UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
______________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended: June 30, 2024
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________ to ________
Commission file number: 001-40345
______________________
(Exact name of registrant as specified in its charter)
______________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of registrant’s principal executive offices and zip code)
Registrant’s telephone number, including area code: (952 ) 851-5200
______________________
Securities registered under Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | ¨ | x | ||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 17(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
On August 5, 2024, the number of shares of common stock, $0.01 par value, outstanding was 47,479,418 .
SkyWater Technology, Inc.
TABLE OF CONTENTS
| Page No. | ||||||||
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that SkyWater Technology, Inc. (“SkyWater,” the “Company,” “we,” “us,” or “our”) believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including, without limitation, our expectations regarding our business, results of operations, financial condition and prospects, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “seek,” “potential,” “believe,” “will,” “could,” “should,” “would,” and “project” or the negative thereof or variations thereon or similar words or expressions that convey the uncertainty of future events or outcomes are generally intended to identify forward-looking statements.
Our forward-looking statements are subject to a number of risks, uncertainties, and assumptions. Key factors that may affect our results include, among others, the following:
•our goals and strategies;
•our future business development, financial condition, and results of operations;
•our ability to continue operating our fabrication facilities at full capacity;
•our ability to appropriately respond to changing technologies on a timely and cost-effective basis;
•our customer relationships and our ability to retain and expand our customer relationships;
•our ability to accurately predict our future revenues for the purpose of appropriately budgeting and adjusting our expenses;
•our expectations regarding dependence on our largest customers;
•our ability to diversify our customer base and develop relationships in new markets;
•the performance and reliability of our third-party suppliers and manufacturers;
•our ability to procure tools, materials, and chemicals;
•our ability to control costs, including our operating and capital expenses;
•the size and growth potential of the markets for our solutions, and our ability to serve and expand our presence in those markets;
•the level of demand in our customers’ end markets;
•our ability to attract, train, and retain key qualified personnel in a competitive labor market;
•adverse litigation judgments, settlements, or other litigation-related costs;
•changes in trade policies, including the imposition of tariffs;
•our ability to raise additional capital or financing;
•our ability to accurately forecast demand;
•changes in local, regional, national, and international economic or political conditions, including those resulting from rising inflation and interest rates, a recession, or intensified international hostilities;
•the level and timing of U.S. government program funding;
•our ability to maintain compliance with certain U.S. government contracting requirements;
•regulatory developments in the United States and foreign countries;
•our ability to protect our intellectual property rights; and
•other factors disclosed in the section entitled “Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and this Quarterly Report on Form 10-Q.
Moreover, our business, results of operations, financial condition, and prospects may be affected by new risks that could emerge from time to time. In light of these risks, uncertainties and assumptions, the forward-looking events and outcomes discussed in this Quarterly Report on Form 10-Q may not occur and our actual results could differ materially and adversely from those expressed or implied in the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should not rely on forward-looking statements as predictions of future events or outcomes. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements may not be achieved or occur.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views only as of the date hereof. We anticipate that subsequent events and developments will cause our views to change. However, we undertake no obligation to update publicly any forward-looking statements to conform such statements to changes in expectations or to actual results, or for any other reason, except as required by law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date hereof.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
| June 30, 2024 | December 31, 2023 | ||||||||||
| (in thousands, except share data) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable (net of allowance for credit losses of $ | |||||||||||
Contract assets (net of allowance for credit losses of $ | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income tax receivable | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses | |||||||||||
| Short-term financing, net of unamortized debt issuance costs | |||||||||||
| Contract liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities | |||||||||||
| Long-term debt, less current portion and net of unamortized debt issuance costs | |||||||||||
| Long-term contract liabilities | |||||||||||
| Deferred income tax liability, net | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Shareholders’ equity | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity, SkyWater Technology, Inc. | |||||||||||
| Noncontrolling interests | |||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | ||||||||||||||||||||
| (in thousands, except share and per share data) | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Selling, general, and administrative expense | |||||||||||||||||||||||
| Operating income (loss) | ( | ( | ( | ||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax (benefit) expense | ( | ( | |||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
| Less: net income attributable to noncontrolling interests | |||||||||||||||||||||||
| Net loss attributable to SkyWater Technology, Inc. | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to common shareholders, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares used in computing net loss per common share, basic and diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Shareholders’ Equity
For the Three-Month Periods Ended June 30, 2024 and July 2, 2023
(dollars and shares in thousands)
