INTEVAC INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

This Quarterly Report on Form
10-Q
contains forward-looking statements, which involve risks and uncertainties.
Words such as "believes," "expects," "anticipates" and the like indicate
forward-looking statements. These forward-looking statements include comments
related to Intevac's shipments, projected revenue recognition, product costs,
gross margin, operating expenses, interest income, income taxes, cash balances
and financial results in 2022 and beyond; projected customer requirements for
Intevac's new and existing products, and when, and if, Intevac's customers will
place orders for these products; the timing of delivery and/or acceptance of the
systems and products that comprise Intevac's backlog for revenue and the
Company's ability to achieve cost savings. Intevac's actual results may differ
materially from the results discussed in the forward-looking statements for a
variety of reasons, including those set forth under "Risk Factors" and in other
documents we file from time to time with the Securities and Exchange Commission,
including our Annual Report on Form
10-K
filed on February 17, 2022, our Quarterly Reports on Form
10-Q
and our Current Reports on Form
8-K.

Intevac's trademarks include the following: "200 Lean
®
," "INTEVAC LSMA
®
," "INTEVAC MATRIX
®
," "oDLC
®
," and "TRIO
™
."

Discontinued Operations

On December 30, 2021, the Company completed the sale of its Photonics business
to EOTECH, LLC, a Michigan limited liability company ("EOTECH"). As a result of
the disposition, the results of operations from the Photonics reporting segment
are reported as "Net loss from discontinued operations, net of taxes" in the
condensed consolidated financial statements. The Company has recast prior period
amounts presented 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 condensed consolidated
financial statements in Item 1 of this Quarterly Report on Form
10-Q.

Insight

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

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

In March 2022, the Company's management approved a restructuring plan to realign
the Company's operational focus, scale the business and improve costs. The
restructuring program includes (i) reducing the Company's headcount and
(ii) eliminating several research and development ("R&D") programs and product
offerings. As part of this realignment effort, the Company will no longer be
pursuing several DCP projects including the coating of the backside covers of
smartphones, solar ion implantation (also known as ENERGi
®
), and advanced packaging for semiconductor manufacturing.

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The following table presents certain significant measures for the three and six months ended July 2, 2022 and July 3, 2021:

                                                Three months ended                                Six months ended
                                    July 2,       July 3,        Change over         July 2,        July 3,        Change over

                                      2022          2021         prior period         2022           2021          prior period

                                                      (In thousands, except percentages and per share amounts)
Net revenues                        $  9,307      $  5,369      $        3,938      $  13,752      $  14,607      $         (855 )
Gross profit                        $  4,487      $  1,006      $        3,481      $   5,209      $   3,140      $        2,069
Gross margin percent                    48.2 %        18.7 %         29 points           37.9 %         21.5 %         16 points
Loss from operations                $ (2,397 )    $ (6,309 )    $       

3,912 ($10,084) ($11,874) $1,790
Loss from continuing operations ($2,580) ($6,124) $3,544 ($10,300) ($11,692) $1,392
Loss of discontinued operations $ (238 ) $ (2 ) $ (236 ) $ (373 ) $ (938 ) $565 Net loss

                            $ (2,818 )    $ (6,126 )    $        

3,308 ($10,673) ($12,630) $1,957
Net loss per diluted share $(0.11) $(0.25) $0.14 $(0.43) $(0.52) $0.09


Net revenues increased during the second quarter of fiscal 2022 compared to the
same period in the prior year primarily due to higher equipment sales to HDD
manufacturers. Higher gross margin in the second quarter of fiscal 2022
reflected the higher-margin contribution from HDD upgrades. Fees earned pursuant
to the TSA with EOTECH since the divestiture of Photonics ("TSA fees") were
$408,000 for the three months ended July 2, 2022, of which $14,000 was reported
as a reduction of cost of net revenues and $394,000 was reported as a reduction
of selling, general and administrative expenses. The agreed-upon charges for
such services are generally intended to allow the service provider to recover
all costs and expenses of providing such services. The Company reported a
smaller net loss for the second quarter of fiscal 2022 compared to the second
quarter of fiscal 2021 due to higher revenues, higher gross margins and lower
operating costs as a result of the cost reduction actions taken in the first
quarter of fiscal 2022.

