The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes, included in our Annual Report on Form 10-K for the year ended
January 2, 2022. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those discussed or implied in our forward-looking statements due to a number of factors, including those described in the sections entitled "Risk Factors" and "Forward-Looking Statements" herein and elsewhere in our Annual Report on Form 10-K. We refer to the three-month periods ended April 3, 2022and April 4, 2021as the first quarter of 2022 and first quarter of 2021, respectively. Each of these three-month periods includes 13 weeks. All percentage amounts and ratios presented in this management's discussion and analysis were calculated using the underlying data in thousands. Unless otherwise indicated, all changes identified for the current period results represent comparisons to results for the prior corresponding period. For purposes of this section, the terms "we," "us," "our," and "SkyWater" refer to CMI Acquisition, LLCand its subsidiaries collectively before the corporate conversion discussed below and to SkyWater Technology, Inc.and its subsidiaries collectively after the corporate conversion.
Corporate Conversion and Initial Public Offering
April 14, 2021, in connection with the IPO of our common stock, CMI Acquisition, LLCfiled a certificate of conversion, whereby CMI Acquisition, LLCeffected a corporate conversion from a Delawarelimited liability company to a Delawarecorporation and changed its name to SkyWater Technology, Inc., which we refer to as the corporate conversion. As part of the corporate conversion, holders of Class B preferred units and common units of CMI Acquisition, LLCreceived shares of our common stock for each unit held immediately prior to the corporate conversion using an approximate one-to-1.56 conversion ratio for Class B preferred units and one-to-1.45 conversion ratio for common units. On April 23, 2021, we completed our IPO and issued 8,004,000 shares of common stock, including the underwriter's exercise of their right to purchase additional shares, at an initial offering price to the public of $14.00per share. Shares of our common stock began trading on the Nasdaq Stock Marketon April 21, 2021under the symbol "SKYT". We received net proceeds from the IPO of approximately $100.2 million, after deducting underwriting discounts and commissions and offering costs of approximately $11.9 million. We estimate that we utilized approximately $45 millionof our IPO proceeds to pay down our revolving credit agreement, approximately $28 millionof our IPO proceeds to fund capital expenditures, and approximately $27 millionof our IPO proceeds to fund our operating activities.
We are a
U.S.investor-owned, independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services from our fabrication facility, or fab, in Minnesotaand advanced packaging services from our Floridafacility. In our technology as a service model, we leverage a strong foundation of proprietary technology to co-develop process technology intellectual property ("IP") with our customers that enables disruptive concepts through our Advanced Technology Servicesfor diverse microelectronics (integrated circuits, or ICs) and related micro- and nanotechnology applications. In addition to differentiated technology development services, we support customers with volume production of ICs for high-growth markets through our Wafer Services. The combination of semiconductor development and manufacturing services we provide our customers is not available to them from a conventional fab. In addition, our status as a publicly-traded, U.S.- based, U.S.investor-owned pure-play technology foundry with DMEA Category 1A accreditation from the U.S. Department of Defense, or DoD, is expected to position us well to provide distinct, competitive advantages to our customers. These advantages include the benefits of enhanced IP security and easy access to a U.S.domestic supply chain. In September 2019, we entered into a contract with the DoDto receive up to $170 millionto expand and upgrade our manufacturing capabilities, specifically to build next-generation rad-hard wafer solutions for the aerospace and defense sector which will have significant benefits for other commercial markets. Our fab expansion supporting this project began operations in October 2020. In January 2021, we entered into an agreement with Osceola County, Floridato take over operation of the Center for NeoVationfacility in Kissimmee, Floridato accelerate pure-play advanced packaging services for differentiated technologies. We primarily focus on serving diversified, high-growth end users in numerous vertical markets, including (1) advanced computation, (2) aerospace and defense, or A&D, (3) automotive and transportation, (4) bio-health, (5) consumer and (6) industrial/internet of things, or IoT. By housing both development and manufacturing in a single operation, we rapidly and 26
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efficiently transition newly-developed processes to high-yielding volume production, eliminating the time it would otherwise take to transfer production to a third-party fab. Through our
Advanced Technology Services, we specialize in co-creating with our customers advanced solutions that directly serve our end markets, such as superconducting ICs for quantum computing, integrated photonics, carbon nanotube technologies, or CNTs, microelectromechanical systems, or MEMS, technologies for biomedical and imaging applications, and advanced packaging. Our Wafer Services include the manufacture of silicon-based analog and mixed-signal ICs for our end markets. Our focus on the differentiated analog and complementary metal-oxide-semiconductor, or CMOS, markets supports long product life-cycles and requirements that value performance over cost-efficiencies, and leverages our portfolio IP. Before we began independent operations, our fab was owned and operated by Cypress Semiconductor Corporation ("Cypress") as a captive manufacturing facility for 20 years. We have leveraged the Cypress system, manufacturing technology and process development capabilities to advance our product offerings. We became an independent company in March 2017when we were acquired by Oxbow Industries, LLC, or Oxbow, as part of a divestiture from Cypress. Our multi-year Foundry Service Agreement with Cypress, which ended in June 2020, created a runway for us to operate the foundry at a high utilization rate while continuing to expand and diversify the customer base transferred by Cypress. Cypress was acquired in April 2020by Infineon Technologies AG ("Infineon").