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity, SkyWater Technology, Inc. | Noncontrolling Interests | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 2, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity compensation plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from VIE member | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 2, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity compensation plans | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from VIE member | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to VIE member | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Shareholders’ Equity
For the Six-Month Periods Ended June 30, 2024 and July 2, 2023
(dollars and shares in thousands)
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity, SkyWater Technology, Inc. | Noncontrolling Interests | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Adoption of new accounting principle | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the ATM | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from VIE member | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 2, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from VIE member | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to VIE member | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six-Month Period Ended | |||||||||||
| June 30, 2024 | July 2, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Gain on sale of property and equipment | ( | ||||||||||
| Amortization of debt issuance costs included in interest expense | |||||||||||
| Long-term incentive and equity-based compensation | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Provision for credit losses | |||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable and contract assets | ( | ||||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ( | |||||||||
| Contract liabilities, current and long-term | ( | ( | |||||||||
| Income tax receivable and payable | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of software and technology licenses | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Draws on revolving line of credit | |||||||||||
| Paydowns of revolving line of credit | ( | ( | |||||||||
| Proceeds from tool financings | |||||||||||
| Repayment of tool financings | ( | ||||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Cash paid for principal on finance leases | ( | ( | |||||||||
| Proceeds from the issuance of common stock pursuant to equity compensation plans | |||||||||||
| Proceeds from the issuance of common stock under the ATM | |||||||||||
| Cash paid on licensed technology obligations | ( | ( | |||||||||
Contributions from noncontrolling interest | |||||||||||
Distributions to noncontrolling interest | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents - beginning of period | |||||||||||
| Cash and cash equivalents - end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six-Month Period Ended | |||||||||||
| June 30, 2024 | July 2, 2023 | ||||||||||
| (in thousands) | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
Cash paid during the period for | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | |||||||||||
Noncash investing and financing activity | |||||||||||
| Capital expenditures incurred, not yet paid | $ | $ | |||||||||
| Equipment acquired through finance lease obligations | |||||||||||
| Intangible assets acquired, not yet paid | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 1 Nature of Business
SkyWater Technology, Inc., together with its consolidated subsidiaries (collectively, “SkyWater,” the “Company,” “it,” or “its”), is a U.S.-based, independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services from its fabrication facility, or fab, in Minnesota and advanced packaging services from its Florida facility. SkyWater’s technology-as-a-service model leverages a foundation of proprietary technology to co-develop process technology intellectual property with its customers that enables disruptive concepts through its Advanced Technology Services (“ATS”) for diverse microelectronics (integrated circuits (“ICs”)) and related micro and nanotechnology applications. In addition to these differentiated technology development services, SkyWater supports customers with volume production of ICs for high-growth markets through its Wafer Services.
SkyWater is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
Note 2 Basis of Presentation and Principles of Consolidation
The unaudited interim condensed consolidated financial statements as of June 30, 2024, and for the three- and six-month periods ended June 30, 2024 and July 2, 2023, are presented in thousands of U.S. dollars (except share and per share information), are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by U.S. GAAP for annual consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with SkyWater’s annual consolidated financial statements and the related notes thereto as of December 31, 2023 and for the fiscal year then ended. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, including normal and recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of June 30, 2024 and its consolidated results of operations, shareholders’ equity, and cash flows for the three- and six-month periods ended June 30, 2024 and July 2, 2023.
The consolidated results of operations for the three- and six-month period ended June 30, 2024 are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 29, 2024, or for any other interim period, or for any other future fiscal year.
Principles of Consolidation
The interim condensed consolidated financial statements include the Company’s assets, liabilities, revenues, and expenses, as well as the assets, liabilities, revenues, and expenses of subsidiaries in which it has a controlling financial interest, SkyWater Technology Foundry, Inc. (“SkyWater Technology Foundry”), SkyWater Federal, LLC (“SkyWater Federal”), SkyWater Florida, Inc. (“SkyWater Florida”), and Oxbow Realty Partners, LLC (“Oxbow Realty”), a variable interest entity (“VIE”) for which SkyWater is the primary beneficiary and an affiliate of the Company’s principal shareholder. All intercompany accounts and transactions have been eliminated in consolidation.
Liquidity and Cash Requirements
The accompanying interim condensed consolidated financial statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties.
For the three- and six-month periods ended June 30, 2024, the Company incurred net losses attributable to SkyWater Technology, Inc. of $1,897 and $7,626 , respectively. For the three- and six-month periods ended July 2, 2023, the Company incurred net losses attributable to SkyWater Technology, Inc. of $8,590 and $12,863 , respectively. As of June 30, 2024 and December 31, 2023, the Company had cash and cash equivalents of $18,362 and $18,382 , respectively.
