SkyWater(SKYT) - 2022 Q1 - Quarterly Report

Forward-Looking Statements This section outlines the nature and inherent risks of forward-looking statements in the report, advising against undue reliance Forward-Looking Statements Content This section highlights that the Quarterly Report on Form 10-Q contains forward-looking statements, which are subject to various risks, uncertainties, and assumptions. It advises against undue reliance on these statements as they represent views only as of the report date and the company undertakes no obligation to update them, except as required by law - The report contains forward-looking statements, which are not guarantees of future performance and are subject to risks, uncertainties, and assumptions[8][9] - Key factors that may affect results include: ability to operate foundry at full capacity, response to changing technologies, customer relationships, ability to predict revenues, dependence on largest customers, supplier performance, cost control, market size and demand, personnel retention, litigation, trade policies, capital raising, demand forecasting, COVID-19 impact, government contracting compliance, regulatory developments, and intellectual property rights[9][10] Explanatory Note This section provides important contextual information and explanations regarding the report's content Corporate Conversion This section explains the corporate conversion of CMI Acquisition, LLC into SkyWater Technology, Inc. on April 14, 2021. It details how Class B preferred units and Common Units were converted into common stock of the new corporation using specific conversion ratios - On April 14, 2021, CMI Acquisition, LLC converted into SkyWater Technology, Inc., a Delaware corporation[12] - 18,000,000 Class B preferred units converted into 27,995,400 shares of common stock (approx. 1-to-1.56 ratio)[12] - 2,105,936 Common Units converted into 3,060,343 shares of common stock (approx. 1-to-1.45 ratio)[12] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for SkyWater Technology, Inc. (formerly CMI Acquisition, LLC), including balance sheets, statements of operations, statements of members' equity (deficit), and statements of cash flows, along with comprehensive notes for the periods ended April 4, 2021, and March 29, 2020 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Item | April 4, 2021 | January 3, 2021 | | :----------------------------------- | :------------ | :-------------- | | Assets | | | | Cash and cash equivalents | $4,216 | $7,436 | | Total current assets | $70,185 | $76,572 | | Property and equipment, net | $173,174 | $178,078 | | Total assets | $252,311 | $263,209 | | Liabilities and Members' Equity (Deficit) | | | | Total current liabilities | $75,500 | $86,327 | | Total long-term liabilities | $181,424 | $178,466 | | Total liabilities | $256,924 | $264,793 | | Total members' deficit | $(4,613) | $(1,584) | | Total liabilities and members' deficit | $252,311 | $263,209 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands) | Item | Three Months Ended April 4, 2021 | Three Months Ended March 29, 2020 | | :------------------------------------------- | :------------------------------- | :------------------------------ | | Net sales | $48,101 | $36,904 | | Cost of sales | $38,935 | $30,480 | | Gross profit | $9,166 | $6,424 | | Research and development | $1,927 | $662 | | Selling, general and administrative expenses | $8,603 | $5,633 | | Operating loss | $(1,420) | $(712) | | Loss before income taxes | $(2,478) | $(2,315) | | Net loss | $(2,053) | $(1,372) | | Net loss attributable to CMI Acquisition, LLC | $(2,811) | $(1,372) | | Net loss per unit attributable to Common Unitholders, basic and diluted | $(1.04) | N/A | | Net loss per unit attributable to Class B Preferred Unitholders, basic and diluted | N/A | $(0.08) | Condensed Consolidated Statements of Members' Equity (Deficit) Condensed Consolidated Statements of Members' Equity (Deficit) (in thousands) | Item | December 29, 2019 | March 29, 2020 | January 3, 2021 | April 4, 2021 | | :----------------------------------- | :---------------- | :------------- | :-------------- | :------------ | | Total Members' Equity (Deficit) | $24,167 | $23,283 | $(1,584) | $(4,613) | | Net loss | $(1,372) | $(1,372) | $(2,811) | $(2,053) | | Unit-based compensation | $488 | $488 | $5 | $5 | | Distribution to VIE member | N/A | N/A | $(981) | $(981) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended April 4, 2021 | Three Months Ended March 29, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------ | | Net cash (used in) provided by operating activities | $(8,424) | $50,451 | | Net cash used in investing