Factors and Trends Affecting our Business and Results of Operations
The following trends and uncertainties either affected our financial performance
during the first three months of 2022 and 2021 or are reasonably likely to
impact our results in the future.
?Macroeconomic and competitive conditions, including cyclicality and
consolidation, affecting the semiconductor industry.
?The global economic climate, including the impact on the economy from geopolitical issues and the ongoing COVID-19 pandemic. Our business has been adversely affected by the effects of the COVID-19 pandemic. We implemented modifications to employee travel and employee work locations, as required, in some cases by federal, state and local authorities, which has had a negative impact on our employee productivity. As a result of the COVID-19 pandemic, one customer reduced its research and development expenditures with us, and a second customer experienced facility shutdowns which resulted in delays in project milestones, in each case negatively affecting our revenues. Because we have a manufacturing facility, we may be vulnerable to an outbreak of a new coronavirus or other contagious diseases. The effects of such an outbreak could include the temporary shutdown of our facilities, disruptions or restrictions on the ability to ship our products to our customers, as well as disruptions that may affect our suppliers. Any disruption of our ability to manufacture or distribute our products or of the ability of our suppliers to delivery key components on a timely basis could have material adverse effect on our revenue and operating results. See "Risk Factors-The effects of the COVID-19 outbreak could adversely affect our business, results of operations, and financial condition" in our Annual Report on Form 10-K and our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further information regarding the effects of the COVID-19 pandemic on our business. ?The impact of vaccine mandates on our workforce. In the
U.S., the Food and Drug Administrationissued emergency use authorization for COVID-19 vaccines and the government began extensive efforts to administer them. We have taken various steps to encourage and facilitate vaccination access for our employees, in accordance with federal guidance. We have provided flexibility for employees to get vaccinated, and strongly encouraged our workforce to take care of themselves and their colleagues. In September 2021, the White Houseissued an executive order and guidance from the Safer Federal Workforce Task Forcebroadly requiring many U.S.-based federal contractors to be fully vaccinated by December 8, 2021(or to have an approved accommodation). In early November 2021, the federal government extended that deadline to January 18, 2022. On December 7, 2021, a federal district judge issued an order, temporarily suspending the government from enforcing the federal contractor mandate. That order is on appeal. State and local governments are also taking actions related to the pandemic, imposing additional and varying requirements on industry. We have taken, and are continuing to take, steps to encourage our employees to be fully vaccinated (or to have an approved accommodation) to protect our workplace and to position us to comply with the executive order, guidance, and related contract terms, if and as necessary, as we continue to evaluate the evolving situation and our customers' requirements. Evolving government requirements, including regarding a vaccine mandate, along with the broader impacts of the continuing pandemic, could significantly impact our workforce and performance, as well as those of our suppliers, and result in costs that we may not be able to recover fully. We continue to take robust actions to protect the health, safety and well-being of our employees, and to serve our customers with continued performance. See "Risk Factors-Vaccination or testing mandates could have a material adverse impact on our 27
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business and results of operations” in our Annual Report on Form 10-K for
discussion of risks associated with the potential adverse effects on our
?The Creating Helpful Incentives to Produce Semiconductors, or CHIPS, for America Act, in which
the United Stateshas committed to a renewed focus on providing incentives and funding for onshore companies to develop and advance the latest semiconductor technologies, supporting onshore manufacturing capabilities, and on strengthening key onshore supply chains. The U.S. Senatepassed broad competitiveness legislation on June 8, 2021, through the U.S.Innovation and Competition Act, which includes $52 billionin federal investments for the domestic semiconductor research, design and manufacturing provisions in the CHIPS Act. The U.S. House of Representativespassed competitiveness legislation on February 4, 2022, through the America COMPETES Act, which also includes $52 billionin CHIPS Act investments. Both legislative chambers must reach agreement on, and pass, the joint competitiveness legislation before it can be signed into law by the President. ?Our overall level of indebtedness from our revolving credit agreement for up to $65 million, which we refer to as the Revolver, and a $39 millionfinancing from the sale of the land and building representing our headquarters in Minnesota, which we refer to as the Financing, the corresponding interest rates charged to us by our lenders and our ability to access borrowings under the Revolver.