10
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
SkyWater’s ability to execute its operating strategy is dependent on its ability to maintain liquidity and continue to access capital through the Revolver (as defined in Note 6 – Debt) and other sources of financing. The Company has identified specific actions it could take to reduce operating costs to improve cash flow, including reductions in spending and delays in hiring personnel. If such actions are taken, it may require the Company to decrease its level of investment in new products and technologies, or discontinue further expansion of its business. The Company has also obtained a support letter from Oxbow Industries, LLC (“Oxbow Industries”), an affiliate of the Company’s principal stockholder, to provide funding in an amount up to $12,500 , if necessary, to enable the Company to meet its obligations as they become due. The support letter expires March 18, 2026. Based upon SkyWater’s operating forecasts, its cash and cash equivalents on hand, available borrowings on the Revolver, and potential cost reduction measures it could undertake, management believes SkyWater will have sufficient liquidity to fund its operations for the next twelve months from the date these interim condensed consolidated financial statements are issued.
Additionally, the Company could seek additional equity or debt financing, including a refinancing and/or expansion of the Revolver, however it cannot provide any assurance that additional funds will be available when needed or, if available, will be available on terms that are acceptable to the Company. The Company’s ability to access additional funds depends on prevailing economic conditions and other factors, many of which are beyond SkyWater’s control.
SkyWater 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.
Use of Estimates
The preparation of the interim condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods then ended. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations, and various other assumptions that management believes are reasonable under the circumstances. Actual results could differ from those estimates.
Net Loss Per Share
Basic net loss per common share is calculated by dividing the net loss attributable to SkyWater Technology, Inc. by the weighted-average number of shares outstanding during the reporting periods, without consideration for potentially dilutive securities. Diluted net loss per common share is computed by dividing the net loss attributable to SkyWater Technology, Inc. by the weighted-average number of shares and potentially dilutive securities outstanding during the reporting periods determined using the treasury-stock method. Because the Company reported a net loss attributable to SkyWater Technology, Inc. for the three- and six-month periods ended June 30, 2024 and July 2, 2023, the number of shares used to calculate diluted net loss per common share is the same as the number of shares used to calculate basic net loss per common share because the potentially dilutive shares would have been anti-dilutive if included in the calculation. For the three- and six-month periods ended June 30, 2024, there were restricted stock units and stock options totaling 1,577,809 and 1,246,440 , respectively, excluded from the computation of diluted weighted-average shares outstanding because their inclusion would have been anti-dilutive. For each of the three- and six-month periods ended July 2, 2023, there were restricted stock units and stock options totaling 2,483,000
11
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
The following table sets forth the computation of basic and diluted net loss per common share for the three- and six-month periods ended June 30, 2024 and July 2, 2023:
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
Numerator: net loss attributable to SkyWater Technology, Inc. | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Denominator: weighted-average common shares outstanding, basic and diluted | |||||||||||||||||||||||
| Net loss per common share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Reportable Segment Information
Operating segments are identified as components of an enterprise about which separate financial information is available for evaluation by the chief operating decision maker when making decisions regarding resource allocation and assessing performance. SkyWater operates and manages its business as one reportable segment.
Note 3 Summary of Significant Accounting Policies
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” later codified in Topic 326, “Financial Instruments – Credit Losses” (“Topic 326”). Topic 326 replaces the preexisting U.S. GAAP guidance that only required the recognition of credit losses when losses were probable and estimable. Topic 326 now requires recognition of credit losses based on SkyWater’s expectation of losses to be incurred while the financial instrument is held. Topic 326 was effective for most public business entities for fiscal years beginning after December 15, 2019. As an emerging growth company, SkyWater adopted Topic 326 on January 2, 2023 using the modified retrospective approach. Upon adoption, the Company increased its accumulated deficit by $375 for the effects of increasing its allowance for credit losses as of January 2, 2023. All other impacts to SkyWater’s consolidated financial position, results of operations, and cash flows were immaterial.
Recently Issued Accounting Standards Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting.” The amendments in this update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. SkyWater will reflect the amended disclosure requirements of this update in its annual consolidated financial statements for its fiscal year ending December 29, 2024 and for the interim periods in its fiscal year ending December 28, 2025. Given that the Company reports as a single reportable segment, the impacts of adopting the provisions of this update will not be significant.
