SKYWATER TECHNOLOGY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes in Item 8 of this Annual Report on Form 10-K. Item 7 in this Form 10-K discusses our fiscal 2022 and fiscal 2021 results and the year-over-year comparisons between fiscal 2022 and fiscal 2021. Discussion of our fiscal 2021 results and the year-over-year comparisons between fiscal 2021 and fiscal 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedJanuary 2, 2022 , filed with theSEC onMarch 10, 2022 , and incorporated by reference in this Form 10-K. 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 "Special Note Regarding Forward-Looking Statements" and elsewhere herein. Our fiscal year ends on the Sunday closest to the end of the twelfth calendar month. We refer to the fiscal years endedJanuary 1, 2023 andJanuary 2, 2022 as fiscal 2022 and fiscal 2021, respectively. Fiscal years 2022 and 2021 each include 52 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," "CMI Acquisition" and "SkyWater" refer toCMI Acquisition, LLC and its subsidiaries collectively before the corporate conversion discussed below and toSkyWater Technology, Inc. and its subsidiaries collectively after the corporate conversion.
Corporate Conversion and Initial Public Offering
OnApril 14, 2021 , in connection with the IPO of our common stock,CMI Acquisition, LLC filed a certificate of conversion, wherebyCMI Acquisition, LLC effected a corporate conversion from aDelaware limited liability company to aDelaware corporation and changed its name toSkyWater 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 ofCMI 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. OnApril 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 theNasdaq Stock Market onApril 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 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 aU.S. -based, independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services from our fabrication facility, or fab, inMinnesota and advanced packaging services from ourFlorida facility. In our technology-as-a-service model, we leverage a strong foundation of proprietary technology to co-develop process technology IP with our customers that enables disruptive concepts through ourAdvanced Technology Services for diverse microelectronics (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 pure-play technology foundry with DMEA Category 1A Trusted Accreditation from theDoD , positions us well to provide distinct, competitive advantages to our customers. These advantages include the benefits of enhanced IP security and easy access to aU.S. domestic supply chain. We primarily focus on serving diversified, high-growth, end users in numerous vertical markets, including (1) advanced computation, (2) A&D, (3) automotive and transportation, (4) bio-health, (5) consumer and (6) industrial/ IoT. By housing both development and manufacturing in a single operation, we rapidly and efficiently transition newly-developed processes to high-yielding volume production, eliminating the time it would otherwise take to transfer 38 -------------------------------------------------------------------------------- production to a third-party fab. Through ourAdvanced 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, CNTs, 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 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 as a captive manufacturing facility for 26 years. We have leveraged the Cypress system, manufacturing technology and process development capabilities to advance our product offerings. We became an independent company inMarch 2017 when we were acquired by Oxbow, as part of a divestiture from Cypress. Our multi-year foundry services agreement with Cypress, which ended inJune 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 inApril 2020 by Infineon Technologies AG, or Infineon.
Factors and Trends Affecting our Business and Results of Operations
The following trends and uncertainties either affected our financial performance in fiscal 2022 and fiscal 2021, or are reasonably likely to impact our results in the future.
•Macroeconomic and competitive conditions, including cyclicality and consolidation, as well as the global availability of significant incentives in semiconductor technology and manufacturing, affecting the semiconductor industry.
•The global economic climate, including the impact on the economy from geopolitical issues and the ongoing COVID-19 pandemic. 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 ongoing COVID-19 pandemic has adversely affected and could continue to adversely affect our business, results of operations and financial condition." and our consolidated financial statements for further information regarding the effects of the COVID-19 pandemic on our business. •OnAugust 9, 2022 ,President Biden signed into law the Creating Helpful Incentives to Produce Semiconductors, or CHIPS, and Science Act, in whichthe 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 act authorizes theU.S. Department of Commerce to enable execution of CHIPS awards and provides$52.7 billion for American semiconductor research, development, manufacturing, and workforce development, including$39 billion in financial assistance to build, expand, or modernize domestic facilities and equipment for semiconductor fabrication, assembly, testing, advanced packaging, or research and development. •Our overall level of indebtedness from our revolving credit agreement for up to$100 million , which we refer to as the Revolver, and a$37 million financing from the sale of the land and building representing our headquarters inMinnesota , 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
•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 inthe United States , orU.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. 39 --------------------------------------------------------------------------------
Results of Operations
This section contains an analysis of our results of operations presented in the accompanying consolidated statement of operations.
