SkyWater(SKYT) - 2023 Q2 - Quarterly Report

Forward-Looking Statements This section provides a standard safe harbor statement, cautioning that forward-looking statements are subject to risks and uncertainties and actual results may differ Forward-Looking Statements This section provides a standard safe harbor statement, cautioning that forward-looking statements are subject to risks and uncertainties and actual results may differ - The report identifies several key factors and risks that could affect future results, including business goals, foundry capacity, customer relationships, supply chain risks, the impact of COVID-19, and U.S. government funding levels[9][11] PART I. FINANCIAL INFORMATION Condensed Financial Statements (unaudited) Presents SkyWater Technology's unaudited condensed consolidated financial statements, including balance sheets, operations, cash flows, and notes for periods ended July 3, 2022 Condensed Consolidated Balance Sheets As of July 3, 2022, total assets increased to $276,647 thousand while total liabilities rose to $239,018 thousand, leading to a decrease in total shareholders' equity to $37,629 thousand Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | July 3, 2022 | January 2, 2022 | | :--- | :--- | :--- | | Total current assets | $79,567 | $74,397 | | Total assets | $276,647 | $263,598 | | Total current liabilities | $64,764 | $47,765 | | Total liabilities | $239,018 | $203,671 | | Total shareholders' equity | $37,629 | $59,927 | Condensed Consolidated Statements of Operations Q2 2022 revenue increased to $47,407 thousand but net loss widened to $13,005 thousand, with year-to-date revenue at $95,528 thousand and net loss at $29,611 thousand Key Operating Results (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $47,407 | $41,189 | $95,528 | $89,290 | | Gross Profit | $2,080 | $1,812 | $1,140 | $10,978 | | Operating Loss | $(11,076) | $(16,000) | $(25,988) | $(17,420) | | Net Loss Attributable to SkyWater | $(13,005) | $(6,979) | $(29,611) | $(9,790) | | Net Loss Per Share | $(0.32) | $(0.20) | $(0.74) | $(0.54) | Condensed Consolidated Statements of Cash Flows For the six months ended July 3, 2022, net cash used in operating activities improved to $13,862 thousand, while net cash provided by financing activities significantly decreased to $17,782 thousand Six-Month Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended July 3, 2022 | Six Months Ended July 4, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(13,862) | $(30,811) | | Net cash used in investing activities | $(5,863) | $(13,255) | | Net cash provided by financing activities | $17,782 | $101,233 | | Net change in cash and cash equivalents | $(1,943) | $57,167 | Notes to Condensed Consolidated Financial Statements These notes provide critical context to the financial statements, detailing liquidity needs, revenue recognition changes, balance sheet components, debt, and major customer concentrations - The company's business plans indicate a need for additional liquidity to continue operations for the next 12 months, and management has obtained a support letter from an affiliate of its principal stockholder for up to $12,500 thousand in funding[41] - In March 2022, a new contract with a significant wafer services customer led to a change in revenue recognition from point-in-time to over-time, resulting in an $8,230 thousand revenue recognition in the first six months of 2022 for in-process wafers[55] Major Customer Revenue Concentration | Customer | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Customer A | 21% | 19% | 20% | 28% | | Customer B | 28% | 28% | 34% | 23% | | Customer C | * | 15% | * | 11% | | Total | 49% | 62% | 54% | 62% | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, liquidity, and capital resources for Q2 and H1 2022, including a reconciliation of Adjusted EBITDA Results of Operations Q2 2022 revenue increased 15% to $47,407 thousand, with six-month revenue up 7% to $95,528 thousand, but gross profit declined to $1,140 thousand due to lower-margin revenue and inflation Revenue by Service Type (in thousands) | Service Type | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Wafer Services | $17,584 | $14,312 | $39,130 | $24,331 | | Advanced Technology Services | $29,823 | $26,877 | $56,398 | $64,959 | | Total | $47,407 | $41,189 | $95,528 | $89,290 | - The six-month gross profit decline of $9,900 thousand was primarily due to a $6,500 thousand (98%) decrease in gross profit from tool revenues and increased inflationary costs for materials and labor[152] - Selling, general and administrative expenses for Q2 2022 decreased by $4,600 thousand (30%) year-over-year, mainly due to a $3,000 thousand reduction in equity-based compensation and a $1,800 thousand decrease in labor expense related to a 2021 IPO bonus program[154] Liquidity and Capital Resources The company requires additional financing for liquidity, holding $10,700 thousand in cash and $17,600 thousand available under its Revolver, with a $12,500 thousand support letter and ongoing capital investments - Management has concluded that additional liquidity is required to continue operations for the next 12 months and has obtained a support letter from an affiliate of its principal stockholder for up to $12,500 thousand in funding[160] - As of July 3, 2022, the company had $10,700 thousand in cash and cash equivalents (excluding VIE) and $17,600 thousand in availability under its Revolver[162] - In July 2021, the Board approved a $56,000 thousand strategic capital investment to expand manufacturing capacity and technology capabilities, with contractual commitments of approximately $12,000 thousand for capital expenditures for the remainder of 2022[164][167] Non-GAAP Financial Measure The company uses Adjusted EBITDA as a non-GAAP measure, which was negative $1,602 thousand in Q2 2022 and negative $6,437 thousand for the first six months of 2022 Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to SkyWater | $(13,005) | $(6,979) | $(29,611) | $(9,790) | | Interest expense | 1,040 | 912 | 2,069 | 1,970 | | Income tax (benefit) expense | 63 | (4,237) | (131) | (4,662) | | Depreciation and amortization | 7,198 | 6,854 | 13,657 | 13,336 | | Other adjustments | 3,102 | 8,023 | 7,579 | 10,771 | | Adjusted EBITDA | $(1,602) | $(804) | $(6,437) | $4,825 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate fluctuations on variable-rate debt and credit risk from 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[206] - Credit risk exists from cash and cash equivalents held in financial institutions and from trade accounts receivable, with the company performing ongoing credit evaluations of customers to manage this risk[207] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of July 3, 2022, due to material weaknesses in internal control over financial reporting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of July 3, 2022, due to material weaknesses in internal control over financial reporting[210] - Material weaknesses exist in the control environment and risk assessment due to limited accounting resources, and in control activities related to revenue recognition[211] - A remediation plan is underway, including hiring new personnel with Sarbanes-Oxley experience and completing the design of internal controls for financial reporting and revenue, though the operating effectiveness of these new controls has not yet been tested over a sustained period[212][213] PART II. OTHER INFORMATION Legal Proceedings The company is not currently involved in any litigation expected to have a material adverse effect on its business or financial condition - As of the filing date, SkyWater is not involved in any material legal proceedings[217] Risk Factors No material changes to the company's risk factors have occurred since its Annual Report on Form 10-K for the fiscal year ended January 2, 2022 - No material changes to risk factors have occurred since the company's 2021 Annual Report on Form 10-K[218] Other Part II Items This section covers standard disclosures including no unregistered equity sales, no defaults on senior securities, and a list of filed exhibits - Item 2: No unregistered sales of equity securities[219] - Item 3: No defaults upon senior securities[220] - Item 6: A list of exhibits filed with the Form 10-Q is provided[223]