?Identification and pursuit of specific product and geographic market
opportunities that we find attractive both within and outside
We will continue to more effectively address these opportunities through
research and development and allocation of additional revenue and marketing
?Material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate inflation. We expect the current economic environment will result in continuing price volatility and inflation for many of our raw materials. In addition, the labor market for skilled manufacturing remains tight and our labor costs have increased as a result. ?Supply chain disruptions impacting our business. We have experienced, and may continue to experience, supply chain disruption for substrates, chemicals and spare parts in addition to customer supply chain constraints that have negatively impacted our revenue.
Financial Performance Metrics
Our senior management team regularly reviews certain key financial performance
metrics within our business, including:
?revenue and gross profit; and
?earnings before interest, taxes, depreciation and amortization, as adjusted, or adjusted EBITDA, which is a financial measure not prepared in accordance with accounting principles generally accepted in
the United States, or U.S.GAAP, that excludes certain items that may not be indicative of our core operating results, as well as items that can vary widely across different industries or among companies within the same industry. For information regarding our non-GAAP financial measure, see the section entitled "-Non-GAAP Financial Measure" below. 28
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Results of Operations
First Quarter of 2022 Compared to First Quarter of 2021
The following table summarizes certain financial information relating to our operating results for the first quarter of 2022 and for the first quarter of 2021. First Quarter Ended April 3, 2022 April 4, 2021 Dollar Percentage (1) (1) Change Change (in thousands) Consolidated Statement of Operations Data: Revenue
$ 48,121 $ 48,101 $ 20- % Cost of revenue 49,061 38,935 10,126 26 % Gross profit (loss) (940) 9,166 (10,106) (110) % Research and development 2,282 1,927 355 18 % Selling, general and administrative expenses 11,690 8,603 3,087 36 % Change in fair value of contingent consideration - 56 (56) (100) % Operating income (loss) (14,912) (1,420) (13,492) (950) % Other income (expense): Interest expense (1,029) (1,058) 29 (3) % Total other income (expense) (1,029) (1,058) 29 3 % Loss before income taxes (15,941) (2,478) (13,463) (543) % Income tax expense (benefit) (194) (425) 231 (54) % Net loss (15,747) (2,053) (13,694) (667) % Less: net income attributable to non-controlling interests 859 758 101 13 % Net loss attributable to SkyWater Technology, Inc. $ (16,606) $ (2,811) $ (13,795)(491) % Other Financial Data: Adjusted EBITDA (2) $ (4,836) $ 5,629 $ (10,465)(186) % __________________ (1)The consolidated statements of operations are for the first quarter of 2022 and the first quarter of 2021. The first quarter of 2022 and 2021 each contained 13 weeks. (2)See "-Non-GAAP Financial Measure" for the definition of adjusted EBITDA and reconciliation to the most directly comparable GAAP measure.