Significant Accounting Policies
12
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 4 Revenue
Disaggregated Revenue
The Company recognizes ATS development, tools, and Wafer Services revenues pursuant to our revenue recognition policies as described in Note 3 – Summary of Significant Accounting Policies to the annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The following tables disclose revenue by product type and the timing of recognition of revenue for transfer of goods and services to customers:
| Three-Month Period Ended June 30, 2024 | |||||||||||||||||||||||
| Topic 606 Revenue | |||||||||||||||||||||||
| Point-in-Time | Over Time | Lease Revenue Per Topic 842 | Total Revenue | ||||||||||||||||||||
ATS development | |||||||||||||||||||||||
Time and materials contracts | $ | $ | $ | $ | |||||||||||||||||||
| Fixed price contracts | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
Total ATS development | |||||||||||||||||||||||
Tools | |||||||||||||||||||||||
| Wafer Services | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
| Three-Month Period Ended July 2, 2023 | |||||||||||||||||||||||
| Topic 606 Revenue | |||||||||||||||||||||||
| Point-in-Time | Over Time | Lease Revenue Per Topic 842 | Total Revenue | ||||||||||||||||||||
ATS development | |||||||||||||||||||||||
Time and materials contracts | $ | $ | $ | $ | |||||||||||||||||||
| Fixed price contracts | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
Total ATS development | |||||||||||||||||||||||
Tools | |||||||||||||||||||||||
| Wafer Services | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
| Six-Month Period Ended June 30, 2024 | |||||||||||||||||||||||
| Topic 606 Revenue | |||||||||||||||||||||||
| Point-in-Time | Over Time | Lease Revenue Per Topic 842 | Total Revenue | ||||||||||||||||||||
ATS development | |||||||||||||||||||||||
Time and materials contracts | $ | $ | $ | $ | |||||||||||||||||||
| Fixed price contracts | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
Total ATS development | |||||||||||||||||||||||
Tools | |||||||||||||||||||||||
| Wafer Services | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
13
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
| Six-Month Period Ended July 2, 2023 | |||||||||||||||||||||||
| Topic 606 Revenue | |||||||||||||||||||||||
| Point-in-Time | Over Time | Lease Revenue Per Topic 842 | Total Revenue | ||||||||||||||||||||
ATS development | |||||||||||||||||||||||
Time and materials contracts | $ | $ | $ | $ | |||||||||||||||||||
| Fixed price contracts | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
Total ATS development | |||||||||||||||||||||||
Tools | |||||||||||||||||||||||
Wafer Services | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
The following table discloses revenue for the three- and six-month periods ended June 30, 2024 and July 2, 2023 by country determined based on customer address:
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | ||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Hong Kong | |||||||||||||||||||||||
| United Kingdom | |||||||||||||||||||||||
| All others | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
Three customers each accounted for 10% or more of revenue, and in aggregate accounted for 72 % and 66 % of revenue for the three- and six-month periods ended June 30, 2024, respectively, and in aggregate accounted for 52 % and 53 % of revenue for the three- and six-month periods ended July 2, 2023, respectively. The loss of a major customer could adversely affect the Company’s operating results and financial condition.
Deferred Contract Costs
The Company recognizes an asset for the incremental cost of obtaining a contract with a customer (i.e., deferred contract costs) when costs are considered recoverable and the duration of the contract is in excess of one year. Deferred contract costs are amortized as the related revenue is recognized. The Company recognized amortization of deferred contract costs totaling $0 for the three-month period ended June 30, 2024 and recognized accretion of deferred contract costs of $32 for the three-month period ended July 2, 2023. The Company recognized amortization of deferred contract costs totaling $172 and $715 for the six-month periods ended June 30, 2024 and July 2, 2023, respectively.
Contract Assets
Contract assets represent SkyWater’s rights to payments for services it has transferred to its customers, but has not yet billed to its customers. Contract assets were $18,467 and $29,666 at June 30, 2024 and December 31, 2023, respectively, and are presented net of allowances for expected credit losses of $49 and $99 , respectively, and net of accrued contract liabilities arising from certain contracts expected to generate losses over the remaining period of performance. As of June 30, 2024 and December 31, 2023, the Company maintained liabilities of $6,292 and $0 , respectively, arising from contracts expected to generate losses.
14
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Contract Liabilities
The Company’s contract liabilities principally consist of deferred revenue on customer contracts and deferred lease revenue representing customer prepayments on a leasing arrangement in which the Company serves as lessor. Deferred revenue on customer contracts represents payments from customers for which performance obligations have not yet been satisfied. In some instances, cash may be received, or payment may be contractually due by a customer before the related revenue is recognized. The contract liabilities and other significant components of contract liabilities at June 30, 2024 and December 31, 2023 are as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
Contract Deferred Revenue (1) | Lease Deferred Revenue | Total Contract Liabilities | Contract Deferred Revenue (1) | Lease Deferred Revenue | Total Contract Liabilities | ||||||||||||||||||||||||||||||
| Current | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Long-term | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1)Contract deferred revenue includes $53,761 and $59,323 at June 30, 2024 and December 31, 2023, respectively, related to material rights provided to a significant customer in exchange for funding additional manufacturing capacity. Of these amounts, $11,123 and $11,123 were classified as current in the interim condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively.