Fiscal 2022 Compared to Fiscal 2021
The following table summarizes certain financial information relating to our operating results for the fiscal years endedJanuary 1, 2023 andJanuary 2, 2022 . Year Ended January 1, January 2, Dollar Percentage 2023 (1) 2022 (1) Change Change (in thousands) Consolidated Statement of Operations Data: Revenue$ 212,941 $ 162,848 $ 50,093 31 % Cost of revenue: Cost of revenue, before inventory write-down 186,974 156,878 30,096 19 % Inventory write-down (Note 17) - 13,442 (13,442) (100) % Total cost of revenue 186,974 170,320 16,654 10 % Gross profit (loss) 25,967 (7,472) 33,439 nm Research and development 9,431 8,747 684 8 % Selling, general and administrative expenses 46,303 43,595 2,708 6 % Change in fair value of contingent consideration - (2,710) 2,710 (100) % Operating loss (29,767) (57,104) 27,337 (48) % Other income (expense): Paycheck Protection Program loan forgiveness - 6,453 (6,453) (100) % Loss on debt extinguishment (1,101) - (1,101) nm Interest expense (5,194) (3,542) (1,652) 47 % Total other income (expense) (6,295) 2,911 (9,206) 316 % Loss before income taxes (36,062) (54,193) 18,131 33 % Income tax expense (benefit) 809 (6,790) 7,599 nm Net loss (36,871) (47,403) 10,532 22 % Less: net income attributable to non-controlling interests 2,722 3,293 (571) 17 % Net loss attributable to SkyWater Technology, Inc.$ (39,593) $ (50,696) $ 11,103 22 % Other Financial Data: Adjusted EBITDA (2)$ 7,717 $ (2,629) $ 10,346 nm nm - Not meaningful ______________________
(1)The consolidated statements of operations are for fiscal 2022 and fiscal 2021. Our fiscal year ends on the Sunday closest to the end of the calendar year. Fiscal 2022 and fiscal 2021 each contained 52 weeks. (2)See "-Non-GAAP Financial Measure" for the definition of adjusted EBITDA and reconciliation to the most directly comparable GAAP measure.
Revenue
Revenue increased
The following table shows revenue by services type for fiscal 2022 and fiscal 2021:
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Year Ended Dollar Percentage
January 1, 2023 January 2, 2022 Change Change
(in thousands)
Wafer Services $ 73,495 $ 51,157 $ 22,338 44 %
Advanced Technology Services 139,446 111,691 27,755 25 %
Total $ 212,941 $ 162,848 $ 50,093 31 %
Wafer Services revenue increased $22.3 million , or 44%, year-over-year, from
$51.2 million in fiscal 2021 to $73.5 million in fiscal 2022. The increase was
primarily driven by a $13.3 million contract modification with one of our
primary customers. During the first quarter of fiscal 2022, we signed a new
contract with an existing customer that included increased pricing terms and
modified other terms, whereby revenue is recognized over time. As a result, we
recognized additional non-recurring revenue of $8.3 million in the first quarter
of fiscal 2022 to account for recognition of wafer services activities in
process at the date the contract was signed, and an additional $5.0 million over
the remainder of 2022.