$48.1 millionfor the first quarter of 2022 compared to $48.1 millionfor the first quarter of 2021. During the first quarter of 2022, we signed a new contract with a significant wafer services customer. The new contract included increased pricing terms and changed other terms, whereby revenue is recognized over time beginning in March 2022. As a result, we recorded revenue of $8.2 millionin the first quarter of 2022 to account for recognition of wafer services activities in process at the date the contract was signed. The following table shows revenue by services type for the first quarters of 2022 and 2021: First Quarter Ended Dollar Percentage April 3, 2022 April 4, 2021 Change Change (in thousands) Wafer Services $ 21,546 $ 10,019 $ 11,527115 % Advanced Technology Services 26,575 38,082 (11,507) (30) % Total $ 48,121 $ 48,101 $ 200 %
The Wafer Services revenue increase for the first quarter of 2022 reflects the
continued demand in the IoT and automotive industries.
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Advanced Technology Servicesrevenue decrease during the first three months of 2022 was due to a decrease in the amount of revenue recognized related to services to qualify customer funded tool technologies. Tool revenue was $1.0 millionduring the first quarter of 2022 compared to $15.4 millionduring the first quarter of 2021. The decrease was partially offset by continued momentum in U.S.government activities, in partnership with SkyWater, to bolster the domestic semiconductor supply chain and strengthen the defense industrial base.
Gross profit (loss)
Gross profit (loss) decreased
$10.1 million, or 110%, to $(0.9) millionfor the first quarter of 2022, from $9.2 millionfor the first quarter of 2021. The decrease was due to increased cost of revenue. The cost of revenue increase was driven by more activities, labor inflation, supply chain constraints, and investments in our strategic platforms. Our labor costs increased as we continued to hire at our Minnesotaand Floridafacilities to support increased activities. In addition to headcount increases, we are seeing wage inflation, similar to others in the semiconductor industry. The labor market for skilled manufacturing remains tight and we have increased our average starting wage in our fabs to attract the best talent in the market. We also experienced higher prices for freight, substrates, equipment, spare parts, chemicals, and gases as we added additional sources at a higher cost to compliment the output from our primary suppliers and navigate supply chain challenges. The gross loss for the first quarter of 2022 includes increased equity-based compensation of $1.1 million.
Research and development
Research and development costs increased to
$2.3 millionfor the first quarter of 2022, from $1.9 millionfor the first quarter of 2021. The increase of $0.4 million, or 18%, was attributable to increased personnel expense of $0.2 millionfrom our continued investment in internal personnel and external engineering support; and increased equity-based compensation expense of $0.2 million.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to
$11.7 millionfor the first quarter of 2022, from $8.6 millionfor the first quarter of 2021. The increase of $3.1 million, or 36%, was attributable to increased equity-based compensation expense of $1.8 million; increased insurance expense of $1.2 million; and increased personnel expense of $0.5 milliondue to the increase in headcount due to public company requirements and build out of strategic sales and business leadership during the first quarter of 2022. The increase was partially offset by decreased commission expenses of $0.6 million.
Interest expense decreased to
$1.0 millionfor the first quarter of 2022, from $1.1 millionfor the first quarter of 2021. The decrease in interest expense was a result of lower debt balances, partially offset by higher interest rates on our Revolver during the first three months of 2022 compared to the interest rates charged during the comparable prior year period.
Income tax expense (benefit)
Income tax benefit decreased to
$0.2 millionfor the first quarter of 2022, from a benefit of $0.4 millionfor the first quarter of 2021. The effective income tax rate for the first quarter of 2022 was 1.2%, compared to an effective income tax rate of 17.2% for the first quarter of 2021. The effective income tax rate applied to our pre-tax loss was lower for the first quarters of 2022 and 2021 than our statutory tax rate of 21% primarily due to deferred tax asset valuation allowances.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests increased to
$0.9 millionfor the first quarter of 2022, from $0.8 millionfor the first quarter of 2021. Net income attributable to non-controlling interests reflects the net income of the variable interest entity, or VIE, that we consolidate, representing the economic interest in the profits and losses of Oxbow Realtythat the owners of our shareholders' equity do not legally have rights or obligations to.
