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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
______________________
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 1, 2023
¨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
______________________
SkyWater Logo.jpg
SkyWater Technology, Inc.
(Exact name of registrant as specified in its charter)
______________________
Delaware37-1839853
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2401 East 86th Street, Bloomington, Minnesota 55425
(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 ClassTrading
Symbol
Name of Each Exchange
on Which Registered
Common stock, par value $0.01 per shareSKYTThe Nasdaq Stock Market LLC
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¨Accelerated filer¨
Non-accelerated filerxSmaller reporting companyx
Emerging growth companyx
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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
On November 6, 2023, the number of shares of common stock, $0.01 par value, outstanding was 47,024,616.



SkyWater Technology, Inc.
TABLE OF CONTENTS
Page No.

2

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that SkyWater Technology, Inc. ("SkyWater," the "Company," "we," "us" or "it") 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, the Company's expectations regarding its 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.
Forward-looking statements are subject to a number of risks, uncertainties and assumptions. Key factors that may affect the Company's results include, among others, the following:
its goals and strategies;
its future business development, financial condition and results of operations;
its ability to continue operating its fabrication facilities at full capacity;
its ability to appropriately respond to changing technologies on a timely and cost-effective basis;
its customer relationships and its ability to retain and expand its customer relationships;
its ability to accurately predict its future revenues for the purpose of appropriately budgeting and adjusting its expenses;
its expectations regarding dependence on largest customers;
its ability to diversify its customer base and develop relationships in new markets;
the performance and reliability of its third-party suppliers and manufacturers;
its ability to procure tools, materials, and chemicals;
its ability to control costs, including its operating and capital expenses;
the size and growth potential of the markets for its solutions, and its ability to serve and expand its presence in those markets;
the level of demand in its customers' end markets;
its 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;
its ability to raise additional capital or financing;
its 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;
its ability to maintain compliance with certain U.S. government contracting requirements;
regulatory developments in the United States and foreign countries;
its ability to protect its 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 year ended January 1, 2023, as amended by the Amendment No. 1 to the Company's Annual Report on Form 10-K filed with the SEC September 25, 2023 (as amended, the "Annual Report on Form 10-K"), and this Quarterly Report on Form 10-Q.
Moreover, SkyWater's 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 SkyWater's 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 SkyWater believes 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 SkyWater's views only as of the date hereof. SkyWater anticipates that subsequent events and developments will cause its views to change. However, SkyWater undertakes no obligation to update publicly any forward-looking statements to conform such statements to changes in its expectations or to its actual results, or for any other reason, except as required by law. You should therefore not rely on these forward-looking statements as representing the Company's 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)
October 1, 2023January 1, 2023
(in thousands, except share data)
Assets
Current assets
Cash and cash equivalents$17,346 $30,025 
Accounts receivable (net of allowance for credit losses of $4,699 and $1,638, respectively)
43,492 28,045 
Contract assets (net of allowance for credit losses of $227 and $0, respectively)
37,733 34,625 
Inventory16,648 13,397 
Prepaid expenses and other current assets8,654 10,290 
Income tax receivable122 169 
Total current assets123,995 116,551 
Property and equipment, net165,818 179,915 
Intangible assets, net4,843 5,608 
Other assets5,053 3,690 
Total assets$299,709 $305,764 
Liabilities and shareholders' equity
Current liabilities
Current portion of long-term debt$4,241 $1,855 
Accounts payable14,378 21,102 
Accrued expenses39,381 25,212 
Short-term financing, net of unamortized debt issuance costs45,253 55,817 
Contract liabilities24,674 28,186 
Total current liabilities127,927 132,172 
Long-term liabilities
Long-term debt, less current portion and net of unamortized debt issuance costs37,729 35,181 
Long-term incentive plan 1,643 
Long-term contract liabilities55,636 67,967 
Deferred income tax liability, net1,121 1,239 
Other long-term liabilities9,466 13,585 
Total long-term liabilities103,952 119,615 
Total liabilities231,879 251,787 
Commitments and contingencies (Note 11)
Shareholders' equity
Preferred stock, $0.01 par value per share (80,000,000 shares authorized; zero shares issued and outstanding)
  
