SkyWater(SKYT) - 2022 Q4 - Annual Report

Special Note Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section clarifies that the Annual Report on Form 10-K contains forward-looking statements, which are subject to various risks, uncertainties, and assumptions, cautioning readers not to rely on them as guarantees of future performance - The report contains forward-looking statements, identified by words like 'may,' 'expect,' 'anticipate,' 'estimate,' 'intend,' 'plan,' 'target,' 'seek,' 'potential,' 'believe,' 'will,' 'could,' 'should,' 'would,' and 'project'[12] - Forward-Looking statements are subject to risks, uncertainties, and assumptions, meaning actual results could differ materially and adversely from expectations[13] - The company does not undertake to update publicly any forward-looking statements to conform to changes in expectations or actual results, except as required by law[14] Summary of Our Risk Factors Key Risk Factors Overview This section summarizes primary risks affecting the company's business, financial condition, and operations, including operational vulnerabilities, market challenges, and external factors - Operational risks include potential damage or inoperability of the sole semiconductor foundry, defects or performance problems in products, and failure to achieve satisfactory yields or quality[18][97][100][101] - Market and growth strategy risks involve difficulty in accurately predicting future revenues, customer order cancellations or quantity changes, inability to diversify the customer base, and inherent risks in expansion strategies[18][19][102][103][111][113] - Supply chain and competitive risks highlight dependence on successful parts and materials procurement, reliance on a limited number of third-party suppliers, and intense competition from larger, more resourced competitors[19][114][115][120] - External and regulatory risks include the highly cyclical nature of the semiconductor industry, potential financial crises, changes in trade policies (e.g., tariffs), and specific risks associated with U.S. Government contracts and compliance requirements[19][20][119][127][129][149][153] - Risks related to public company operations include increased costs and expenses, challenges in maintaining effective internal control over financial reporting, and volatility in common stock price[20][23][142][146][179] Explanatory Note Corporate Conversion Details This section explains the corporate conversion of CMI Acquisition, LLC into SkyWater Technology, Inc. on April 14, 2021, detailing conversion ratios for preferred and common units into common stock - On April 14, 2021, CMI Acquisition, LLC converted into SkyWater Technology, Inc., a Delaware corporation[22] - 18,000,000 Class B preferred units converted into 27,995,400 shares of common stock (approx. 1:1.56 ratio)[22] - 2,105,936 common units converted into 3,060,343 shares of common stock (approx. 1:1.45 ratio)[22] PART I ITEM 1. Business SkyWater is a U.S. independent technology foundry providing advanced semiconductor development and manufacturing services through a 'technology as a service' model for high-growth markets - SkyWater is a U.S. investor-owned, independent, pure-play technology foundry providing advanced semiconductor development and manufacturing services[25] - The company operates under a 'technology as a service' model, offering Advanced Technology Services for IP co-development and Wafer Services for volume production[25][38] - Key competitive advantages include DMEA Category 1A Trusted Foundry accreditation, enhanced IP security, and a U.S. domestic supply chain, positioning it well for aerospace and defense markets[26][46] - Growth strategy involves diversifying the customer base, expanding into new end markets (e.g., rad-hard, advanced packaging), leveraging U.S. government investments, and co-developing next-generation technologies[48] Customer Revenue Concentration (Fiscal Years 2022 & 2021) | Customer | FY2022 Revenue % | FY2021 Revenue % | | :--------- | :--------------- | :--------------- | | Cypress | 25% | 29% | | Other 1 | 24% | 16% | | Other 2 | <10% | 14% | Overview Our Industry Our Business Model Advanced Technology Services Wafer Services Our Competitive Strengths Our Growth Strategy Our Customers Our Platform Technologies Manufacturing Our Competition Sales and Marketing Intellectual Property and Research and Development Environmental, Safety and Quality Matters Human Capital Resources Emerging Growth Company Status Available Information ITEM 1A. Risk Factors SkyWater faces significant risks from operational vulnerabilities, market challenges, supply chain disruptions, and stock volatility - The company's sole semiconductor foundry in Minnesota is a