activities | $(5,397) | $(10,775) | | Net cash provided by (used in) financing activities | $10,601 | $(14,248) | | Net change in cash and cash equivalents | $(3,220) | $25,428 | | Cash and cash equivalents - end of period | $4,216 | $30,033 | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures and explanations for the condensed consolidated financial statements, covering business operations, accounting policies, revenue recognition, balance sheet components, debt, income taxes, equity, fair value measurements, commitments, customer concentration, related party transactions, and variable interest entities Note 1 Nature of Business SkyWater Technology, Inc. operates as a U.S. investor-owned, independent technology foundry, offering advanced semiconductor development (Advanced Technology Services) and manufacturing (Wafer Services). The company completed a corporate conversion from CMI Acquisition, LLC and an Initial Public Offering (IPO) in April 2021, raising approximately $100.3 million in net proceeds for working capital, growth, and potential acquisitions - SkyWater is a U.S. investor-owned, independent, pure-play technology foundry offering Advanced Technology Services and Wafer Services[25] - The company converted from CMI Acquisition, LLC to SkyWater Technology, Inc. on April 14, 2021, and completed its IPO on April 23, 2021, issuing 8,004,000 shares at $14.00 per share[27][28] - Net proceeds from the IPO were approximately $100,312 thousand, intended for working capital, growth, capital expenditures, and potential acquisitions or strategic investments[28][30] Note 2 Basis of Presentation and Principles of Consolidation This note details the unaudited interim financial statements' preparation in accordance with U.S. GAAP, principles of consolidation including subsidiaries and Variable Interest Entities (VIEs), and the use of management estimates. It also addresses the adverse effects of the COVID-19 pandemic on business operations and the accounting for net loss per unit under the two-class method. Additionally, it describes the agreement to operate the Center for NeoVation (CfN) facility in Florida - The COVID-19 pandemic adversely affected the business, leading to modifications in employee travel/work locations and negative impacts on employee productivity. One customer reduced R&D expenditures, and another experienced facility shutdowns, delaying project milestones[37][116] - Net loss per unit is calculated using the two-class method, allocating income/losses between Common Units and Class B Preferred Units, with Class B Preferred Units having an 8% preferred return[38][41][43] - SkyWater Florida entered agreements to operate the Center for NeoVation (CfN) facility for at least 23 years with a nominal lease payment of $1.00 per year, responsible for taxes, utilities, insurance, maintenance, and operation[44][45] Note 3 Summary of Significant Accounting Policies This section confirms that there were no material changes to the company's significant accounting policies and estimates during the three months ended April 4, 2021. It also outlines the company's intent to adopt new accounting standards for Leases (Topic 842) and Current Expected Credit Losses (Topic 326) in future fiscal years, leveraging its emerging growth company status for extended transition periods, with no material impact expected - No material changes to significant accounting policies and estimates during the three months ended April 4, 2021[48] - The company, as an emerging growth company, intends to adopt ASU 2016-02 (Leases) on January 3, 2022, and ASU 2016-13 (Credit Losses) on January 2, 2023, with no material impact expected on financial statements[50][51] Note 4 Revenue This note details revenue recognition, including engineering and test wafer services provided to BRIDG and access fees for cleanrooms. It disaggregates revenue by service type (Wafer Services, Advanced Technology Services) and timing of recognition (point-in-time, over time), and by country. It also provides information on deferred contract costs, contract assets, and contract liabilities, noting a decrease in contract liabilities due to performance obligation completion Disaggregated Revenue by Service Type (in thousands) | Service Type | Three Months Ended April 4, 2021 | Three Months Ended March 29, 2020 | | :---------------------------- | :------------------------------- | :------------------------------ | | Wafer Services | $10,019 | $13,318 | | Advanced Technology Services | $38,082 | $23,586 | | Total revenue | $48,101 | $36,904 | Revenue by Country (in thousands) | Country | Three Months Ended April 4, 2021 | Three Months Ended March 29, 