Advanced Technology Services revenue increased $27.8 million , or 25%, year-over
year, from $111.7 million in fiscal 2021 to $139.4 million in fiscal 2022. The
increase was driven by continued program expansion with existing customers and
new program additions. Additionally, in fiscal 2022 and fiscal 2021, Advanced
Technology Services revenue included revenue of $1.5 million and $19.2 million ,
respectively, related to services we provide to qualify customer funded tool
technologies as our customers invest in our capabilities to expand our
technology platforms. In the fourth quarter of fiscal 2022, we had a significant
contract modification with a customer pursuant to which the customer's option to
purchase discounted services expired, resulting in a recognition of $4.7 million
of revenue previously recorded as a contract liability. During the third and
fourth quarter of fiscal 2021, our Advanced Technology Services experienced
supply chain challenges, hiring constraints, and continued delays in the funding
of existing United States government programs. This resulted in delayed revenue
for certain Advanced Technology Services and Wafer Services programs in the
amount of approximately $15 million for the third and fourth quarter of fiscal
2021. This included a revised schedule for a significant complex multi-year
Advanced Technology Services program originally estimated to be completed in
2021 to early 2022, causing revenue to be pushed from 2021 into 2022.
Gross profit (loss)
Gross profit (loss) increased$33.4 million , to$26.0 million for fiscal 2022, from$(7.5) million for fiscal 2021. The increase was due to increased top line revenue outpacing the increase in Cost of revenue as ourAdvanced Technology Services and Wafer Services functions continued to mature and gain efficiencies. The increase in Cost of revenue was primarily due increased labor costs, which increased$13.6 million year-over-year as we continued to hire at ourMinnesota andFlorida facilities to support increased activities. Year-over-year, our full time labor population increased 16%. We experienced wage inflation due to an increasingly competitive labor market in 2022, similar to others in the semiconductor industry, as well as the labor market in general. In addition, direct spend increased by$15.8 million year-over-year primarily due to increases in customer costs related to the RH90 program, utility rates, and equipment maintenance costs.
Inventory Write-down
In the fourth quarter of fiscal 2021, we recorded a full inventory write-down of$13.4 million to cost of revenue for inventory which we were contracted to manufacture for a customer. The customer's financing for its COVID-19-related business was not obtained and the customer was unable to meet it contractual payment obligations. We have filed a claim against the customer for full payment. We explored alternative sales channels, such as partnering with a customer, to sell the inventory. However, our sales efforts have not progressed and it is not probable we will recover the value of the inventory.
Research and development
Research and development costs increased to$9.4 million for fiscal 2022, from$8.7 million for fiscal 2021. The increase of$0.7 million , or 8%, was attributable to increased personnel expense of$0.9 million and increased software expense of$0.7 million , partially offset by decreased equity-based compensation expense of$0.7 million .
Selling, general and administrative expenses
Selling, general and administrative expenses increased to$46.3 million for fiscal 2022, from$43.6 million for fiscal 2021. The increase of$2.7 million , or 6%, was attributable to increased personnel expense of$1.4 million , as well as an increase in direct expenses, including increases in insurance expense of$1.5 million ; government relations expense of$0.5 million ; technology-related expenses of$0.8 million ; and other direct expenses of$1.4 million . These increases were partially offset by a decrease in equity-based compensation expense of$2.9 million .
Change in fair value of contingent consideration
Change in fair value of contingent consideration was
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business from Cypress, we recorded a contingent consideration liability for the
future estimated earn-out/royalties owed on Advanced Technology Services
revenues. For each reporting period thereafter, we revalued future estimated
earn-out payments and record the changes in fair value of the liability in our
consolidated statements of operations.
Loss on debt extinguishment
In fiscal 2022, we expensed$1.1 million of unamortized debt issuance costs and fees in connection with the extinguishment of debt inDecember 2022 . There was no loss on debt extinguishment in 2021.
Interest expense
Interest expense increased to$5.2 million for fiscal 2022, from$3.5 million for fiscal 2021. The increase of$1.7 million , or 47%, was due to increases in both the average outstanding balance and the average interest rate for the Revolver from 2021 to 2022.