The change in contract liabilities during the three- and six-month periods ended June 30, 2024 and July 2, 2023 are as follows:
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | ||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
Revenue recognized included in the balance at the beginning of the period | ( | ( | ( | ( | |||||||||||||||||||
Increase due to payments received, excluding amounts recognized as revenue | |||||||||||||||||||||||
Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
Remaining Performance Obligations
At June 30, 2024, the Company had $131,695 of remaining performance obligations that had not been fully satisfied on contracts with original expected durations of one year or more, which were primarily related to ATS development and tools revenue contracts. The Company expects to recognize those revenues as it satisfies its performance obligations within the next 6.5 years.
The Company does not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less. Further, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between when it transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
15
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 5 Balance Sheet Information
Certain significant amounts included in the Company’s interim condensed consolidated balance sheets are summarized in the following tables:
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
Allowance for credit losses - Accounts receivable | June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | |||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Add | |||||||||||||||||||||||
| Adoption of Credit Loss Standard (Topic 326) | |||||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Deduct | |||||||||||||||||||||||
| Accounts written-off | |||||||||||||||||||||||
| Less recoveries of accounts charged-off | |||||||||||||||||||||||
| Net account charge-offs (recoveries) | |||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
Allowance for credit losses - Contract assets | June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | |||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Add | |||||||||||||||||||||||
| Adoption of Credit Loss Standard (Topic 326) | |||||||||||||||||||||||
| Provision for credit losses | ( | ( | ( | ( | |||||||||||||||||||
| Deduct | |||||||||||||||||||||||
| Accounts written-off | |||||||||||||||||||||||
| Less recoveries of accounts charged-off | |||||||||||||||||||||||
| Net account charge-offs (recoveries) | |||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
Inventory | June 30, 2024 | December 31, 2023 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Supplies and spare parts | |||||||||||
Total inventories, current | |||||||||||
Inventory, non-current (1) | |||||||||||
Total inventory | $ | $ | |||||||||
(1)Inventory, non-current consists of spare parts that will not be used within twelve months following the date of the interim condensed consolidated balance sheets.
16
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Prepaid expenses and other current assets | June 30, 2024 | December 31, 2023 | |||||||||
| Prepaid expenses | $ | $ | |||||||||
Equipment purchased for customers (1) | |||||||||||
| Deferred contract costs | |||||||||||
| Total prepaid assets and other current assets | $ | $ | |||||||||
__________________
(1)The Company acquires equipment for its customers that, while owned by our customers, will be installed and qualified in a SkyWater facility. Prior to the customer obtaining ownership and control of the equipment, the Company records costs, including equipment acquisition costs, incurred to date within prepaid expenses and other current assets. These deferred costs will be recognized as a cost of revenue when control of the equipment transfers to the customer and associated tool revenue is recognized.
Property and equipment, net | June 30, 2024 | December 31, 2023 | |||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery and equipment | |||||||||||
Property and equipment placed in service, at cost (1) | |||||||||||
Less: accumulated depreciation (1) | ( | ( | |||||||||
Property and equipment placed in service, net (1) | |||||||||||
Property and equipment not yet in service | |||||||||||
Total property and equipment, net | $ | $ | |||||||||
__________________
For the three-month periods ended June 30, 2024 and July 2, 2023, depreciation expense was $3,704 and $6,700 , respectively, and $8,394 and $13,556 for the six-month periods ended June 30, 2024 and July 2, 2023, respectively, substantially all of which was classified as cost of revenue.
Intangible assets consist of (1) purchased software and license costs from the Company’s acquisition of the business in 2017; and (2) payments made under software and technology licensing agreements with third parties. During the three- and six-month periods ended June 30, 2024, the Company acquired third-party software and licensed technology placed in service of $399 and $797 , respectively, which will be amortized over a weighted average estimated life of 7.8 years and 7.9 years, respectively.
Intangible assets are summarized as follows:
Intangible assets, net | June 30, 2024 | December 31, 2023 | |||||||||
| Software and licensed technology | $ | $ | |||||||||
Less: accumulated amortization | ( | ( | |||||||||
Intangible assets placed in service, net | |||||||||||
Intangible assets not yet in service | |||||||||||
| Total intangible assets, net | $ | $ | |||||||||
For the three-month periods ended June 30, 2024 and July 2, 2023, amortization of software and licenses was $360 and $507 , respectively, and $735 and $1,003 for the six-month periods ended June 30, 2024 and July 2, 2023, respectively.
