SKYWATER TECHNOLOGY, INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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, 2022 and April 4, 2021 as 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, LLC and 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

On April 14, 2021, in connection with the IPO of our common stock, CMI
Acquisition, LLC filed a certificate of conversion, whereby CMI Acquisition, LLC
effected a corporate conversion from a Delaware limited liability company to a
Delaware corporation 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, LLC
received 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 $14.00 per
share. Shares of our common stock began trading on the Nasdaq Stock Market on
April 21, 2021 under 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
million of our IPO proceeds to pay down our revolving credit agreement,
approximately $28 million of our IPO proceeds to fund capital expenditures, and
approximately $27 million of our IPO proceeds to fund our operating activities.

Overview

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 Minnesota and advanced packaging services from
our Florida facility. 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 Services for 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 DoD to receive up
to $170 million to 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, Florida
to take over operation of the Center for NeoVation facility in Kissimmee,
Florida to 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

——————————————————————————–

Table of Contents

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 2017 when 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 2020 by 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
Administration issued 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 House issued an executive
order and guidance from the Safer Federal Workforce Task Force broadly 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

——————————————————————————–

Table of Contents

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
business.

?The Creating Helpful Incentives to Produce Semiconductors, or CHIPS, for
America Act, in which the United States has 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. Senate
passed broad competitiveness legislation on June 8, 2021, through the U.S.
Innovation and Competition Act, which includes $52 billion in federal
investments for the domestic semiconductor research, design and manufacturing
provisions in the CHIPS Act. The U.S. House of Representatives passed
competitiveness legislation on February 4, 2022, through the America COMPETES
Act, which also includes $52 billion in 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 million financing 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 the United States.
We will continue to more effectively address these opportunities through
research and development and allocation of additional revenue and marketing
resources.

?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

——————————————————————————–

Table of Contents

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.

Revenue

Revenue was $48.1 million for the first quarter of 2022 compared to $48.1
million for 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 million in 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      $ 11,527            115  %
Advanced Technology Services             26,575              38,082       (11,507)           (30) %
Total                            $       48,121      $       48,101      $     20              0  %

The Wafer Services revenue increase for the first quarter of 2022 reflects the
$8.2 million impact from recognition of in process wafers in March 2022 and
continued demand in the IoT and automotive industries.

                                       29

——————————————————————————–

Table of Contents

The Advanced Technology Services revenue 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
million during the first quarter of 2022 compared to $15.4 million during 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) million for the
first quarter of 2022, from $9.2 million for 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 Minnesota and Florida facilities 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 million for the first quarter
of 2022, from $1.9 million for the first quarter of 2021. The increase of $0.4
million, or 18%, was attributable to increased personnel expense of $0.2 million
from 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 million for the
first quarter of 2022, from $8.6 million for 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 million due 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

Interest expense decreased to $1.0 million for the first quarter of 2022, from
$1.1 million for 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 million for the first quarter of 2022, from
a benefit of $0.4 million for 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 million
for the first quarter of 2022, from $0.8 million for 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 Realty that the owners of
our shareholders' equity do not legally have rights or obligations to.

Adjusted EBITDA

Adjusted EBITDA decreased $10.5 million, or 186%, to $(4.8) million for the
first quarter of 2022 from $5.6 million for 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

——————————————————————————–

Table of Contents

Liquidity and Capital Resources

General

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 million in cash and cash equivalents, not including cash held by a
variable interest entity that we consolidate, and availability under our
Revolver of $29.1 million as of April 3, 2022. However, we must maintain
availability under the Revolver of at least $15 million in 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 $14.00 per
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
million of our IPO proceeds to pay down our revolving credit agreement,
approximately $28 million of our IPO proceeds to fund capital expenditures, and
approximately $27 million of our IPO proceeds to fund our operating activities.

Capital Expenditures

On July 26, 2021, we announced that our Board of Directors approved $56 million
in strategic capital investments for expanding manufacturing capacity and
technology capabilities at our Minnesota facility. The majority of this
investment is targeted to expand capacity and capabilities at our Minnesota fab
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 SkyWater can 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
million during 2021 and the first quarter of 2022.

For the first three months of 2022, we spent approximately $4.8 million on
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 NeoVation in 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 Minnesota facility. We have approximately $10 million of contractual
commitments outstanding as of April 3, 2022 that 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.

Contingent Consideration

We anticipate paying $0.8 million to 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

——————————————————————————–

Table of Contents

Working Capital

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 million under our Revolver. However, we must maintain
availability under the Revolver of at least $15 million in 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

At April 3, 2022 and January 2, 2022, we had $6.4 million and $12.9 million of
cash and cash equivalents, respectively, including cash of $0.2 million and $0.5
million, respectively, held by a variable interest entity that we consolidate.

Operating Activities

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 million during the first three months of 2022, a decrease of $2.4 million
from $8.4 million of 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.

Investing Activities

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
capacity.

Net cash used in investing activities was $4.8 million during the first three
months of 2022, a decrease of $0.6 million from $5.4 million during 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
Minnesota facility.

Financing Activities

Net cash provided by financing activities was $9.1 million during the first
three months of 2022, a decrease of $1.5 million from net cash provided by
financing activities of $10.6 million during 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 million during the first three months of 2022 compared to $13.0
million during the first three
                                       32

——————————————————————————–

Table of Contents

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, Minnesota
to Oxbow Realty, LLC, or Oxbow Realty, an entity controlled by our principal
stockholder for $39 million, less applicable transaction costs of $1.5 million
and transaction services fees paid to Oxbow Realty of $2.0 million and 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 Realty for
initial payments of $0.4 million per 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

On December 28, 2020, we entered into an amended and restated revolving credit
agreement with Wells Fargo, our Revolver, of up to $65 million that 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 million and 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

——————————————————————————–

Table of Contents

Contractual Obligations

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.

JOBS Act

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
January 2, 2022, except as set forth below.

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 $8,230 in 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

——————————————————————————–

Table of Contents

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 U.S. GAAP.

Adjusted EBITDA

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.

© Edgar Online, source Glimpses