critical asset; damage or inoperability would severely impact business[97] - Dependence on two major customers (Cypress and one other) for a significant portion of sales (25% and 24% respectively in FY2022) poses a risk if these relationships are lost or volumes decrease[110] - The semiconductor industry is highly cyclical, characterized by rapid technological change, price erosion, and fluctuating supply and demand, which can lead to unpredictable operating results[119][141] - Supply chain disruptions for raw materials (substrates, chemicals, spare parts) and increased labor costs due to a tight market have negatively impacted operations and profitability[114][236] - The company has identified material weaknesses in internal control over financial reporting due to limited accounting and finance resources, impacting documentation and execution of controls[148][515] - Significant risks are associated with U.S. Government contracts, including funding appropriations, fixed-price contract cost overruns, audits, and compliance with regulations like ITAR and EAR[149][150][153] - The company relies on trade secrets and non-patent IP rights, and currently owns no patents, which could put it at a competitive disadvantage and increase litigation risk[159][160] Risks Relating to Our Business and Our Industry Risks Relating to Government Regulation Risks Relating to Intellectual Property Risks Relating to Ownership of our Common Stock ITEM 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[201] ITEM 2. Properties SkyWater's primary operations are conducted at its leased headquarters and fabrication facility in Bloomington, Minnesota, with expanded operations at the Center for NeoVation in Kissimmee, Florida - Corporate headquarters and fabrication facility are located in Bloomington, Minnesota, occupying approximately 356,000 square feet, leased from Oxbow Realty, LLC[203] - Expanded operations in January 2021 with the Center for NeoVation in Kissimmee, Florida, a 200 mm advanced packaging facility (109,000 sq ft, 36,000 sq ft cleanroom space), through a public-private partnership with Osceola County[26][204] ITEM 3. Legal Proceedings The company is occasionally involved in ordinary course legal proceedings, which management believes will not materially adversely affect its financial position or operations - The company is involved in legal proceedings and claims in the ordinary course of business[206] - Management believes current legal matters will not materially adversely affect business, operating results, financial condition, or cash flows[206] - Litigation can negatively impact the company due to defense/settlement costs and diversion of management resources[206] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant[207] Information About Our Executive Officers This section provides biographical information for SkyWater Technology, Inc.'s executive officers as of March 9, 2022, including Thomas Sonderman (President, CEO) and Steve Manko (CFO) Executive Officers as of March 9, 2022 | Name | Age | Position | | :-------------- | :-- | :------------------------------------- | | Thomas Sonderman | 58 | President, Chief Executive Officer and Director | | Steve Manko | 41 | Chief Financial Officer | - Thomas Sonderman has been President and CEO since December 2020, and President of SkyWater Technology Foundry since October 2017, with prior roles at Rudolph Technologies and Globalfoundries[211] - Steve Manko has been CFO since December 2020, previously serving as a Managing Director at Riveron Consulting and Ernst & Young[212] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SkyWater's common stock began trading on Nasdaq in April 2021, with approximately three holders of record as of March 2022, and IPO proceeds were used for debt reduction and capital expenditures - SkyWater's common stock began trading on the Nasdaq Stock Market under the symbol 'SKYT' on April 21, 2021[215] - As of March 7, 2022, there were approximately three holders of record of the company's common stock[216] - The company has never declared or paid cash dividends and does not expect to in the foreseeable future, intending to retain earnings for business operations and expansion[217] - Net proceeds from the IPO (approx. $100.2 million) were used to pay down the revolving credit agreement ($45 million), fund capital expenditures ($28 million), and support operating activities ($27 million)[221] ITEM 6. [Reserved] This item is reserved and contains no information ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes SkyWater's financial condition and results, covering revenue growth, gross profit decline, and IPO-driven liquidity - The company completed its IPO on April 23, 2021, issuing 8,004,000 