Net revenues decreased during the first half of fiscal 2022 compared to the same
period in the prior year primarily due to lower system sales. We did not
recognize revenue on any system sales in the first half of fiscal 2022 compared
to one MATRIX PVD system for advanced semiconductor packaging recognized in the
first half of fiscal 2021. Higher gross margin in the first half of fiscal 2022
reflects the higher-margin contribution from HDD upgrades, offset in part by
$755,000 in charges for excess and obsolete inventory as part of the Company's
realignment effort. Lower gross margin in the first half of fiscal 2021
reflected the lower-margin contribution from the first MATRIX PVD system for
advanced semiconductor packaging. In March 2022, the Company's management
approved a restructuring plan to realign the Company's operational focus, scale
the business and improve costs. R&D expenses for the first half of fiscal 2022
include $1.5 million in expenditures related to the disposal of certain lab
equipment as part of the realignment effort. The cost of employee severance
associated with the realignment effort of $1.2 million was offset in full by
stock-based compensation forfeitures related to the employees affected by the
reduction in workforce. TSA fees were $1.2 million for the six months ended
July 2, 2022, of which $23,000 was reported as a reduction of cost of net
revenues and $1.2 million was reported as a reduction of selling, general and
administrative expenses. During the first half of fiscal 2021, the Company
received $82,000 in government assistance related to
COVID-19
from the government of Singapore, of which $55,000 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. The Company did not receive any JSS grants in the first half of fiscal
2022. The Company reported a smaller net loss for the first half of fiscal 2022
compared to the first half of fiscal 2021 due to higher gross margins, offset in
part by lower revenues and higher operating costs as a result of the realignment
effort.

We believe fiscal 2022 will be a challenging year, and Intevac does not expect
be profitable in fiscal 2022. Intevac expects that 2022 HDD equipment sales will
be similar to 2021 levels as we expect a customer to take delivery of one system
in backlog. We believe there will be improvements to our HDD equipment sales in
the future as we expect a customer to start taking deliveries from the remaining
ten systems in backlog starting in fiscal 2023. However, our operating results
and growth prospects could be impacted by macroeconomic conditions such as a
global economic slowdown, global economic instability and political conflicts,
wars, and public health crises. In addition, rising inflation and interest rates
may impact demand for our products and services and our cost to provide products
and services.

COVID-19
Update

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 and interest rate fluctuations
on our business

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and the broader economy, which may continue to 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. Although we have since fully reopened our offices in accordance with
local guidelines, our employees' health and safety remain 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, to
determine whether and when additional safeguards may become necessary.

In Singapore, Intervac received government assistance under the Job Support Scheme (“JSS”). The goal of the JSS is to provide wage support to employers to help them retain their local employees. As part of the JSS, Intervac received
$82,000 of JSS grants during the first half of fiscal 2021. The Company did not receive any JSS grants during the first half of fiscal 2022.

For the three and six months ended July 2, 2022, the Company's expenses included
approximately $16,000 and $34,000, respectively, due to costs related to actions
taken in response to
COVID-19.
For the three and six months ended July 3, 2021, the Company's expenses included
approximately $44,000 and $87,000, respectively, due to costs related to actions
taken in response to
COVID-19.

Results of Operations

Net revenues

                         Three months ended                            Six months ended
               July 2,      July 3,       Change over      July 2,      July 3,       Change over

                 2022         2021       prior period        2022         2021        prior period

                                                  (In thousands)
Net revenues   $  9,307     $  5,369     $       3,938     $ 13,752     $ 14,607     $         (855 )



Revenue for the three months ended July 2, 2022 increased compared to the same
period in the prior year as a result of higher sales of technology upgrades,
spare parts and service. Revenue for the six months ended July 2, 2022 decreased
compared to the same period in the prior year as a result of lower sales of
systems, spare parts and service, offset in part by higher sales technology
upgrades. Revenue for the three months ended July 2, 2022 and July 3, 2021 did
not include revenue recognized for any systems. Revenue for the six months ended
July 2, 2022 did not include revenue recognized for any systems compared to
revenue recognized on one MATRIX PVD system for advanced semiconductor packaging
in the first half of fiscal 2021.

Backlog

           July 2,       January 1,      July 3,

            2022            2022           2021

                      (In thousands)
Backlog   $ 100,194     $     24,725     $ 18,943


Order book at July 2, 2022 included eleven 200 Lean HDD systems. Order book at
January 1, 2022 included a 200 Lean HDD system. Order book at July 3, 2021 did not include any 200 Lean HDD system.