Income tax expense (benefit)
Income tax expense increased to$0.8 million for fiscal 2022 from a benefit of$6.8 million for fiscal 2021. The effective income tax rate was (2.2)% for fiscal 2022 compared to 12.5% for fiscal 2021. The effective income tax rate was lower for fiscal 2022 and fiscal 2021 than our statutory tax rate of 21% primarily due to a deferred tax asset valuation allowance. The income tax benefit for fiscal 2021 included the tax impact from the gain on the PPP Loan forgiveness, which is exempt from federal income taxation. Refer to Note 7 - Income Taxes in the notes to our consolidated financial statements for further discussion of income taxes.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests decreased to$2.7 million for fiscal 2022 from$3.3 million for fiscal 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 ofOxbow Realty that the owners of our shareholders' equity do not legally have rights or obligations to.
Adjusted EBITDA
Adjusted EBITDA increased$10.3 million , to$7.7 million for fiscal 2022 from$(2.6) million for fiscal 2021. The increase in adjusted EBITDA primarily reflects increased gross profit as top line revenue in bothAdvanced Technology Services and Wafer Services revenue continues to grow, while cost of revenue stays relatively stable. For a discussion of adjusted EBITDA as well as a reconciliation to the most directly comparableU.S. GAAP measure, see "-Non-GAAP Financial Measure."
Liquidity and Capital Resources
General
Our ability to execute our operating strategy is dependent on our ability to maintain liquidity and continue to access capital through our Revolver and other sources of financing. Our current business plans indicate that we may require additional liquidity to continue our operations for the next 12 months from the issuance of the consolidated financial statements. We have identified specific actions we could take to reduce operating costs to improve cash flow, which include a reduction in spending and a delayed increase in certain personnel, and may require us to decrease our level of investment in new products and technologies, or discontinue further expansion of our business. We also obtained a support letter fromOxbow Industries, LLC , an affiliate of our principal stockholder, to provide funding in an amount up to$12.5 million , if necessary, to enable us to meet our obligations as they become due through at least one year beyond the issuance of the consolidated financial statements. Management believes that based upon the Company's operational forecasts, cash and cash equivalents on hand, available borrowings on our Revolver, potential cost reduction measures and the support letter from an affiliate of our principal stockholder, as needed, will provide sufficient liquidity to fund its operations for the next 12 months from the issuance of the consolidated financial statements.
Additionally, we could raise additional capital through the ATM Program (as defined below) and seek additional equity or debt financing, including a refinancing and/or expansion of the Revolver; however we cannot provide any assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us.
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
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--------------------------------------------------------------------------------Initial Public Offering
We received net proceeds from the IPO of approximately$100.2 million in fiscal 2021, after deducting underwriting discounts and commissions and offering costs of approximately$11.9 million . Refer to "Corporate Conversion and Initial Public Offering" earlier in this section for further information on our Initial Public Offering. Open Market Sale Agreement OnSeptember 2, 2022 , the Company entered into an Open Market Sale Agreement withJefferies LLC with respect to an at the market offering program under which the Company may, from time to time, offer and sell up to$100 million in shares of the Company's common stock. From the date of the Open Market Sale Agreement throughJanuary 1, 2023 , the Company sold 435,419 shares under the Open Market Sale Agreement at an average sale price of$9.28 per share, resulting in gross proceeds of approximately$4.0 million before deducting sales commissions and fees of approximately$0.6 million . The Company used the net proceeds of approximately$3.5 million to pay down its Revolver and fund its operations. As ofJanuary 1, 2023 , approximately$96 million in shares were available for issuance under the Open Market Sale Agreement.
Common Stock Offering
OnNovember 17, 2022 , we completed a public offering (the "Offering") and issued 1,916,667 shares of common stock, including the underwriter's exercise of its right to purchase additional shares, at a price per share of$9.00 to the public, less underwriting discounts and commissions. We received net proceeds of$16.1 million from the Offering, after deducting the underwriting discounts and commissions. We used the net proceeds from the Offering primarily for general corporate purposes, which included, among other things, funding of operations, repayment of indebtedness, additions to working capital and/or capital expenditures.