shares of common stock and receiving net proceeds of approximately $100.2 million[228][229] - Revenue increased by $22.4 million (16%) to $162.8 million in fiscal 2021, driven by Advanced Technology Services, particularly in aerospace and defense[243] - Gross profit decreased by $30.2 million (133%) to $(7.5) million in fiscal 2021, primarily due to a $13.4 million inventory write-down, increased labor costs, and investments in rad-hard and advanced packaging capabilities[246][247] - Net loss attributable to SkyWater Technology, Inc. increased to $(50.7) million in fiscal 2021 from $(20.6) million in fiscal 2020[330] - Adjusted EBITDA decreased by $17.0 million (118%) to $(2.6) million in fiscal 2021, reflecting decreased gross profit and increased operating costs[257] - The company approved $56 million in strategic capital investments in July 2021 to expand manufacturing capacity (expected 40% increase) and technology capabilities, including entry into the gallium nitride (GaN) market[262] - Material weaknesses in internal controls were identified due to limited accounting and finance resources, impacting documentation and execution of controls[515] Corporate Conversion and Initial Public Offering Overview Factors and Trends Affecting our Business and Results of Operations Financial Performance Metrics Results of Operations Fiscal 2021 Compared to Fiscal 2020 Revenue Gross Profit (Loss) Inventory Write-down Research and Development Selling, General and Administrative Expenses Change in Fair Value of Contingent Consideration Change in Fair Value of Warrant Liability Loss on Debt Extinguishment Interest Expense Income Tax Expense (Benefit) Net Income Attributable to Non-Controlling Interests Adjusted EBITDA Liquidity and Capital Resources General Initial Public Offering Capital Expenditures Contingent Consideration Working Capital Cash and Cash Equivalents Operating Activities Investing Activities Financing Activities Indebtedness Material Cash Requirements Recent Accounting Developments JOBS Act Critical Accounting Policies and Estimates Revenue Recognition Inventory Income Taxes Long-lived Assets Non-GAAP Financial Measure Adjusted EBITDA ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, primarily credit and interest rate risks, and how they are managed - The company's market risks primarily relate to potential changes in the fair value of its debt due to fluctuations in market interest rates[312] - Credit risk is managed by monitoring financial institutions for cash balances and performing ongoing credit evaluations for trade receivables, with no allowance for doubtful accounts recorded as of January 2, 2022, or January 3, 2021[313][315][368] - Interest rate risk stems from the variable-rate Revolver; a 100 basis point increase in the interest rate would increase annual interest expense by $0.3 million based on the outstanding balance as of January 2, 2022[316] ITEM 8. Financial Statements and Supplementary Data This section presents SkyWater's audited consolidated financial statements for fiscal years 2022 and 2021, including balance sheets, statements of operations, cash flows, and detailed notes - The financial statements were audited by Deloitte & Touche LLP, who issued an unqualified opinion, stating the financial statements present fairly the financial position and results of operations in conformity with U.S. GAAP[320] Consolidated Balance Sheet Highlights (in thousands) | Metric | January 2, 2022 | January 3, 2021 | | :---------------------- | :-------------- | :-------------- | | Total Assets | $263,598 | $263,209 | | Total Liabilities | $203,671 | $264,793 | | Total Shareholders' Equity (Deficit) | $59,927 | $(1,584) | Consolidated Statements of Operations Highlights (in thousands) | Metric | Year Ended Jan 2, 2022 | Year Ended Jan 3, 2021 | | :---------------------- | :--------------------- | :--------------------- | | Revenue | $162,848 | $140,438 | | Gross profit (loss) | $(7,472) | $22,692 | | Operating loss | $(57,104) | $(8,642) | | Net loss | $(47,403) | $(19,714) | | Net loss attributable to SkyWater Technology, Inc. | $(50,696) | $(20,617) | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Year Ended Jan 2, 2022 | Year Ended Jan 3, 2021 | | :-------------------------------------- | :--------------------- | :--------------------- | | Net cash (used in) provided by operating activities | $(55,680) | $96,195 | | Net cash used in investing activities | $(29,823) | $(88,177) | | Net cash provided by (used in) financing activities | $90,984 | $(5,187) | Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders' Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Note 1 Nature of Business Note 2 Basis of Presentation and Principles of Consolidation