2020 | | :-------------- | :------------------------------- | :------------------------------ | | United States | $43,621 | $31,470 | | Canada | $1,609 | $3,036 | | All others | $2,871 | $2,398 | | Total | $48,101 | $36,904 | Remaining Performance Obligations (in thousands) as of April 4, 2021 | Period | Amount | | :------------------ | :----- | | Within one year | $12,542 | | From one to two years | $13,921 | | From two to three years | $12,695 | | After three years | $47,607 | | Total | $86,765 | Note 5 Balance Sheet Information This note provides detailed breakdowns of specific balance sheet accounts, including accounts receivable (trade, unbilled revenue, notes), inventories (raw materials, work-in-process, supplies), prepaid expenses (equipment for customers, deferred contract/offering costs), property and equipment (land, buildings, machinery, fixed assets not yet in service), intangible assets (customer list, software/licenses), and accrued expenses (compensation, commissions, fixed asset expenditures, royalties) Accounts Receivable, Net (in thousands) | Item | April 4, 2021 | January 3, 2021 | | :-------------------------- | :------------ | :-------------- | | Trade accounts receivable | $16,372 | $21,357 | | Unbilled revenue (contract assets) | $9,874 | $8,147 | | Total accounts receivable, net | $26,730 | $29,995 | Inventories (in thousands) | Item | April 4, 2021 | January 3, 2021 | | :-------------------------- | :------------ | :-------------- | | Raw materials | $1,867 | $1,463 | | Work-in-process | $23,808 | $19,719 | | Supplies and spare parts | $5,555 | $5,987 | | Total inventories—current | $31,230 | $27,169 | Property and Equipment, Net (in thousands) | Item | April 4, 2021 | January 3, 2021 | | :-------------------------------- | :------------ | :-------------- | | Total property and equipment, at cost | $238,468 | $237,325 | | Less: Accumulated depreciation | $(65,294) | $(59,247) | | Total property and equipment, net | $173,174 | $178,078 | Intangible Assets, Net (in thousands) | Item | April 4, 2021 | January 3, 2021 | | :-------------------------- | :------------ | :-------------- | | Customer list | $1,500 | $1,500 | | Software and licenses | $5,627 | $5,408 | | Total intangible assets, net | $4,345 | $4,561 | Note 6 Debt This note details the company's debt structure, including the Revolver ($45.3 million outstanding at 3% interest), a $39 million Financing (fixed 3.44% interest), and a $6.453 million Paycheck Protection Program (PPP) loan. The company was granted a waiver for Revolver financial covenants and was in compliance as of April 4, 2021. Future principal payments are scheduled through 2030 Components of Debt Outstanding (in thousands) | Debt Type | April 4, 2021 | January 3, 2021 | | :---------------------------------------------------------------- | :------------ | :-------------- | | Revolver, net | $43,873 | $30,766 | | Financing (by VIE), net | $35,215 | $35,381 | | Paycheck Protection Program loan | $6,453 | $6,453 | | Total long-term debt | $85,541 | $72,600 | - The company was granted a waiver for financial covenants related to the Revolver on March 19, 2021, and was in full compliance as of April 4, 2021[70] Future Principal Payments of Debt (in thousands) | Year | Amount | | :---------------- | :----- | | Remainder of 2021 | $2,523 | | 2022 | $5,333 | | 2023 | $1,422 | | 2024 | $1,094 | | 2025 | $46,470 | | Thereafter | $33,534 | | Total | $90,376 | Note 7 Income Taxes This note explains the effective tax rates for the three months ended April 4, 2021 (17.2%) and March 29, 2020 (40.7%). The Q1 2021 rate was lower than the statutory 21% due to a partial reversal of a deferred tax asset valuation allowance, offset by state income taxes. The Q1 2020 rate was higher due to excess tax benefits from unit-based compensation, partially offset by a valuation allowance. A valuation allowance of $1,401 thousand was recorded as of April 4, 2021 - Effective tax rate for Q1 2021 was 17.2%, compared to 40.7% for Q1 2020[73] - The Q1 2021 tax benefit was lower than the statutory 21% rate due to partial reversal of a deferred tax asset valuation allowance, offset by state income taxes[73] - A valuation allowance of $1,401 thousand was recorded as of April 4, 2021, to reduce net deferred tax assets[74] Note 8 Members' Equity (Deficit) This note details the company's equity structure prior to the April 14, 2021 corporate conversion, which involved Class A Preferred, Class B Preferred, and Common Units. Post-conversion, all units were converted into 31,055,743 shares of common stock. It also describes the granting of restricted common units and restricted unit units, and the