Capital Expenditures
OnJuly 26, 2021 , we announced that our board of directors approved$56 million in strategic capital investments for expanding manufacturing capacity and technology capabilities at ourMinnesota facility. The majority of this investment is targeted to expand capacity and capabilities at ourMinnesota 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 believeSkyWater 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 and we are in the process of identifying a partner to commercialize this technology. The strategic capital investment is a multi-year strategy and we invested approximately$11.1 million and$13.8 million during fiscal 2022 and 2021, respectively, substantially all of which was for expanding capacity and capabilities at ourMinnesota fab. For fiscal 2022 and 2021, we spent approximately$18.6 million and$32.0 million , respectively, on capital expenditures, including purchases of property, equipment and software. The majority of these capital expenditures relate to our foundry expansion inMinnesota , as discussed below, and the development of our advanced packaging capabilities at theCenter for NeoVation inFlorida . We anticipate our cash on hand and the availability under the Revolver will provide the funds needed to meet our customer demand and anticipated capital expenditures in fiscal 2023. We have various contracts outstanding with third parties in connection with expansion of our manufacturing capabilities at ourMinnesota fab andCenter for NeoVation inFlorida . We have approximately$4.8 million of contractual commitments outstanding as ofJanuary 1, 2023 that we expect to be paid in fiscal 2023 through cash on hand and operating cash flows. During 2022, the Company executed a capital lease to replace the existing nitrogen plant with a larger and more modern nitrogen generator. The capital lease has a lease term of 15 years for total payments of$14 million .
Contingent Consideration
For fiscal 2022 and 2021, we made cash payments of
Working Capital
Historically, we have depended on cash on hand, funds available under our Revolver and, more recently, net proceeds from sales of our common stock pursuant to the ATM Program and the Offering, and in the future may depend on additional debt and equity financings 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 ofJanuary 1, 2023 , we had available aggregate undrawn borrowing capacity of approximately$22.0 million under our Revolver. For the periods presented, our use of cash was primarily driven by our operating and investing activities, and specifically by our investments in capital expenditures. 43 --------------------------------------------------------------------------------
The following table sets forth general information derived from our statement of cash flows for fiscal 2022 and 2021:
Year Ended
January 1, 2023 January 2, 2022
(in thousands)
Net cash used in operating activities $ (14,297) $ (55,680)
Net cash used in investing activities $ (17,453) $ (29,823)
Net cash provided by financing activities $ 48,858 $ 90,984
Cash and Cash Equivalents
At January 1, 2023 and January 2, 2022 , we had $30.0 million and $12.9 million
of cash and cash equivalents, respectively, including cash of $0.0 million and
$0.5 million 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. Net cash used in operating activities was$14.3 million during fiscal 2022, a decrease of$41.4 million from$55.7 million of net cash used in operating activities during fiscal 2021. The decrease in cash used in operating activities in fiscal 2022 was driven primarily by an increase in accounts payable of$21.0 million in fiscal 2022 compared to a decrease in accounts payable of$6.5 million in fiscal 2021. Our accounts payable and accrued expenses increased during fiscal 2022 due to the timing of cash payments to our suppliers and vendors.
Investing Activities
Capital expenditures are a significant use of our capital resources. These investments are intended to enable sales 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$17.5 million during fiscal 2022, a decrease of$12.3 million from$29.8 million in fiscal 2021. The decrease in cash used in fiscal 2022 reflects decreased capital spending on property and equipment as we fully completed our foundry expansion project in 2021 to increase manufacturing capacity at ourMinnesota facility and decreased capital spending on software.