Note 3 Summary of Significant Accounting Policies Note 4 Revenue Note 5 Balance Sheet Information Note 6 Debt Note 7 Income Taxes Note 8 Warrant Liability Note 9 Shareholders' Equity Note 10 Share-Based Compensation Note 11 Benefit Plans Note 12 Fair Value Measurements Note 13 Commitments and Contingencies Note 14 Major Customers and Concentration Risk Note 15 Related Party Transactions Note 16 Inventory Write-down Note 17 Variable Interest Entities Note 18 Condensed Financial Information (Parent Company Only) ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[511] ITEM 9A. Controls and Procedures SkyWater's disclosure controls were not effective as of January 2, 2022, due to material weaknesses in internal control over financial reporting, though financial statements are fairly presented, and a remediation plan is underway - Disclosure controls and procedures were deemed not effective as of January 2, 2022, due to material weaknesses in internal control over financial reporting[514] - Material weaknesses are attributed to limited accounting and finance resources, leading to inappropriate preparation, review, and maintenance of critical documentation and inconsistent execution of internal controls[515] - Despite the material weaknesses, management concluded that the consolidated financial statements fairly present the financial position, results of operations, and cash flows[514] - A remediation plan is in progress, involving hiring additional qualified accounting and finance personnel and developing a 2022 Sarbanes Oxley 404 Remediation Plan for policies, procedures, and controls[516] ITEM 9B. Other Information The company reported no other information required to be disclosed in this item - There is no other information to report[520] ITEM 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable to the registrant[521] PART III ITEM 10. Directors, Executive Officers and Corporate Governance This section incorporates by reference information on directors, executive officers, and corporate governance from the definitive proxy statement, including the company's adopted codes of ethics and conduct - Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement[524] - The company has adopted a code of ethics for its chief executive officer and senior financial officers, and a code of conduct for all employees, officers, and directors, both available on its website[525] ITEM 11. Executive Compensation This section incorporates by reference information regarding executive compensation from the company's definitive proxy statement - Information on executive compensation is incorporated by reference from the definitive proxy statement[526] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information on security ownership from the definitive proxy statement and details shares authorized for issuance under equity compensation plans as of January 2, 2022 - Information on security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement[527] Equity Compensation Plan Information as of January 2, 2022 | Plan Category | Number of shares to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :----------------------------------------------- | :-------------------------------------------------------------------- | :------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by our shareholders | 986,000 | $14.29 | 4,164,000 | | Equity compensation plans not approved by our shareholders | N/A | N/A | N/A |\ | Total | 986,000 | $14.29 | 4,164,000 | ITEM 13. Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information regarding certain relationships and related transactions, and director independence, from the company's definitive proxy statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the definitive proxy statement[530] ITEM 14. Principal Accounting Fees and Services This section incorporates by reference information regarding principal accounting fees and services from the company's definitive proxy statement - Information on principal accounting fees and services is incorporated by reference from the definitive proxy statement[533] PART IV ITEM 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, confirming their inclusion or omission and providing a comprehensive exhibit list - All financial statements and supplemental information are included in Part II, Item 8 of this Annual Report on Form 10-K[536] - All financial statement schedules are omitted as they are not required[537] - A detailed list of exhibits, including the Certificate of Incorporation, Bylaws, Equity Incentive Plans, Credit Agreements, and various certifications, is provided[538][539][540][543] ITEM 16. Form 10-K Summary The company reported no Form 10-K summary - There is no Form 10-K Summary[542]