Revenue by geographic area

                        Three Months Ended          Six Months Ended
                      July 2,        July 3,      July 2,      July 3,

                        2022           2021         2022         2021

                                       (In thousands)
United States        $    1,656      $  2,121     $  1,950     $  2,488
Asia                      7,651         3,248       11,802        8,269
Europe                       -             -            -         3,850

Total net revenues   $    9,307      $  5,369     $ 13,752     $ 14,607



International sales include products shipped to overseas operations of U.S.
companies. The decrease in sales to the U.S. region in the three and six months
ended July 2, 2022 versus the three and six months ended July 3, 2021, reflected
lower HDD upgrade sales, offset in part by higher spare parts and service sales.
The increase in sales to the Asia region in the three and six months ended
July 2, 2022 versus the three and six months ended July 3, 2021, reflected
higher HDD upgrade, spare parts and service sales. Sales to the Asia region in
all periods presented did not include any systems. Sales to the Europe region in
the six months ended July 3, 2021 included one MATRIX PVD system for advanced
semiconductor packaging.

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  Table of Contents

Gross profit

                                              Three months ended                             Six months ended
                                   July 2,       July 3,        Change over      July 2,       July 3,        Change over

                                     2022          2021        prior period        2022          2021        prior period

                                                             (In thousands, except percentages)
Gross profit                       $  4,487      $  1,006      $       3,481     $  5,209      $  3,140      $       2,069
% of net revenues                      48.2 %        18.7 %                          37.9 %        21.5 %


Cost of net revenue primarily includes purchased materials, and also includes labor and overhead for manufacturing, assembly, testing and installation, customer-specific engineering costs, warranty, royalties, provisions for inventory reserves and scrap metal.

Gross margin was 48.2% in the three months ended July 2, 2022 compared to 18.7%
in the three months ended July 3, 2021 and was 37.9% in the six months ended
July 2, 2022 compared to 21.5% in the six months ended July 3, 2021. The
improvement in the gross margin percentage for the three months ended
July 2, 2022 compared to the same period in the prior year was due primarily to
higher revenues, the higher-margin contribution from HDD upgrades, and higher
factory utilization. The improvement in the gross margin percentage for the six
months ended July 2, 2022 was due primarily to the higher-margin contribution
from HDD upgrades, offset in part by $755,000 in charges for excess and obsolete
inventory as part of the Company's realignment effort. Gross margin for the six
months ended July 3, 2021 reflects the lower margin on the first MATRIX PVD
system for advanced semiconductor packaging. Gross margins will vary depending
on a number of factors, including revenue levels, product mix, product cost,
system configuration and pricing, factory utilization, and provisions for excess
and obsolete inventory.

Research and development costs

                                                Three months ended                            Six months ended
                                     July 2,      July 3,       Change over        July 2,      July 3,       Change over

                                       2022         2021        prior period         2022         2021       prior period
                1
                                                                        (In 

thousands)

Research and development costs $2,868 $3,118 $ (250 ) $7,028 $6,483 $545


Research and development spending during the three months ended July 2, 2022
decreased compared to the same periods in the prior year primarily due to
savings from cost reduction activities completed in the first quarter of fiscal
2022, offset in part by higher spending on DCP development. R&D spending during
the six months ended July 2, 2022 increased compared to the six months ended
July 3, 2021 primarily due to $1.5 million in expenditures related to the
disposal of certain lab equipment as part of the realignment effort, offset by
lower spending on R&D programs.

Selling, general and administrative expenses

                                               Three months ended                             Six months ended
                                    July 2,      July 3,       Change over        July 2,      July 3,       Change over

                                      2022         2021        prior period         2022         2021        prior period

                                                                        (In thousands)
Selling, general and
administrative expense              $  4,016     $  4,197     $         

(181 ) $8,265 $8,531 $ (266 )


Selling, general and administrative expense consists primarily of selling,
marketing, customer support, financial and management costs. Selling, general
and administrative expense for the three months ended July 2, 2022 decreased
compared to the three months ended July 3, 2021 due to cost savings as a result
of the realignment program implemented in the first quarter of fiscal 2022,
reimbursement under the TSA, and lower variable compensation expenses, offset in
part by higher stock compensation expenses. Selling, general and administrative
expense for the six months ended July 2, 2022 decreased compared to the six
months ended July 3, 2021 as lower variable compensation expenses, lower stock
compensation expenses, and TSA reimbursements were offset
in-part
by
one-time
severance charges associated with the realignment effort and higher legal and
consulting fees. Selling, general and administrative expense for the three and
six months ended July 2, 2022, is net of $394,000 and $1.2 million, respectively
in TSA fees earned since the Photonics divestiture. The agreed-upon charges for
such services are generally intended to allow the service provider to recover
all costs and expenses of providing such services.