Financing Activities
Net cash provided by financing activities was$48.9 million during fiscal 2022, a decrease of$42.1 million from net cash provided by financing activities of$91.0 million during fiscal 2021. The decrease was driven by proceeds of over$100.0 million from the IPO in fiscal 2021, partially offset by proceeds from the issuance of common stock and net proceeds from our new revolver in fiscal 2022. Indebtedness Sale Leaseback Transactions OnSeptember 29, 2020 , we entered into an agreement to sell the land and building representing our primary operating location inBloomington, Minnesota toOxbow Realty for$39 million , less applicable transaction costs of$1.5 million and transaction services fees paid toOxbow 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 fromOxbow 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. OnOctober 20, 2022 , we entered into an agreement to sell a semiconductor manufacturing tool to an equipment financing lender for$3.1 million . We subsequently entered into an agreement to lease the tool from the lender for monthly payments of$0.1 million over 42 months. The agreement provides for a bargain purchase option at the end of the lease term, which we intend to exercise. Because control of the asset did not transfer to the lender, and due to our intent to exercise the bargain purchase option at the end of the lease term, we accounted for the transaction 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. 44 --------------------------------------------------------------------------------
Revolving Credit Agreement
OnDecember 28, 2022 , we entered into a Loan and Security Agreement (the "Loan Agreement") withSiena Lending Group LLC ("Siena"). The Loan Agreement provides for a revolving line of credit of up to$100 million with scheduled maturity date ofDecember 28, 2025 (the "Revolver"). The Company incurred$4.3 million of debt issuance costs, which will be amortized as additional interest expense over the life of the Revolver. In connection with the entry into the Loan Agreement, the Company drew$60.0 million on the Revolver and repaid$43.5 million in outstanding indebtedness under, and terminated, our lending agreement with Wells Fargo and recognized a$1.1 million write-off of unamortized debt issuance costs. As ofJanuary 1, 2023 , we had borrowings of$60.1 million under the Revolver. Borrowing under the Loan Agreement is limited by a borrowing base of specified advance rates applicable to billed accounts receivable, unbilled accounts receivable, inventory and equipment, subject to various conditions, limits and any availability block as provided in the Loan Agreement. The Loan Agreement also provides for borrowing base sublimits applicable to each of unbilled accounts receivable and equipment. Under certain circumstances, Siena may from time to time establish and revise reserves against the borrowing base and/or the maximum revolving facility amount. Borrowings under the Loan Agreement bear interest at a rate that depends upon the type of borrowing, whether a term secured overnight financing rate (SOFR) loan or base rate loan, plus the applicable margin. The term SOFR loan rate is a forward-looking term rate based on SOFR for a tenor of one month on the applicable day, subject to a minimum of 2.5% per annum. The base rate is the greatest of the prime rate, the Federal funds rate plus 0.5%, and 7.% per annum. The applicable margin is an applicable percentage based on the fix charged coverage ratio that ranges from 6.25% to 5.25% per annum for term SOFR loans and ranges from 5.25% to 4.25% per annum for base rate loans. The Loan Agreement contains customary representations and warranties and financial and other covenants and conditions. Subject to certain cure rights, the Loan Agreement requires$10 million in minimum EBITDA (as defined in the Loan Agreement) calculated as of the last day of each calendar month commencingApril 30, 2023 for the preceding twelve calendar months, prohibits unfunded capital expenditures in excess of$15 million calculated as of the last day of each calendar month commencingApril 30, 2023 for the preceding twelve calendar months, and requires a minimum fixed charge coverage ratio, measured on a trailing 12 month basis, of not less than 1.00 to 1.00 if our liquidity is less than$15 million . In addition, the Loan Agreement places certain restrictions on our ability to incur additional indebtedness (other than permitted indebtedness), to create liens or other encumbrances (other than liens relating to permitted indebtedness), to sell or otherwise dispose of assets, to merge or consolidate with other entities, and to make certain restricted payments, including payments of dividends to our stockholders. We were in compliance with the covenants of the Loan Agreement as ofJanuary 1, 2023 .
Due to a lockbox clause in the Loan Agreement, the outstanding loan balance is required to be serviced with working capital, and the debt is classified as short-term on the consolidated balance sheet in accordance with Accounting Standards Codification ("ASC") 470-10-45-5.