Adjusted EBITDA decreased
$10.5 million, or 186%, to $(4.8) millionfor the first quarter of 2022 from $5.6 millionfor the first quarter of 2021. The decrease in adjusted EBITDA during the first quarter of 2022 primarily reflects decreased gross profit due to increased labor and infrastructure costs as we continue to scale our business to meet the demands of our customers and the requirements of being a public company. For a discussion of adjusted EBITDA as well as a reconciliation to the most directly comparable U.S.GAAP measure, see the section below entitled "-Non-GAAP Financial Measure." 30
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Liquidity and Capital Resources
Our ability to execute our operating strategy is dependent on our ability to continue to access capital through our Revolver and other sources of financing. Our current business plans indicate that we will require additional liquidity to continue our operations for the next 12 months from the issuance of the consolidated financial statements. In response to this, we are in the process of implementing a plan to reduce operating costs to improve cash flow, which includes a reduction in spending and a delayed increase in personnel, and may require us to decrease our level of investment in new products and technologies, discontinue further expansion of our business, or scale back our existing operations. Management believes that its cash and cash equivalents on hand, available borrowings on our Revolver, and these cost reduction measures, as needed, will provide sufficient liquidity to fund its operations for the next 12 months from the issuance of the consolidated financial statements. The Company has based this estimate on assumptions that may prove to be wrong, and its operating plan may change as a result of many factors currently unknown to it. To the extent that our current resources and plans to reduce expenses are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. We had
$6.2 millionin cash and cash equivalents, not including cash held by a variable interest entity that we consolidate, and availability under our Revolver of $29.1 millionas of April 3, 2022. However, we must maintain availability under the Revolver of at least $15 millionin order to not have to comply with the leverage ratio and fixed charge coverage ratio financial covenants contained in the Revolver with respect to the fiscal quarters ending on or prior to July 2, 2023. Initial Public Offering On April 23, 2021, we completed our IPO and issued 8,004,000 shares of common stock, including the underwriter's exercise of their right to purchase additional shares, at an initial offering price to the public of $14.00per share. We received net proceeds from the IPO of approximately $100.2 million, after deducting underwriting discounts and commissions and offering costs of approximately $11.9 million. We estimate that we utilized approximately $45 millionof our IPO proceeds to pay down our revolving credit agreement, approximately $28 millionof our IPO proceeds to fund capital expenditures, and approximately $27 millionof our IPO proceeds to fund our operating activities.
July 26, 2021, we announced that our Board of Directors approved $56 millionin strategic capital investments for expanding manufacturing capacity and technology capabilities at our Minnesotafacility. The majority of this investment is targeted to expand capacity and capabilities at our Minnesotafab which is expected to increase overall output by at least 40% and to enable accelerated revenue growth. The remainder is focused on expediting our entry into the gallium nitride, or GaN, market, a promising technology for electric vehicles, 5G and consumer electronics, among others due to its properties that enable higher charging efficiencies, smaller ship size, and lighter weight for many applications. We believe SkyWatercan fill the need for a US-based 200 mm foundry to offer technology services for GaN-based solutions expanding the serviceable market for our technology-as-a-serviceSM model. The strategic capital investment is a multi-year strategy and we invested approximately $15.8 millionduring 2021 and the first quarter of 2022. For the first three months of 2022, we spent approximately $4.8 millionon capital expenditures, including purchases of property, equipment and software. The majority of these capital expenditures relate to our foundry expansion in Minnesota, as discussed below, and the development of our advanced packaging capabilities at the Center for NeoVationin Florida. We anticipate our cash on hand and the availability under our Revolver will provide the funds needed to meet our customer demand and anticipated capital expenditures in 2022. We have various contracts outstanding with third parties in connection with the completion of a building expansion project to increase manufacturing capacity at our Minnesotafacility. We have approximately $10 millionof contractual commitments outstanding as of April 3, 2022that we expect to be paid in 2022, through cash on hand and availability under our Revolver. On April 1, 2022, we commenced a finance lease for a nitrogen generator. The lease has a term of 15 years for total fixed payments of approximately $14 million.