adoption of new share-based compensation plans (2021 Equity Incentive Plan and 2021 Employee Stock Purchase Plan) in connection with the IPO - Prior to corporate conversion, equity consisted of Class A Preferred Units (none outstanding), Class B Preferred Units (18,000,000 outstanding), and Common Units (2,105,936 outstanding at April 4, 2021)[76] - Upon corporate conversion on April 14, 2021, all units converted into an aggregate of 31,055,743 shares of common stock[78] - The company adopted the 2021 Equity Incentive Plan (5,000,000 shares reserved) and the 2021 Employee Stock Purchase Plan (700,000 shares reserved) in connection with its IPO[82][84] Note 9 Fair Value Measurements This note defines the fair value hierarchy (Level 1, 2, 3) and details the valuation of the contingent consideration obligation using Level 3 unobservable inputs. The fair value of this liability was $7,600 thousand as of April 4, 2021, with expected future cash payments between $7,600 and $8,500 thousand, discounted based on forecasted future revenues - Fair value hierarchy categorizes inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[89] - The contingent consideration obligation is valued using Level 3 inputs, specifically forecasted receipts of projected future revenues of Advanced Technology Services[86][87] Contingent Consideration Fair Value (in thousands) | Item | Amount | | :------------------------ | :----- | | Balance at January 3, 2021 | $10,900 | | Payments | $(3,356) | | Change in fair value | $56 | | Balance at April 4, 2021 | $7,600 | Note 10 Commitments and Contingencies This note addresses the expiration of the Foundry Services Agreement (FSA) in June 2020, which previously required the company to provide semiconductor wafers to a major customer. It also states that the company is involved in ordinary-course legal proceedings, but does not anticipate a material adverse effect on its business, operating results, financial condition, or cash flows - The Foundry Services Agreement (FSA) with a main customer expired in June 2020[91] - The company is involved in ordinary-course legal proceedings but does not expect a material adverse effect on its business[92] Note 11 Major Customers and Concentration Risk This note highlights the company's concentration risk, with a significant portion of sales and accounts receivable attributed to a few major customers. For the three months ended April 4, 2021, three customers accounted for 66% of sales, and three customers accounted for 60% of outstanding trade accounts receivable Major Customer Sales Concentration | Customer | Three Months Ended April 4, 2021 | Three Months Ended March 29, 2020 | | :--------- | :------------------------------- | :------------------------------ | | Customer A | 37% | — | | Customer B | 19% | 34% | | Customer C | 10% | 27% | | Total | 66% | 61% | - Three major customers accounted for 24%, 19%, and 17% of outstanding trade accounts receivable as of April 4, 2021[93] - The loss of a major customer could adversely affect operating results and financial condition[93] Note 12 Related Party Transactions This note discloses related party transactions, including management and financial consulting services provided by Oxbow Industries, LLC (principal owner) for an annual fee not exceeding $700 thousand, and legal/professional services from board members. It also details a sale-leaseback transaction on September 29, 2020, where the company sold its Minnesota facility to Oxbow Realty (controlled by Oxbow) and leased it back for 20 years - Oxbow Industries, LLC, the principal owner, provides management and financial consulting services for an annual fee not exceeding $700 thousand; $160 thousand incurred in Q1 2021 and Q1 2020[94] - The company sold its Minnesota facility to Oxbow Realty (controlled by Oxbow) for $39 million and leased it back for 20 years, with initial monthly payments of $394 thousand, increasing 2% annually[97][149] Future Minimum Lease Commitments to Oxbow Realty (in thousands) as of April 4, 2021 | Period | Amount | | :---------------- | :------- | | Remainder of 2021 | $3,560 | | 2022 | $4,836 | | 2023 | $4,932 | | 2024 | $5,031 | | 2025 | $5,132 | | Thereafter | $89,350 | | Total lease payments | $112,841 | Note 13 Variable Interest Entities This note explains the consolidation of Oxbow Realty as a Variable Interest Entity (VIE) because it lacks sufficient equity and SkyWater is its primary beneficiary, directing its operations. The assets, liabilities, revenues, and expenses of Oxbow Realty are consolidated, with a non-controlling interest recorded for the portion not owned by SkyWater's members - Oxbow Realty is consolidated