Material Cash Requirements
Our material cash requirements from known contractual and other obligations primarily relate to following, for which information on both a short-term and long-term basis is provided in the indicated notes to the consolidated financial statements: •Debt-Refer to Note 6.
•Capital expenditure commitments-Refer to Note 13.
•Capital lease commitments-Refer to Note 16.
•Sale leaseback obligation-Refer to Note 18.
•Tax obligations-Refer to Note 7.
•Other commitments and contingencies-Refer to Note 13.
Recent Accounting Developments
For information on new accounting pronouncements, see Note 3 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
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
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--------------------------------------------------------------------------------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
Our consolidated financial statements are prepared in accordance withU.S. GAAP. In connection with preparing our consolidated financial statements, 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 consolidated financial statements. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance withU.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.
Revenue Recognition
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 judgement 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 contractAdvanced Technology Services - We have both fixed price and time-and-materials contracts. The customer receives the benefits provided by our performance as we complete them, and revenue is recognized from our fixed price and time-and-materials contracts over time as we perform. Revenue on fixed price contracts is recognized either over time as work progresses using the input or output method based upon which method we believe represents the best indication of the overall progress toward satisfying our performance obligation. Over time revenue recognition using the output method relies on surveys of performance completed to date to satisfy our performance obligation. This can require judgment to determine the related measure of progress that will be assigned to the respective contract. Over time revenue recognition using the input method, is based on costs incurred to date on performance obligations compared to estimated total cost required to complete the performance obligation as of the reporting date. We measure progress on these performance obligations by comparing total costs incurred to-date to the total estimated costs for the performance obligation, and record that proportion of the total performance obligation transaction price as revenue in the period. Costs include labor, manufacturing costs, materials and other direct costs related to the customer contract. During the third quarter of 2022, we signed new contracts with a significantAdvanced Technology Services customer that we are recording revenue based upon the input method using a cost-based measure of progress. We believe this method of recognizing revenue is consistent with our progress in satisfying our contract obligations. The estimation of total costs for the performance obligation can require significant judgment and any adjustment to estimated total cost may have an impact on proportion of progress achieved resulting in a cumulative catch-up of revenue. Wafer Services - InMarch 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 inMarch 2022 . The contract terms and pricing is applicable to all in-process and future wafers. We recorded revenue of$13.3 million for the twelve months endedJanuary 1, 2023 to account for recognition of Wafer Services activities. 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. The terms of a contract and historical business practices can, but generally do not, give rise to variable consideration. We estimate variable consideration at the most likely amount we will receive from customers. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. In general, variable consideration in our contracts relates to the entire contract. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current, and forecasted) that is reasonably available to us at contract inception and require judgment. We have no significant instances where variable consideration is 46 -------------------------------------------------------------------------------- constrained and not recorded at the initial time of sale. In addition, we have not experienced significant changes to our estimates and judgments related to variable consideration in our contracts. If we make material changes to our assumptions, we may have to make cumulative catch-up adjustments in the financial statements related to revenue previously recognized. No material gross favorable or unfavorable changes to our material long-term contracts existed for fiscal 2022 or fiscal 2021.