17
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Remaining estimated aggregate annual amortization expense for intangible assets placed in service is as follows for future fiscal years:
| Amortization Expense | |||||
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
Other assets | June 30, 2024 | December 31, 2023 | |||||||||
Inventory, non-current (1) | $ | $ | |||||||||
| Other assets | |||||||||||
| Total other assets | $ | $ | |||||||||
__________________
(1)Inventory, non-current consists of spare parts that will not be used within twelve months following the date of the interim condensed consolidated balance sheets.
Accrued expenses | June 30, 2024 | December 31, 2023 | |||||||||
| Accrued compensation | $ | $ | |||||||||
| Accrued commissions | |||||||||||
| Accrued royalties | |||||||||||
| Accrued inventory | |||||||||||
| Accrued consulting fees | |||||||||||
Accrued restructuring costs (1) | |||||||||||
Accrued warranty (2) | |||||||||||
Accrued vendor purchase commitments (3) | |||||||||||
| Other accrued expenses | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
__________________
(1)The Company incurred restructuring costs of $1,921 during the fiscal year ended December 31, 2023. The Company paid $602 during the fiscal year ended December 31, 2023, and the remainder was paid in the three-month period ended March 31, 2024.
(2)The Company accrued provisions for warranties of $1,623 and $(15 ) during the three-month periods ended June 30, 2024 and July 2, 2023, respectively, and $1,125 and $(9 ) for the six-month periods ended June 30, 2024 and July 2, 2023, respectively.
18
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Other long-term liabilities | June 30, 2024 | December 31, 2023 | |||||||||
| $ | $ | ||||||||||
Operating lease liabilities | |||||||||||
| Total other long-term liabilities | $ | $ | |||||||||
Note 6 Debt
The components of debt outstanding at June 30, 2024 and December 31, 2023 are as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
Short-term financing | |||||||||||
| Revolver | $ | $ | |||||||||
Tool financing advance payments (1) | |||||||||||
Unamortized debt issuance costs | ( | ( | |||||||||
Total short-term financing, net of unamortized debt issuance costs | |||||||||||
Long-term debt | |||||||||||
| VIE Financing | |||||||||||
Tool financing loans (1) | |||||||||||
Unamortized debt issuance costs | ( | ( | |||||||||
| Total long-term debt, including current maturities | |||||||||||
| Less: Current portion of long-term debt | ( | ( | |||||||||
| Total long-term debt, excluding current portion | $ | $ | |||||||||
__________________
Revolver
The outstanding balance of the revolving line of credit under the Company’s Loan and Security Agreement (the “Loan Agreement”) with Siena Lending Group LLC (the “Revolver”) was $26,017 as of June 30, 2024 at an interest rate of 10.7 % due in December 2025. Borrowing under the Revolver is limited by a borrowing base of specified advance rates applicable to billed accounts receivable, contract assets, inventory and equipment, subject to various conditions and limits as provided in the Loan Agreement. As the borrowing base was above the borrowing limit of $100,000 , the remaining availability under the Revolver was $73,983 as of June 30, 2024. As of June 30, 2024, the Company was in compliance with applicable financial covenants of the Revolver.
19
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
VIE Financing
On September 30, 2020, Oxbow Realty, the Company’s consolidated VIE (see Note 11 – Related Party Transactions and Note 12 – Variable Interest Entity), entered into a loan agreement for $39,000 (the “VIE Financing”) to finance the acquisition of the land and building of the SkyWater Minnesota facility. The VIE Financing is repayable in equal monthly installments of $194 over 10 years, with the remaining balance payable at the maturity date of October 6, 2030. The interest rate under the VIE Financing is fixed at 3.44 %. The VIE Financing is guaranteed by Oxbow Industries, who is also the sole equity holder of Oxbow Realty. The VIE financing is not subject to financial covenants.
The terms of the VIE Financing include provisions that grant the lender several protective rights when certain triggering events defined in the loan agreement occur, including events tied to the Company’s occupancy of the SkyWater Minnesota facility and SkyWater’s financial performance. The triggering events are not financial covenants and the occurrence of these triggering events do not represent events of default, nor do they result in the VIE Financing becoming callable, rather the protective rights become enforceable by the lender. As defined in the loan agreement, a triggering event occurred beginning in the three-month period ended January 1, 2023. Pursuant to its protective rights, the lender retained in a restricted account amounts paid by SkyWater to Oxbow Realty that were in excess of the scheduled debt payments paid by Oxbow Realty to the lender. The triggering event was cured during the three-month period ended June 30, 2024 and the funds held in the restricted account were remitted back to Oxbow Realty. As defined in the loan agreement, no triggering events existed as of June 30, 2024.