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Cost reduction plans

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

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.
During the first half of 2021, the Company reported costs of $43,000 under the
2021 Cost Reduction Plan of which $9,000 was reported under cost of net revenues
and $34,000 was reported under operating expenses. 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 $95,000 was reported under operating
expenses during fiscal 2021. Substantially all cash outlays in connection with
the 2021 Cost Reduction Plan were completed in the third quarter of 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.

Interest income and other income (expenses), net

                                                  Three months ended                               Six months ended
                                       July 2,         July 3,       Change over       July 2,        July 3,       Change over

                                         2022           2021        prior period         2022          2021        prior period

                                                                            (In thousands)
Interest income and other, income
(expense), net                        $      317      $      20     $       

297 $310 $50 $260


Interest income and other income (expense), net in the three months ended
July 2, 2022 included $166,000 of interest income on investments, various other
income of $11,000 and $140,000 of foreign currency gains. Interest income and
other income (expense), net in the six months ended July 2, 2022 included
$175,000 of interest income on investments, various other income of $28,000 and
$107,000 of foreign currency gains. Interest income and other income (expense),
net in the three months ended July 3, 2021 included $10,000 of interest income
on investments, various other income of $5,000 and $5,000 of foreign currency
gains. Interest income and other income (expense), net in the six months ended
July 3, 2021 included $27,000 of interest income on investments and various
other income of $25,000, offset in part by $2,000 of foreign currency losses.
The increase in interest income in the three and six months ended July 2, 2022
compared to the same periods in the prior year resulted from higher invested
balances and higher interest rates.

Provision for (profit) income taxes

                                                Three months ended                              Six months ended
                                     July 2,       July 3,        Change over       July 2,       July 3,        Change over

                                      2022          2021         prior period        2022          2021         prior period

                                                                         (In thousands)
Provision for (benefit from)
income taxes                        $     500     $    (165 )    $         

665 $526 $ (132 ) $658


Intevac recorded income tax provisions of $500,000 and $526,000 for the three
and six months ended July 2, 2022, respectively, and income tax benefits of
$165,000 and $132,000 for the three and six months ended July 3, 2021,
respectively. The income tax provisions (benefits) for these three and six month
periods are based upon estimates of annual income (loss), annual permanent
differences and statutory tax rates in the various jurisdictions in which
Intevac operates. For the three and six month periods ended July 2, 2022,
Intevac recorded income tax provisions on profits of its international
subsidiaries of $390,000 and $364,000, respectively, and recorded $107,000 and
$158,000, respectively, for withholding taxes on royalties paid to the United
States from Intevac's Singapore subsidiary as discrete items. For the three and
six month periods ended July 3, 2021, Intevac recorded income tax benefits on
losses of its international subsidiaries

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of $189,000 and $208,000, respectively, and recorded $24,000 and $72,000,
respectively, for withholding taxes on royalties paid to the United States from
Intevac's Singapore subsidiary as discrete items. For all periods presented,
Intevac utilized net operating loss carry-forwards to offset the impact of
global intangible
low-taxed
income. Intevac's tax rate differs from the applicable statutory rates due
primarily to the establishment of a valuation allowance, the utilization of
deferred and current credits and the effect of permanent differences and
adjustments of prior permanent differences. Intevac's future effective income
tax rate depends on various factors, including the level of Intevac's projected
earnings, the geographic composition of worldwide earnings, tax regulations
governing each region, net operating loss carry-forwards, availability of tax
credits and the effectiveness of Intevac's tax planning strategies. Management
carefully monitors these factors and timely adjusts the effective income tax
rate.

The income tax expense (benefit) consists primarily of income taxes in foreign
jurisdictions in which we conduct business and foreign withholding taxes. We
maintain a full valuation allowance for domestic deferred tax assets, including
net operating loss carry-forwards and certain domestic tax credits. Intevac's
effective tax rate differs from the U.S. statutory rate in both 2022 and 2021
primarily due to the Company not recognizing an income tax benefit on the
domestic loss.

Loss from discontinued operations, net of tax

                                                   Three months ended                               Six months ended
                                       July 2,          July 3,       Change over       July 2,       July 3,       Change over

                                         2022            2021        prior period        2022          2021         prior period

                                                                            (In thousands)
Loss from discontinued operations,
net of taxes                          $      238       $       2     $      

236 $373 $938 $ (565 )