Long-lived Assets
We review long-lived assets, including property and equipment and intangible assets with definite lives, for impairment whenever events or changes in circumstances, known as triggering events, indicate that the asset's carrying amount may not be recoverable. Triggering events include, but are not limited to, reduced or expected sustained decreases in cash flows generated by an asset or asset group, negative changes in industry conditions, a significant change in a long-lived asset's use or physical condition and the introduction of competing technologies. For purposes of impairment testing, we group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not exceed the carrying value of the long-lived asset or asset group, the asset group is not recoverable and impairment is recognized to the extent the carrying amount exceeds the estimated fair value of the asset or asset group. The undiscounted cash flow analysis consists of estimating the future cash flows that are directly associated with, and are expected to arise from, the use and eventual disposition of the asset over its remaining useful life. These estimated discounted cash flows are inherently subjective and include significant assumptions, specifically the forecasted revenue, forecasted operating margins, and require estimates based upon historical experience and future expectations. Due to our history of operating losses and uncertainty with forecasts, we utilized third party appraisers to assess the estimated fair value of our long-lived asset group. The estimated fair value of our long-lived assets exceeded the carrying value. As such, we did not experience an impairment of our long-lived assets despite having triggering events during fiscal 2022 and fiscal 2021. Appraisals utilize various approaches to determine fair value, including the income approach, the sales comparison approach and the cost approach. Each appraisal approach is inherently subjective and includes significant assumptions, specifically the comparability of similar properties or equipment, the potential income and expenses that would be derived or incurred to rent those long-lived assets, obsolescence factors, and capitalization and discount rates. Income Taxes In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions regarding the reversal of temporary differences. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. We currently have recorded a valuation allowance that we will maintain until, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Our income tax expense recorded in the future may be reduced to the extent of a decrease in our valuation allowance. The realization of our remaining deferred tax assets is primarily dependent on future taxable income. Any reduction in future taxable income may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings. Because the determination of the amount of deferred tax assets that can be realized is based, in part, on our forecast of future profitability, it is inherently uncertain and subjective. Changes in market conditions and our assumptions may cause the actual future profitability to differ materially from our current expectation, which may require us to increase or decrease the valuation allowance. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on our deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on our financial condition, results of operations or cash flows.
Non-GAAP Financial Measure
Our audited consolidated financial statements are prepared in accordance withU.S. GAAP. To supplement our audited consolidated financial statements presented in accordance withU.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 ourU.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 comparableU.S. GAAP measure. In addition, because our non-GAAP measure is not determined in accordance withU.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 47 --------------------------------------------------------------------------------
presented in this Annual Report on Form 10-K 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
Adjusted EBITDA is not a financial measure determined in accordance withU.S. GAAP. We define adjusted EBITDA as net income (loss) 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 withU.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 withU.S. GAAP. Year Ended January 1, January 2, 2023 2022 Net loss attributable to SkyWater Technology, Inc.$ (39,593) $ (50,696) Interest expense (9) 6,295 3,542 Income tax (benefit) expense 809 (6,790) Depreciation and amortization 28,192 27,368 EBITDA (4,297) (26,576) Inventory write-down (1) - 13,442 Paycheck Protection Program loan forgiveness - (6,453)
Corporate conversion and initial public offering related costs (2)
- 1,934
SkyWater Florida start-up costs (3) 686 1,147
Management transition expense (4) - 435
Fair value changes in contingent consideration (5) - (2,710)
Equity-based compensation (6) 8,606 12,527
Management fees (7) - 332
Net income attributable to non-controlling interests (8) 2,722 3,293
Adjusted EBITDA $ 7,717 $ (2,629)
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(1)Represents a full write-down for inventory which we were contracted to manufacture for a specific customer. See Note 17 - Inventory Write Down in the notes to our consolidated financial statements for additional information.
(2)Represents expenses directly associated with the corporate conversion and IPO, such as professional, consulting, legal and accounting services. This also includes bonus awards granted to employees upon the completion of the IPO. These expenses are not indicative of our ongoing costs and were discontinued following the completion of our initial public offering. (3)Represents start-up costs associated with our 200 mm advanced packaging facility inKissimmee, 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. 48 --------------------------------------------------------------------------------
(4)Represents expense for the departure of our former Chief Administrative Officer, which includes primarily severance benefits.
(5)Represents non-cash valuation adjustment of contingent consideration to fair market value during the period.
(6)Represents non-cash equity-based compensation expense.
(7)Represents a related party transaction with Oxbow, our principal stockholder. As these fees are not part of the core business, will 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. (8)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.
(9)Includes losses related to the extinguishment of our revolving credit agreement.
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