as a Variable Interest Entity (VIE) because it lacks sufficient equity and SkyWater is its primary beneficiary[98] Consolidated Assets and Liabilities of Oxbow Realty (in thousands) | Item | April 4, 2021 | January 3, 2021 | | :-------------------- | :------------ | :-------------- | | Total assets | $37,455 | $37,889 | | Total liabilities | $39,247 | $39,457 | Consolidated Revenue and Expenses of Oxbow Realty (in thousands) for Three Months Ended April 4, 2021 | Item | Amount | | :-------------------------- | :----- | | Revenue | $1,345 | | General and administrative expenses | $252 | | Interest expense | $335 | | Total expenses | $587 | | Net income | $758 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on SkyWater's financial performance and condition, comparing the first quarter of 2021 to 2020. It covers the corporate conversion and IPO, business overview, factors affecting results, detailed operational results, liquidity, capital resources, and accounting policies, including a reconciliation of Adjusted EBITDA Corporate Conversion and Initial Public Offering This subsection reiterates the corporate conversion of CMI Acquisition, LLC to SkyWater Technology, Inc. on April 14, 2021, and the subsequent IPO on April 23, 2021. The IPO generated approximately $100.3 million in net proceeds, which are earmarked for working capital, growth, capital expenditures, and potential strategic investments - CMI Acquisition, LLC converted to SkyWater Technology, Inc. on April 14, 2021, and completed its IPO on April 23, 2021[106][107] - The IPO issued 8,004,000 shares at $14.00 per share, yielding approximately $100.3 million in net proceeds[107] - Proceeds are intended for working capital, general corporate purposes, financing growth, funding capital expenditures, and potential acquisitions or strategic investments[109] Overview SkyWater operates as a U.S. investor-owned, independent technology foundry, providing advanced semiconductor development and manufacturing services from its Minnesota fab and advanced packaging from its Florida facility. The company leverages its DMEA Category 1A accreditation and domestic supply chain for competitive advantages, focusing on high-growth markets like aerospace & defense and advanced computing, and rapidly transitioning new processes to volume production - SkyWater is a U.S. investor-owned, independent, pure-play technology foundry offering advanced semiconductor development and manufacturing services[110] - The company's DMEA Category 1A accreditation and U.S.-based operations provide enhanced IP security and domestic supply chain advantages[112] - Focuses on high-growth end markets including advanced computation, aerospace & defense, automotive & transportation, bio-health, consumer, and industrial/IoT[113] Factors and Trends Affecting our Business and Results of Operations Key factors influencing SkyWater's business include macroeconomic conditions, semiconductor industry cyclicality, and the ongoing impact of the COVID-19 pandemic, which has negatively affected employee productivity and customer R&D. The CHIPS Act is expected to provide incentives for onshore semiconductor development. Other factors include indebtedness, market opportunities, and material cost inflation - The COVID-19 pandemic adversely affected business, leading to reduced R&D expenditures from one customer and project delays from another due to facility shutdowns[116] - The Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS Act) is expected to provide incentives and funding for onshore semiconductor development and manufacturing[119] - Material and other cost inflation is a factor, mitigated by productivity improvements and selling price increases, with continued price volatility expected[119] Results of Operations SkyWater reported a 30.3% increase in net sales to $48.1 million for Q1 2021, driven by Advanced Technology Services. Gross profit rose 42.7% to $9.2 million due to a shift to more profitable services. Operating expenses increased, with R&D up 191.1% and SG&A up 52.7%. Net loss increased by 49.6% to $2.053 million, while Adjusted EBITDA saw a modest 5.2% increase to $5.6 million, reflecting higher gross profit offset by increased labor and infrastructure costs Consolidated Statement of Operations Data (in thousands) | Item | Q1 2021 | Q1 2020 | Dollar Change | Percentage Change | | :------------------------------------------- | :------ | :------ | :------------ | :---------------- | | Net sales | $48,101 | $36,904 | $11,197 | 30.3% | | Cost of sales | $38,935 | $30,480 | $8,455 | 27.7% | | Gross profit | $9,166 | $6,424 | $2,742 | 42.7% | | Research and development | $1,927 | $662 | $1,265 | 191.1% | | Selling, general and administrative expenses | $8,603 | $5,633 | $2,970 | 52.7% | | Operating loss | $(1,420) | $(712) | $(708) | 99.4% | | Net loss | $(2,053) | $(1,372) | $(681) | 49.6% | | Adjusted EBITDA | $5,629 | $5,349 | $280 | 5.2% | Net Sales by Service Type (in thousands) | Service Type | Q1 2021 | Q1 2020 | | :---------------------------- | :------ | :------ | | Wafer Services | $10,019 | $13,318 | | Advanced Technology Services | $36,915 | $23,586 | | Lease revenue | $1,167 | — | | Total | $48,101 | $36,904 | - Gross profit increase was due to a shift to more profitable Advanced Technology Services sales in Q1 2021[123] Liquidity and Capital Resources SkyWater's liquidity is supported by operating cash flows, cash on hand ($4.2 million at April 4, 2021), and $19.7 million available under its Revolver. The recent IPO generated $100.3 million in net proceeds, expected to cover working capital and capital expenditures for at least 12 months. Capital expenditures are projected to be $20-25 million for fiscal year 2022, primarily for foundry expansion and advanced packaging capabilities. The company's Revolver provides up to $65 million, secured by assets, and includes financial covenants for fixed charge coverage and leverage ratios, which were in compliance as of April 4, 2021 after a waiver - Cash and cash equivalents were $4.2 million as of April 4, 2021, with $19.7 million available under the Revolver[134][142] - Net proceeds from the IPO were approximately $100.3 million, expected to meet working capital and capital expenditure requirements for at least 12 months[135] - Projected capital expenditures for fiscal year 2022 are $20-25 million, mainly for Minnesota foundry expansion and Florida advanced packaging[136] Cash Flow Activities (in thousands) | Cash Flow Activity | Q1 2021 | Q1 2020 | | :--------------------------------------- | :------ | :------ | | Net cash (used in) provided by operating activities | $(8,424) | $50,451 | | Net cash used in investing activities | $(5,397) | $(10,775) | | Net cash provided by (used in) financing activities | $10,601 | $(14,248) | - The Revolver provides up to $65 million, secured by accounts receivable, inventory, and equipment, with financial covenants for fixed charge coverage and leverage ratios. A waiver was granted on March 19, 2021, ensuring compliance as of April 4, 2021[152][154][157] JOBS Act SkyWater qualifies as an "emerging growth company" under the JOBS Act, allowing it to take advantage of exemptions from certain reporting requirements, such as auditor attestation for Section 404(b) and reduced executive compensation disclosures. The company has elected to use the extended transition period for complying with new or revised accounting standards - SkyWater is an "emerging growth company" under the JOBS Act[158] - The company benefits from exemptions including not complying with auditor attestation for Section 404(b) and reduced executive compensation disclosures[158] - SkyWater has elected to use the extended transition period for complying with new or revised financial accounting standards[159] Critical Accounting Policies This section states that there have been no material changes to the company's critical accounting policies and estimates previously disclosed in its Prospectus. The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts - No material changes to critical accounting policies and estimates disclosed in the Prospectus[161] Recent Accounting Pronouncements For a description of recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, refer to "Note 3 — Summary of Significant Accounting Policies" in Part I, Item 1 of this Quarterly Report on Form 10-Q - Refer to Note 3 for details on recently adopted and issued accounting standards[162] Non-GAAP Financial Measure This section introduces Adjusted EBITDA as a non-GAAP financial measure used by management to evaluate ongoing financial performance, excluding items not indicative of core operating results. It provides a reconciliation of net loss to Adjusted EBITDA, emphasizing that it should not be considered an alternative to U.S. GAAP measures due to potential calculation differences among companies - Adjusted EBITDA is a non-GAAP financial measure used to evaluate ongoing financial performance, excluding items not indicative of core operating results[164][166] - Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income determined in accordance with U.S. GAAP[165][167] Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Item | Q1 2021 | Q1 2020 | | :------------------------------------ | :------ | :------ | | Net loss | $(2,053) | $(1,372) | | Interest