We anticipate paying
$0.8 millionto settle the remaining obligation related to our contingent consideration royalty liability in the first half of 2022. We anticipate our cash on hand and availability under our Revolver will provide the funds necessary to settle the contingent consideration royalty liability. 31
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Historically, we have depended on cash on hand, funds available under our Revolver, funds from the sale of our land and building in
Minnesota, cash flows from operations, and in the future may depend on additional debt and equity financings, similar to our IPO, to finance our expansion strategy, working capital needs and capital expenditures. We believe that these sources of funds will be adequate to provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. However, we cannot be certain that we will be able to obtain future debt or equity financings adequate for our cash requirements on commercially reasonable terms or at all. As of April 3, 2022, we had available aggregate undrawn borrowing capacity of approximately $29.1 millionunder our Revolver. However, we must maintain availability under the Revolver of at least $15 millionin order to not have to comply with the leverage ratio and fixed charge coverage ratio financial covenants contained in the Revolver with respect to the fiscal quarters ending on or prior to July 2, 2023. For the periods presented, our use of cash was primarily driven by our investing activities, and specifically by our investments in capital expenditures. The following table sets forth general information derived from our condensed consolidated statement of cash flows for the first three months of 2022 and 2021: Three Months Ended April 3, 2022 April 4, 2021 (in thousands) Net cash used in operating activities $ (10,792) $ (8,424)Net cash used in investing activities $ (4,814) $ (5,397)Net cash provided by financing activities $ 9,124 $ 10,601
First Quarter of 2022 Compared to First Quarter of 2021
Cash and Cash Equivalents
April 3, 2022and January 2, 2022, we had $6.4 millionand $12.9 millionof cash and cash equivalents, respectively, including cash of $0.2 millionand $0.5 million, respectively, held by a variable interest entity that we consolidate.
Cash flow from operations is driven by changes in the working capital needs associated with the various goods and services we provide, and expenses related to the infrastructure in place to support revenue generation. Working capital is primarily affected by changes in accounts receivable, accounts payable, accrued expenses, and deferred revenue, all of which tend to be related and are affected by changes in the timing and volume of work performed and our increased expenditures as a public company. Net cash used in operating activities was
$10.8 millionduring the first three months of 2022, a decrease of $2.4 millionfrom $8.4 millionof cash used in operating activities during the first three months of 2021. The decrease in cash provided by operating activities during the first three months of 2022 was driven primarily by an increase in our costs as described in Gross profit (loss) above. Our operating cash flow was additionally impacted from the change in our working capital accounts. Deferred revenue decreased during the first three months of 2022 as we recognized revenue from customers who funded our building expansion during 2020.
Capital expenditures are a significant use of our capital resources. These
investments are intended to enable revenue growth in new and expanding markets,
help us meet product demand and increase our manufacturing efficiencies and
Net cash used in investing activities was
$4.8 millionduring the first three months of 2022, a decrease of $0.6 millionfrom $5.4 millionduring the first three months of 2021. The decrease in cash used during the first three months of 2022 reflects decreased capital spending on property and equipment as we fully complete our foundry expansion project to increase manufacturing capacity at our Minnesotafacility. Financing Activities Net cash provided by financing activities was $9.1 millionduring the first three months of 2022, a decrease of $1.5 millionfrom net cash provided by financing activities of $10.6 millionduring the first three months of 2021. The decrease in net cash provided by financing activities during the first three months of 2022 was driven by a decrease in net proceeds of our revolver, which amounted to $9.4 millionduring the first three months of 2022 compared to $13.0 millionduring the first three 32
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months of 2021. The decrease was additionally driven by a decrease in
distributions to our VIE and partially offset from proceeds from our employee
stock purchase plan.
Indebtedness Sale Leaseback Transaction On
September 29, 2020, we entered into an agreement to sell the land and building representing our primary operating location in Bloomington, Minnesotato Oxbow Realty, LLC, or Oxbow Realty, an entity controlled by our principal stockholder for $39 million, less applicable transaction costs of $1.5 millionand transaction services fees paid to Oxbow Realtyof $2.0 millionand paid a guarantee fee to our principal stockholder of $2.0 million. We subsequently entered into an agreement to lease the land and building from Oxbow Realtyfor initial payments of $0.4 millionper month over 20 years. The monthly payments are subject to a 2% increase each year during the term of the lease. We are also required to make certain customary payments constituting "additional rent," including certain monthly reserve, insurance and tax payments, in accordance with the terms of the lease. Due to our continuing involvement in the property, we are accounting for the transactions as a failed sale leaseback (a financing transaction). Under failed sale leaseback accounting, we are deemed the owner of the property with the proceeds received recorded as a financial obligation.
