SkyWater(SKYT) - 2023 Q1 - Quarterly Report

Forward-Looking Statements This section cautions readers that the report contains forward-looking statements subject to numerous risks and uncertainties Forward-Looking Statements This section cautions readers that the report contains forward-looking statements subject to numerous risks and uncertainties - The report contains forward-looking statements that are not guarantees of future performance and are subject to a number of risks, uncertainties, and assumptions[8][9] - Key factors that may affect results include customer relationships, ability to respond to changing technologies, supply chain shortages, cost control, the impact of the COVID-19 pandemic, and the level of US government program funding[11] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarter ended April 3, 2022 Condensed Consolidated Balance Sheets As of April 3, 2022, total assets were $271.7 million, total liabilities increased to $224.2 million, and total shareholders' equity decreased to $47.5 million Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | April 3, 2022 | January 2, 2022 | | :--- | :--- | :--- | | Total Assets | $271,676 | $263,598 | | Cash and cash equivalents | $6,435 | $12,917 | | Accounts receivable, net | $47,698 | $39,381 | | Property and equipment, net | $187,364 | $180,475 | | Total Liabilities | $224,167 | $203,671 | | Long-term debt | $67,727 | $58,428 | | Deferred revenue - long-term | $82,944 | $88,094 | | Total Shareholders' Equity | $47,509 | $59,927 | Condensed Consolidated Statements of Operations Revenue was flat at $48.1 million, but increased cost of revenue led to a gross loss of $0.9 million and a net loss of $16.6 million Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended April 3, 2022 | Three Months Ended April 4, 2021 | | :--- | :--- | :--- | | Revenue | $48,121 | $48,101 | | Cost of revenue | $49,061 | $38,935 | | Gross profit (loss) | $(940) | $9,166 | | Operating loss | $(14,912) | $(1,420) | | Net loss attributable to SkyWater | $(16,606) | $(2,811) | | Net loss per share, basic and diluted | $(0.42) | $(1.04) | Condensed Consolidated Statements of Shareholders' Equity (Deficit) Total shareholders' equity decreased by $12.4 million to $47.5 million, primarily due to a net loss of $16.6 million for the period - Total shareholders' equity decreased by $12.4 million during the quarter, from $59.9 million on January 2, 2022, to $47.5 million on April 3, 2022. The decline was mainly due to a net loss of $16.6 million attributable to the company[19] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased to $10.8 million, resulting in a $6.5 million decrease in cash and cash equivalents during the quarter Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended April 3, 2022 | Three Months Ended April 4, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,792) | $(8,424) | | Net cash used in investing activities | $(4,814) | $(5,397) | | Net cash provided by financing activities | $9,124 | $10,601 | | Net change in cash and cash equivalents | $(6,482) | $(3,220) | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, liquidity concerns, revenue recognition changes, and significant customer concentrations - The company states it will require additional liquidity to continue operations for the next 12 months and is implementing a plan to reduce operating costs, which may include reducing spending and delaying personnel increases[36] - In March 2022, a new contract with a significant wafer services customer changed revenue recognition to 'over time', resulting in an immediate recognition of $8.2 million for work-in-process wafers[50] - For Q1 2022, two major customers accounted for 56% of revenue (Customer A: 16%, Customer B: 40%), compared to 66% from three customers in Q1 2021[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial performance, highlighting flat revenue, a gross loss, and a widened net loss, alongside liquidity and capital resource needs Results of Operations Revenue remained flat at $48.1 million, with Wafer Services growing 115% while Advanced Technology Services declined 30%, leading to a gross loss due to increased costs Revenue by Service Type (in thousands) | Service Type | Q1 2022 | Q1 2021 | Dollar Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Wafer Services | $21,546 | $10,019 | $11,527 | 115% | | Advanced Technology Services | $26,575 | $38,082 | $(11,507) | (30)% | | Total | $48,121 | $48,101 | $20 | 0% | - Gross profit decreased by $10.1 million (110%) to a loss of $0.9 million, driven by increased cost of revenue from higher labor costs, wage inflation, and higher prices for materials and parts due to supply chain challenges[142] - Selling, general and administrative expenses increased by $3.1 million (36%) primarily due to a $1.8 million increase in equity-based compensation, a $1.2 million increase in insurance expense, and higher personnel costs[144] Liquidity and Capital Resources The company requires additional liquidity for the next 12 months, implementing cost reduction plans, and has $6.2 million in cash with $29.1 million available under its Revolver - Management states that additional liquidity will be required to continue operations for the next 12 months and is implementing a plan to reduce operating costs[150] - As of April 3, 2022, the company had $6.2 million in cash and cash equivalents and $29.1 million in availability under its Revolver, but must maintain at least $15 million in availability to avoid triggering financial covenants[152] - The Board of Directors approved a $56 million strategic capital investment for expanding manufacturing capacity. Approximately $15.8 million was invested during 2021 and Q1 2022[154] Non-GAAP Financial Measure Adjusted EBITDA, a non-GAAP measure, was a loss of $4.8 million for Q1 2022, a significant decrease from a positive $5.6 million in Q1 2021 Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net loss attributable to SkyWater | $(16,606) | $(2,811) | | Interest expense | 1,029 | 1,058 | | Income tax (benefit) expense | (194) | (425) | | Depreciation and amortization | 6,458 | 6,482 | | EBITDA | (9,313) | 4,304 | | Adjustments | 4,477 | 1,325 | | Adjusted EBITDA | $(4,836) | $5,629 | - Adjusted EBITDA decreased by $10.5 million, or 186%, to $(4.8) million for Q1 2022 from $5.6 million for Q1 2021, primarily due to decreased gross profit[148] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from interest rate fluctuations on variable-rate debt and credit risk associated with cash balances and accounts receivable - The company's main market risk is from potential changes in the fair value of its debt due to fluctuations in market interest rates[192] - Credit risk is present in cash balances held in financial institutions, which may exceed federally insured limits, and in trade receivables from customers[193] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of April 3, 2022, due to material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of April 3, 2022, due to material weaknesses in internal control over financial reporting[197] - Material weaknesses were identified in the control environment and risk assessment due to limited accounting resources, and in control activities related to revenue recognition[198] - A remediation plan is in progress, which includes hiring additional qualified accounting and finance personnel and developing a Sarbanes-Oxley 404 Remediation Plan[199] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business or financial condition - The company is not presently a party to any litigation that is expected to have a material adverse effect on its business[202] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended January 2, 2022[203] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities during the period - None[204] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[206] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[207] Item 5. Other Information The company reports no other information - None[208] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and a new material contract - A list of exhibits filed with the report is provided, including a Frame Agreement for the Purchase of Wafers and Services with Infineon Technologies AG, dated March 29, 2022[209]