Tool Financing Loans
The Company, from time to time, enters into financing arrangements with lenders to finance the purchase of manufacturing tools and other equipment. These agreements include bargain purchase options at the end of the lease terms which the Company intends to exercise. These transactions represent failed sale leasebacks with the associated equipment recorded in property and equipment, net and the proceeds received, net of scheduled repayments of the financings, recorded as debt on the Company’s interim condensed consolidated balance sheets. Additionally, advance payments made to tool vendors by financing lenders on the Company’s behalf totaled $0 and $3,822 as of June 30, 2024 and December 31, 2023, respectively. When the financed tools are placed into service, financing agreements are executed to repay the lender the outstanding financial liability over a period of time. The advance payments are recorded as short-term financing on the Company’s interim condensed consolidated balance sheets.
Maturities
Future principal payments of the Company’s long-term debt, excluding unamortized debt issuance costs, are as follows:
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
20
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 7 Income Taxes
The Company’s effective tax rates for the three- and six-month periods ended June 30, 2024 and July 2, 2023 differ from its 21 11.7 % and (0.4 )% for the three-month periods ended June 30, 2024 and July 2, 2023, respectively, and 1.5 % and (0.2 )% for the six-month periods ended June 30, 2024 and July 2, 2023, respectively.
Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this analysis, a valuation allowance of $26,396 and $26,111 was recorded at June 30, 2024 and December 31, 2023, respectively, to reduce the net deferred tax assets to the amount that is more likely than not to be realized.
In August 2022, the U.S. enacted the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (the “CHIPS Act”). The CHIPS Act provides incentives to semiconductor chip manufacturers in the U.S., including providing a 25% manufacturing investment credit for investments in semiconductor manufacturing property placed in service after December 31, 2022, for which construction begins before January 1, 2027. Property investments qualify for the 25% credit if, among other requirements, the property is integral to the operation of an advanced manufacturing facility, defined as having a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. Currently, management is evaluating the impact of the CHIPS Act on its business.
Note 8 Shareholders’ Equity
On September 2, 2022, SkyWater entered into an Open Market Sale Agreement with Jefferies LLC with respect to an at the market offering program (the “ATM Program”). Pursuant to the agreement, the Company may, from time to time, offer and sell up to $100,000 in shares of the Company’s common stock. During the six-month period ended June 30, 2024, the Company did not sell shares under the ATM Program. During the three and six-month periods ended July 2, 2023, the Company sold 1,056,181 and 1,301,470 shares under the ATM Program, respectively. From the date of the ATM program through June 30, 2024, the Company has cumulatively sold 2,516,586 shares at an average sale price of $9.96 per share, resulting in gross proceeds of approximately $25,070 before deducting sales commissions and fees of approximately $1,212 . The Company used the net proceeds to pay down the Revolver and fund its operations.
As of June 30, 2024, the Company was authorized to sell an additional $74,930 in shares under the ATM Program.
Note 9 Equity-Based Compensation
Equity-based compensation expense was recorded in the interim condensed consolidated statements of operations as follows:
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
Research and development expense | |||||||||||||||||||||||
| Selling, general and administrative expense | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
21
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 10 Commitments and Contingencies
Litigation
From time to time, the Company is involved in legal proceedings and subject to claims arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the resolution of these ordinary-course matters are not expected to have a material adverse effect on its business, consolidated operating results, financial condition, or cash flows. Even if any particular litigation is resolved in a manner that is favorable to the Company, such litigation can have a negative impact on the Company because of defense and settlement costs, diversion of management resources from its business, and other factors.
Capital Expenditures
The Company has various contracts outstanding with third parties, primarily related to the purchase of tools. The Company had $7,589 and $7,910 of contractual commitments outstanding as of June 30, 2024 and December 31, 2023, respectively, that it expects to pay in the next twelve months using cash on hand and operating cash flows.
Center for NeoVation
On January 25, 2021, the Company entered into a technology and economic development agreement (the “TED Agreement”), and a lease agreement (the “CfN Lease”) with the government of Osceola County, Florida (“Osceola”) and ICAMR, Inc., a Florida non-profit corporation (also known as “BRIDG”), to lease and operate the Center for NeoVation (the “CfN”), a semiconductor research and development and manufacturing facility in Florida. Under the CfN Lease, the Company agrees to bring the plant to full production capacity within five years , and then to operate the plant at full capacity for an additional 15 years. At the end of the lease, SkyWater will take ownership of the facility. The Company is responsible for taxes, utilities, insurance, maintenance, operation of the assets, and making capital investments in the facility to bring the facility to its full production capacity. Investments and costs required to bring the facility to its full capacity will be substantial. The Company may terminate the TED Agreement and CfN Lease with 18 months’ notice. In the event the Company terminates the agreements, the Company must continue to operate the CfN until either a replacement operator for the CfN is identified, or the 18 -month termination notice period expires. The Company may be required to make a payment of up to $15,000 to Osceola upon termination.