Revolving Credit Agreement
December 28, 2020, we entered into an amended and restated revolving credit agreement with Wells Fargo, our Revolver, of up to $65 millionthat replaced our previous line of credit and term loan. Under the agreement, the facility is available on a revolving basis, subject to availability under a borrowing base consisting of a percentage of eligible accounts receivable, inventory and owned equipment. The Revolver is secured by a security interest in substantially all of our accounts receivable, inventory and equipment. The Revolver can be repaid and borrowed again at any time without penalty or premium until the maturity date of December 28, 2025. The Revolver is available for issuance of letters of credit to a specified limit of $10 million. Under the Revolver, we can elect the base rate (greatest of the federal funds rate plus 0.5%, LIBOR for a one-month period plus 1%, or the institution's prime rate) or LIBOR for a period of one, two, three or six months as selected by us, plus a margin depending on the amount of borrowings outstanding. We will also pay a commitment fee equal to 0.25% to 0.375% of the average commitment not utilized, depending on the amount not utilized. Interest payments are due monthly. On November 3, 2021, we entered into an amendment to the Revolver, effective as of October 1, 2021, to eliminate the requirement for us to comply with the leverage ratio financial covenant contained therein with respect to the fiscal quarters ending on or prior to July 2, 2023, so long as the remaining availability under the Revolver has equaled or exceeded $15 million. Certain financial covenants, including a fixed charge coverage ratio and leverage ratio, become applicable only if unused remaining availability falls below $15 million. As of April 3, 2022, our unused remaining availability was $29.1 millionand we were in compliance with applicable financial covenants of the Revolver and expect to be in compliance with applicable financial covenants over the next twelve months. The fixed charge coverage ratio financial covenant requires us to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 on a rolling twelve-month basis. The fixed charge coverage ratio included in our credit agreement is defined as (A) earnings before interest, taxes, depreciation and amortization ("EBITDA"), less unfinanced capital expenditures, divided by (B) fixed charges, which are generally defined as cash interest and income taxes, scheduled principal payments on loans and contingent consideration arrangements, and restricted payments such as dividends. EBITDA, as defined, includes adjustments for such items as unusual gains or losses, equity-based compensation and management fees, as well as other adjustments. The leverage ratio financial covenant requires us to maintain a leverage ratio of no greater than 3.0 to 1.0 on a rolling twelve-month basis measured quarterly. The leverage ratio included in our credit agreement is defined as our funded indebtedness as of the measurement date divided by our EBITDA for the twelve-month period as of the measurement date. The Revolver contains covenants, including restrictions on indebtedness, liens, mergers, consolidations, investments, acquisitions, disposition of assets, and transactions with affiliates. Dividends, redemptions and other payments on equity (restricted payments) are limited to (1) restricted payments to the loan parties, and (2) declaring and making dividend payments or other distributions payable solely in capital stock. Customary events of default (with customary grace periods, notice and cure periods and thresholds) include payment default, breach of representation in any material respect, breach of certain covenants, default to material indebtedness, bankruptcy, ERISA violations, material judgments, change in control and termination or invalidity of guaranty or security documents. 33
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There were no significant changes outside the ordinary course of business in our contractual obligations from those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Material Cash Requirements" of our Annual Report on Form 10-K for the fiscal year ended
January 2, 2022.
We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act. For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.
