusted is included in cost of net revenues on the condensed consolidated statements of operations.
The following table displays the activity in the warranty provision account for the three and nine months ended September 26, 2020 and September 28, 2019:
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 26,

2020
   
September 28,

2019
   
September 26,

2020
   
September 28,

2019
 
    
(In thousands)
 
Opening balance
   $ 662     $ 948     $ 1,022     $ 997  
Expenditures incurred under warranties
     (89     (167     (398     (592
Accruals for product warranties issued during the reporting period
     39       427       198       829  
Adjustments to previously existing warranty accruals
     (57     (72     (267     (98
  
 
 
   
 
 
   
 
 
   
 
 
 
Closing balance
   $ 555     $ 1,136     $ 555     $ 1,136  
  
 
 
   
 
 
   
 
 
   
 
 
 
The following table displays the balance sheet classification of the warranty provision account at September 26, 2020 and at December 28, 2019:
 
    
September 26,
    
December 28,
 
    
2020
    
2019
 
    
(In thousands)
 
Other accrued liabilities
   $ 425      $ 846  
Other long-term liabilities
     130        176  
  
 
 
    
 
 
 
Total warranty provision
   $ 555      $ 1,022  
  
 
 
    
 
 
 
 
14

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
8.
Guarantees
Officer and Director Indemnifications
As permitted or required under Delaware law and to the maximum extent allowable under that law, Intevac has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was, serving at Intevac’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Intevac could be required to make under these indemnification obligations is unlimited; however, Intevac has a director and officer insurance policy that mitigates Intevac’s exposure and enables Intevac to recover a portion of any future amounts paid. As a result of Intevac’s insurance policy coverage, Intevac believes the estimated fair value of these indemnification obligations is not material.
Other Indemnifications
As is customary in Intevac’s industry, many of Intevac’s contracts provide remedies to certain third parties such as defense, settlement, or payment of judgments for intellectual property claims related to the use of its products. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Letters of Credit
As of September 26, 2020, we had letters of credit and bank guarantees outstanding totaling $787,000, including the standby letter of credit outstanding under the Santa Clara, California facility lease and various other guarantees with our bank. These letters of credit and bank guarantees are collateralized by $787,000 of restricted cash.
 
15

INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 
9.
Cash, Cash Equivalents and Investments
Cash and cash equivalents, short-term investments and long-term investments consist of:
 
    
September 26, 2020
 
    
Amortized Cost
    
Unrealized
Holding Gains
    
Unrealized
Holding Losses
    
Fair Value
 
    
(In thousands)
 
Cash and cash equivalents:
           
Cash
   $ 23,829      $ —        $ —        $ 23,829  
Money market funds
     3,416        —          —          3,416  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash and cash equivalents
   $ 27,245      $ —        $ —        $ 27,245  
Short-term investments:
           
Certificates of deposit
   $ 7,450      $ 7      $ —        $ 7,457  
Commercial paper
     499        1        —          500  
Corporate bonds and medium-term notes
     3,842        27        —          3,869  
U.S. treasury and agency securities
     6,481        35        —