Build Back Better Grant
In third quarter 2022, the U.S. Department of Commerce Economic Development Administration granted funds to Osceola and BRIDG for continued development of Central Florida’s Semiconductor Cluster for Broad-Based Prosperity through the Build Back Better Regional Challenge, a portion of which is committed to the expansion of the CfN and purchase, installation, and qualification of equipment in the CfN. In February 2023, SkyWater committed to a 20 % matching share contribution of the project costs to Osceola totaling approximately $9,100 . SkyWater’s commitment to fund this matching contribution is limited to $1,000 in any single calendar quarter. As of June 30, 2024, SkyWater has not been obligated to pay any portion of the matching contribution to which it has committed.
22
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 11 Related Party Transactions
In August 2022, SkyWater entered into an agreement with Oxbow Industries to provide funding in an amount up to $12,500 , if necessary, to enable the Company to meet its obligations as they become due. In March 2024, the agreement was amended to extend the term through March 18, 2026. No amounts have been provided to the Company under this agreement.
Sale-Leaseback Transaction
On September 29, 2020, SkyWater entered into an agreement to sell the land and building of its Minnesota facility to Oxbow Realty. In the fourth quarter of 2020, SkyWater entered into an agreement to lease the land and building back from Oxbow Realty for initial lease payments of $394 per month over 20 years. The monthly payments are subject to a 2 % increase each year during the term of the lease. In the most recent month, the rental payment to Oxbow Realty was $418 . The Company is 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 agreement. Future minimum lease commitments to Oxbow Realty as of June 30, 2024 were as follows (such amounts are eliminated from the Company’s interim condensed consolidated financial statements due to the consolidation of Oxbow Realty, see Note 12 – Variable Interest Entity):
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: imputed interest | ( | ||||
| Total | $ | ||||
23
SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 12 Variable Interest Entity
Oxbow Realty was established for the purpose of holding real estate and facilitating real estate transactions on behalf of Oxbow Industries. This included facilitating the purchase of the land and building of SkyWater’s Minnesota facility with proceeds from a bank loan (see Note 6 – Debt) and managing the leaseback of the land and building to SkyWater (see Note 11 – Related Party Transactions). Management determined that Oxbow Realty meets the definition of a VIE under Accounting Standards Codification Topic 810, “Consolidations” (“Topic 810”), because it lacks sufficient equity to finance its activities. Furthermore, the Company is the primary beneficiary of Oxbow Realty as it has the power over those activities that most significantly affect Oxbow Realty’s economic performance, mainly activities focused on the operation and maintenance of the Minnesota facility. As the primary beneficiary, the Company consolidates the assets, liabilities, and results of operations of Oxbow Realty pursuant to Topic 810, eliminating any transactions between the Company and Oxbow Realty, and recording a noncontrolling interest for the economic interest in Oxbow Realty attributable to parties other than the Company’s common stock shareholders. In addition, the assets of Oxbow Realty can only be used to settle its liabilities, and the creditors of Oxbow Realty do not have recourse to the general credit of SkyWater.
The following table shows the carrying amounts of assets and liabilities of Oxbow Realty that are consolidated by the Company as of June 30, 2024 and December 31, 2023. The assets and liabilities are presented prior to the elimination of intercompany balances.
| June 30, 2024 | December 31, 2023 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Finance receivable | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
Contract liabilities | |||||||||||
| Debt | |||||||||||
| Total liabilities | $ | $ | |||||||||
The following table shows the revenue and expenses of Oxbow Realty for the three- and six-month periods ended June 30, 2024 and July 2, 2023. These results of Oxbow Realty are presented prior to the elimination of intercompany transactions.
| Three-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Note 13 Leases
SkyWater as the Lessor
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the interim condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the Company’s audited annual consolidated financial statements and related notes, included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2023. In addition to historical financial information, the following discussion contains forward-looking statements that reflect the Company’s current expectations, estimates and assumptions concerning events and financial trends that may affect the Company’s future operating results or financial position. Actual results and the timing of events may differ materially from those discussed or implied in the Company’s 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 its Annual Report on Form 10-K.
SkyWater refers to the three-month periods ended June 30, 2024 and July 2, 2023 as the second quarter of 2024 and second quarter of 2023, respectively. Each of these three-month periods includes 13 weeks. The six-month periods ended June 30, 2024 and July 2, 2023 are referred to as the first six months of 2024 and