Critical Accounting Policies and Estimates
In connection with preparing our condensed consolidated financial statements in accordance with
U.S.GAAP, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expense, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time we prepare our condensed consolidated financial statements. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S.GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, valuation of long-lived assets and inventory, share-based compensation and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and
estimates disclosed in our Annual Report on Form 10-K for the year ended
Revenue Recognition of New Wafer Services Contract
Revenue is recognized either over time as work progresses using an output measure or at a point-in-time, depending upon contract-specific terms and the pattern of transfer of control of the product or service to the customer. Due to the nature of our contracts, there can be judgment involved in determining the performance obligations that are included in the related contract. We analyze each contract to conclude what enforceable rights and obligations exist between us and our customers. In doing so, we determine our unit of account by identifying the promises within the contract that are both (1) considered to be distinct and (2) distinct within the context of each contract. In
March 2022, we signed a new contract with a significant wafer services customer. Under the contract, orders are non-cancellable and we have an enforceable right to complete the orders and to payment for any finished or in-process wafers plus a reasonable margin. The wafers produced for that customer are highly customized and have no alternative use to us. Control of these wafers is deemed to transfer to the customer over time during the fabrication process, using the same measure of progress toward satisfying the promise to deliver the units to the customer. Consequently, the transaction price is recognized as revenue over time based on actual costs incurred in the fabrication process to date relative to total expected costs to produce all wafers beginning in March 2022. The contract terms and pricing is applicable to all in-process and future wafer. We recorded revenue of $8,230in the first quarter of 2022 to account for recognition of wafer services activities in process at the date the contract was signed. Additionally, this change in the timing of revenue recognition reduced our work-in-process inventory and increased our unbilled receivables (contract assets) and cost of revenue. Under the previous contract with the significant customer, we were recognizing revenue at a point-in-time under a bill and hold arrangement as disclosed in our Annual Report on Form 10-K for the year ended January 2, 2022. 34
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Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently
issued accounting standards not yet adopted, see “Note 3 – Summary of
Significant Accounting Policies” to the condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measure
Our condensed consolidated financial statements are prepared in accordance with
U.S.GAAP. To supplement our condensed consolidated financials presented in accordance with U.S.GAAP, an additional non-GAAP financial measure is provided and reconciled in the following table. We provide supplemental non-GAAP financial information that our management utilizes to evaluate our ongoing financial performance and provide additional insight to investors as supplemental information to our U.S.GAAP results. We use adjusted EBITDA to provide a baseline for analyzing trends in our business and to exclude certain items that may not be indicative of our core operating results. The use of non-GAAP financial information should not be considered as an alternative to, or more meaningful than, the comparable U.S.GAAP measure. In addition, because our non-GAAP measure is not determined in accordance with U.S.GAAP, it is susceptible to differing calculations, and not all comparable or peer companies may calculate their non-GAAP measures in the same manner. As a result, the non-GAAP financial measure presented in this Quarterly Report on Form 10-Q may not be directly comparable to similarly titled measures presented by other companies.
This non-GAAP financial measure should not be considered as an alternative to,
or more meaningful than, net income determined in accordance with
Adjusted EBITDA is not a financial measure determined in accordance with
U.S.GAAP. We define adjusted EBITDA as net income before interest expense, income tax provision (benefit), depreciation and amortization, equity-based compensation and certain other items that we do not view as indicative of our ongoing performance, including fair value changes in contingent consideration, management fees, inventory write-down, corporate conversion and IPO related costs, Paycheck Protection Program Loan forgiveness, SkyWater Florida start-up costs, net income attributable to non-controlling interests, and management transition expense. We believe adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income determined in accordance with U.S.GAAP. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from adjusted EBITDA. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual, unless otherwise expressly indicated. The following table presents a reconciliation of net income (loss) to adjusted EBITDA, our most directly comparable financial measure calculated and presented in accordance with U.S.GAAP. 35
Table of Contents First Quarter Ended April 3, 2022 April 4, 2021 (in thousands) Net loss attributable to SkyWater Technology, Inc.
$ (16,606) $ (2,811)Interest expense 1,029 1,058 Income tax (benefit) expense (194) (425) Depreciation and amortization 6,458 6,482 EBITDA (9,313) 4,304 SkyWater Florida start-up costs (1) 402 - Fair value changes in contingent consideration (2) - 56 Equity-based compensation (3) 3,216 235 Management fees (4) - 276 Net income attributable to non-controlling interests (5) 859 758 Adjusted EBITDA $ (4,836) $ 5,629__________________ (1)Represents start-up costs associated with our 200 mm advanced packaging facility in Kissimmee, Florida, which includes legal fees, recruiting expenses, retention awards and facility start-up expenses. These expenses are not indicative of our ongoing costs and will be discontinued following completion of the start-up of SkyWater Florida. (2)Represents non-cash valuation adjustment of contingent consideration to fair market value during the period. (3)Represents non-cash equity-based compensation expense. (4)Represents a related party transaction with Oxbow, our principal stockholder. As these fees are not part of the core business, did not continue after our IPO and are excluded from management's assessment of the business, we believe it is useful to investors to view our results excluding these fees. (5)Represents net income attributable to our VIE, which was formed for the purpose of purchasing our land and building with the proceeds of a bank loan. Since depreciation and interest expense are excluded from net loss in our adjusted EBITDA financial measure, we also exclude the net income attributable to the VIE.
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