The loss from discontinued operations consists primarily of the results of
operations of the Photonics business which was sold to EOTECH on December 30,
2021. Loss from discontinued operations for the three months ended July 2, 2022
includes contract termination costs associated with certain software maintenance
contracts, settlement of the closing net working capital adjustment from the
sale of the Photonics business to EOTECH and stock based compensation associated
with 16 mutual employees of both the Company and the Buyer that are assisting in
the assignment and novation of all government contracts and to sponsor the
Buyer's facility clearance from the Defense Counterintelligence and Security
Agency of the U.S. government. Loss from discontinued operations for the six
months ended July 2, 2022 includes salaries and wages and employee benefits up
to and including January, 4, 2022, the date when employees were conveyed to the
Buyer, severance for several employees that were not hired by the Buyer,
stock-based compensation expense associated with the acceleration of stock
awards, contract termination costs associated with software maintenance
agreements, settlement of the net working capital adjustment and incremental
legal expenses associated with the divestiture, offset in part by a stock based
compensation divestiture-related forfeiture benefit. Loss from discontinued
operations for the three and six months ended July 3, 2021 represents the loss
from the Photonics division, net of tax.

Cash and capital resources

At July 2, 2022, Intevac had $110.2 million in cash, cash equivalents,
restricted cash and investments compared to $121.2 million at January 1, 2022.
During the first six months of fiscal 2022, cash, cash equivalents, restricted
cash and investments decreased by $11.0 million due primarily to cash used in
operating activities, purchases of fixed assets and tax payments on net share
settlements, partially offset by cash received from the sale of Intevac common
stock to Intevac's employees through Intevac's employee benefit plans.

Cash, cash equivalents, restricted cash and investments consist of the
following:

                                                                 July 2,      January 1,

                                                                  2022           2022

                                                                     (In thousands)
Cash and cash equivalents                                       $  53,669     $   102,728
Restricted cash                                                       786             786
Short-term investments                                             31,168          10,221
Long-term investments                                              24,565           7,427

Total cash, cash equivalents, restricted cash and investments $110,188

$121,162



Operating activities used cash of $11.4 million during the first six months of
fiscal 2022 and generated cash of $3.4 million during the first six months of
fiscal 2021.

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Accounts receivable totaled $30.3 million at July 2, 2022 compared to
$14.3 million at January 1, 2022. Customer advances for products that had not
been shipped to customers and included in accounts receivable were $19.3 million
at July 2, 2022 which were collected on July 7, 2022. Net inventories totaled
$11.8 million at July 2, 2022 compared to $5.8 million at January 1, 2022 due to
increased manufacturing activities. Accounts payable decreased to $3.6 million
at July 2, 2022 from $5.3 million at January 1, 2022. Accounts payable at
January 1, 2022 included a payable of $2.0 million as a commission to the
investment banker for the Photonics sale. Accrued payroll and related
liabilities decreased to $3.5 million at July 2, 2022 compared to $5.5 million
at January 1, 2022 due primarily to the settlement of 2021 bonuses. Other
accrued liabilities decreased to $3.0 million at July 2, 2022 compared to
$3.7 million at January 1, 2022 primarily due to lower other tax liability
balances. Customer advances increased from $2.1 million at January 1, 2022 to
$24.8 million at July 2, 2022 primarily as a result of new orders.

Investing activities used cash of $39.3 million during the first six months of
fiscal 2022. Purchases of investments net of proceeds from sales totaled
$38.4 million. Capital expenditures for the six months ended July 2, 2022 were
$888,000.

Financing activities generated cash of $1.9 million in the first six months of
fiscal 2022. The sale of Intevac common stock to Intevac's employees through
Intevac's employee benefit plans generated cash of $2.2 million. Tax payments
related to the net share settlement of restricted stock units were $295,000.

Intevac's investment portfolio consists principally of investment grade money
market mutual funds, U.S. Treasury and agency securities, certificates of
deposit, asset-backed securities, 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 July 2, 2022, approximately $27.7 million of cash and cash equivalents and
$2.9 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, settlement of the PAGA
litigation 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 the
remainder of fiscal 2022 are projected to be approximately $3.7 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 July 2, 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.

Significant Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
("US GAAP") requires management to make judgments, assumptions and estimates
that affect the amounts reported. Intevac's significant accounting policies are
described in Note 1 to the consolidated financial statements included in Item 8
of Intevac's Annual Report on Form
10-K
for the year ended January 1, 2022, filed with the SEC on February 17, 2022.
Certain of these significant accounting policies are considered to be critical
accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the
presentation of Intevac's financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
Intevac's financial conditions and results of operations. Specifically, critical
accounting estimates 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.

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Contents

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 become 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. Many of these
uncertainties are discussed in the section below entitled "Risk Factors." Based
on a critical assessment of Intevac's 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 US GAAP, and provide a meaningful presentation of
Intevac's financial condition and results of operations.

There were no material changes to our significant accounting policies during the six months ended July 2, 2022.

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