expense | $1,058 | $1,462 | | Income tax benefit | $(425) | $(943) | | Depreciation and amortization | $6,482 | $4,322 | | EBITDA | $5,062 | $3,469 | | Fair value changes in contingent consideration | $56 | $841 | | Equity-based compensation | $235 | $676 | | Fair value changes in warrants | — | $141 | | Management fees | $276 | $222 | | Adjusted EBITDA | $5,629 | $5,349 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines SkyWater's market risks, primarily focusing on potential changes in the fair value of its debt due to fluctuations in market interest rates. It also addresses credit risk associated with cash and cash equivalents held in financial institutions and accounts receivable from customers, noting ongoing credit evaluations and monitoring - Market risks primarily relate to potential changes in the fair value of debt due to fluctuations in applicable market interest rates[170] - Credit risk exists for cash and cash equivalents (balances may exceed federally insured limits) and accounts receivable (ongoing credit evaluations, no collateral generally required)[172] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that SkyWater's disclosure controls and procedures were not effective as of April 4, 2021, due to previously identified material weaknesses in internal control over financial reporting. These weaknesses stem from limited accounting and finance resources, leading to issues in documentation, execution, and monitoring of controls, particularly in revenue recognition. A remediation plan is underway, involving hiring additional personnel and formalizing policies - Disclosure controls and procedures were not effective as of April 4, 2021, due to material weaknesses in internal control over financial reporting[174] - Material weaknesses include limited accounting and finance resources, resulting in inappropriate preparation, review, and maintenance of documentation, and insufficient design/implementation of controls for revenue recognition[175] - Remediation plan involves hiring additional qualified accounting/finance personnel and formalizing documentation of policies, procedures, and controls, with ongoing validation and testing[176][177] PART II. OTHER INFORMATION This part contains disclosures on legal proceedings, risk factors, equity sales, and other relevant information Item 1. Legal Proceedings SkyWater is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business, operating results, cash flows, or financial condition - No current legal proceedings are expected to have a material adverse effect on the company's business[180] Item 1A. Risk Factors This section refers readers to the risk factors previously disclosed in the company's Prospectus, stating that there have been no material changes to these risk factors - No material changes to the risk factors disclosed in the company's Prospectus[181] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds SkyWater reports no unregistered sales of equity securities during the period. The detailed use of proceeds from the Initial Public Offering (IPO) completed on April 23, 2021, will be further described in the company's Quarterly Report for the second quarter of 2021 - No unregistered sales of equity securities occurred[182] - The use of proceeds from the IPO will be detailed in the Q2 2021 Quarterly Report[183] Item 3. Defaults Upon Senior Securities SkyWater reports that there have been no defaults upon senior securities during the period - No defaults upon senior securities[184] Item 4. Mine Safety Disclosures This item is not applicable to SkyWater Technology, Inc.'s operations - Mine Safety Disclosures are not applicable to the registrant[185] Item 5. Other Information SkyWater reports that there is no other information to disclose under this item - No other information to disclose[186] Item 6. Exhibits This section provides a comprehensive list of exhibits filed or furnished as part of this Quarterly Report on Form 10-Q. These include corporate governance documents (Certificate of Incorporation, Bylaws), equity incentive plans (2021 Equity Incentive Plan, 2021 Employee Stock Purchase Plan), various agreements (Waiver, Consent and First Amendment to Amended and Restated Credit Agreement, Technology and Economic Development Agreement), and certifications (CEO, CFO certifications, XBRL documents) - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws), equity incentive plans (2021 Equity Incentive Plan, 2021 Employee Stock Purchase Plan), and various agreements[188] - Certifications from the Chief Executive Officer and Chief Financial Officer are furnished, along with XBRL Instance and Taxonomy Extension Documents[188]