Common stock, $0.01 par value per share (200,000,000 shares authorized; 47,006,694 and 43,704,876 shares issued and outstanding)
470 437 
Additional paid-in capital177,286 147,304 
Accumulated deficit(114,878)(94,072)
Total shareholders' equity, SkyWater Technology, Inc.62,878 53,669 
Noncontrolling interests4,952 308 
Total shareholders' equity67,830 53,977 
Total liabilities and shareholders' equity$299,709 $305,764 
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 EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
(in thousands, except share and per share data)
Revenue$71,624 $52,326 $207,529 $147,854 
Cost of revenue57,477 44,049 160,247 138,437 
Gross profit14,147 8,277 47,282 9,417 
Research and development expense
2,233 2,580 7,296 7,223 
Selling, general, and administrative expense
16,105 10,778 48,821 33,263 
Operating loss(4,191)(5,081)(8,835)(31,069)
Interest expense(2,507)(1,331)(7,928)(3,400)
Loss before income taxes(6,698)(6,412)(16,763)(34,469)
Income tax (benefit) expense(96)87 (71)(44)
Net loss(6,602)(6,499)(16,692)(34,425)
Less: net income attributable to noncontrolling interests966 440 3,739 2,125 
Net loss attributable to SkyWater Technology, Inc.$(7,568)$(6,939)$(20,431)$(36,550)
Net loss per share attributable to common shareholders, basic and diluted$(0.16)$(0.17)$(0.45)$(0.91)
Weighted average shares used in computing net loss per common share, basic and diluted46,445,309 40,669,322 45,001,998 40,245,736 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Shareholders' Equity (Deficit)
For the Three-Month Periods Ended October 1, 2023 and October 2, 2022
(dollars and shares in thousands)
(Unaudited)
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Deficit
Total
Shareholders' Equity,
 SkyWater Technology, Inc.
Noncontrolling
Interests
Total Shareholders'
Equity
SharesAmountSharesAmount
Balance at July 3, 2022 $ 40,450 $404 $121,697 $(84,090)$38,011 $(382)$37,629 
Issuance of common stock — — 274 6 2,163 — 2,169 — 2,169 
Issuance of common stock pursuant to equity compensation plans    — — 730 5 1,615 — 1,620 — 1,620 
Equity-based compensation    — — — — 1,592 — 1,592 — 1,592 
Net distribution to VIE member    — — — — — — — (430)(430)
Net (loss) income— — — — — (6,939)(6,939)440 (6,499)
Balance at October 2, 2022 $ 41,454 $415 $127,067 $(91,029)$36,453 $(372)$36,081 
Balance at July 2, 2023 $ 45,400 $454 $166,179 $(107,310)$59,323 $3,559 $62,882 
Issuance of common stock— — 884 9 8,225 — 8,234 — 8,234 
Issuance of common stock pursuant to equity compensation plans— — 723 7 1,029 — 1,036 — 1,036 
Equity-based compensation— — — — 1,853 — 1,853 — 1,853 
Net contribution from VIE member— — — — — — — 427 427 
Net (loss) income— — — — — (7,568)(7,568)966 (6,602)
Balance at October 1, 2023 $ 47,007 $470 $177,286 $(114,878)$62,878 $4,952 $67,830 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Shareholders' Equity (Deficit)
For the Nine-Month Periods Ended October 1, 2023 and October 2, 2022
(dollars and shares in thousands)
(Unaudited)
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Deficit
Total
Shareholders' Equity,
 SkyWater Technology, Inc.
Noncontrolling
Interests
Total Shareholders'
Equity
SharesAmountSharesAmount
Balance at January 2, 2022 $ 39,836 $398 $115,208 $(54,479)$61,127 $(1,200)$59,927 
Issuance of common stock — — 274 6 2,163 — 2,169 — 2,169 
Issuance of common stock pursuant to equity compensation plans— — 1,344 11 3,054 — 3,065 — 3,065 
Equity-based compensation— — — — 6,642 — 6,642 — 6,642 
Net distribution to VIE member— — — — — — — (1,297)(1,297)
Net (loss) income— — — — — (36,550)(36,550)2,125 (34,425)
Balance at October 2, 2022 $ 41,454 $415 $127,067 $(91,029)$36,453 $(372)$36,081 
Balance at January 1, 2023  43,705 437 147,304 (94,072)53,669 308 53,977 
Adoption of new accounting principle— — — — — (375)(375)— (375)
Issuance of common stock — — 2,040 20 20,366 — 20,386 — 20,386 
Issuance of common stock pursuant to equity compensation plans— — 1,262 13 3,943 — 3,956 — 3,956 
Equity-based compensation— — — — 5,673 — 5,673 — 5,673 
Net contribution from VIE member— — — — — — — 905 905 
Net (loss) income— — — — — (20,431)(20,431)3,739 (16,692)
Balance at October 1, 2023 $ 47,007 $470 $177,286 $(114,878)$62,878 $4,952 $67,830 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine-Month Period Ended
October 1, 2023October 2, 2022
(in thousands)
Cash flows from operating activities
Net loss$(16,692)$(34,425)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization21,651 20,740 
Amortization of debt issuance costs included in interest expense1,349 521 
Long-term incentive and equity-based compensation5,673 7,033 
Cash paid for contingent consideration in excess of initial valuation (816)
Deferred income taxes(118)(30)
Cash paid for operating leases(37) 
Cash paid for interest on finance leases(649) 
Provision for credit losses4,133  
Changes in operating assets and liabilities
Accounts receivable and contract assets(23,063)773 
Inventory(3,251)(4,686)
Prepaid expenses and other assets270 (1,212)
Accounts payable and accrued expenses4,868 16,705 
Contract liabilities, current and long-term(15,843)(10,612)
Income tax receivable and payable47 1 
Net cash used in operating activities(21,662)(6,008)
Cash flows from investing activities
Purchase of software and licenses(612)(400)
Purchases of property and equipment(3,864)(11,325)
Net cash used in investing activities(4,476)(11,725)
Cash flows from financing activities
Draws on revolving line of credit182,763  
Paydowns of revolving line of credit(194,396) 
Net proceeds on Revolver 14,522 
Proceeds from tool financings6,492  
Principal payments on long-term debt(1,839)(765)
Cash paid for principal on finance leases(818)(1,158)
Proceeds from the issuance of common stock pursuant to the employee stock purchase plan2,305 1,800 
Proceeds from the issuance of common stock, net of commissions20,397 2,186 
Cash paid on license technology obligations(2,350)(1,150)
Net contributions (distributions) from (to) noncontrolling interest905 (1,297)
Net cash provided by financing activities13,459 14,138 
Net uses of cash and cash equivalents(12,679)(3,595)
Cash and cash equivalents - beginning of period30,025 12,917 
Cash and cash equivalents - end of period$17,346 $9,322 
The accompanying notes are an integral part of these condensed consolidated financial statements.
8

SKYWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Nine-Month Period Ended
October 1, 2023October 2, 2022
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest$6,578 $3,014 
Income taxes 3 
Noncash investing and financing activity
Capital expenditures incurred, not yet paid$3,269 $7,082 
Equipment acquired through capital lease obligations662 9,008 
Intangible assets acquired, not yet paid 2,562 
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 strong 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, or 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.
Note 2 Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements as of October 1, 2023, and for the three- and nine-month periods ended October 1, 2023 and October 2, 2022, 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 January 1, 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 October 1, 2023 and its consolidated results of operations, shareholders' equity, and cash flows for the three- and nine-month periods ended October 1, 2023 and October 2, 2022.
The consolidated results of operations for the three- and nine-month periods ended October 1, 2023 are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2023, 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 the Company's 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, CMI Oxbow Partners, LLC ("Oxbow"). 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 nine-month periods ended October 1, 2023, SkyWater incurred losses of $7,568 and $20,431, respectively. As of October 1, 2023, the Company had cash and cash equivalents of $17,346.
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 current business plans indicate that the Company may require additional liquidity to continue to operate for the next twelve months from the date these interim condensed consolidated financial statements are issued. The Company has identified specific actions that can be taken to reduce operating costs and 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 also obtained a support letter from Oxbow Industries, LLC ("Oxbow Industries"), an affiliate of Oxbow, to provide funding in an amount up to $12,500, if necessary, to enable the Company to meet its obligations as they become due for the twelve months following the date these interim condensed consolidated financial statements are issued. Based upon SkyWater's operating forecasts, its cash and cash equivalents on hand, available borrowings on the Revolver, potential cost reduction measures it could undertake, and the support letter from Oxbow Industries, as needed, 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.
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. To the extent that the Company's current resources and plans to potentially reduce expenses are insufficient to satisfy the Company's cash requirements, it may need to seek additional equity or debt financing. The Company's ability to do so depends on prevailing economic conditions and other factors, many of which are beyond SkyWater's control.
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 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 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 for the three- and nine-month periods ended October 1, 2023 and October 2, 2022, 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. At October 1, 2023 and October 2, 2022, there were restricted stock units and stock options totaling 2,258,000 and 2,222,000, respectively, excluded from the computation of diluted weighted-average shares outstanding because their inclusion would have been anti-dilutive.

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 nine-month periods ended October 1, 2023 and October 2, 2022:
Three-Month Period EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
(in thousands, except per share data)
Numerator: net loss attributable to SkyWater Technology, Inc.
$(7,568)$(6,939)$(20,431)$(36,550)
Denominator: weighted-average common shares outstanding, basic and diluted
46,445 40,669 45,002 40,246 
Net loss per common share, basic and diluted$(0.16)$(0.17)$(0.45)$(0.91)
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 in making decisions regarding resource allocation and assessing performance. SkyWater operates and manages its business as a single operating segment, and as a result, only has 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 No. 2016-13, "Measurement of Credit Losses on Financial Instruments", later codified in FASB Accounting Standards Codification ("ASC") 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.
Significant Accounting Policies
The annual consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2023 include discussion of the significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements. The Company made no changes to its significant accounting policies and estimates during the three- and nine-month periods ended October 1, 2023, except as noted below.
Revenue Recognition
Revenue is recognized when control of promised goods or services are transferred to the Company's customers, in amounts that reflect the consideration the Company expects to be entitled to in exchange for those goods or services. To recognize revenues, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the customer contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the customer contract; and (5) recognize revenues when or as we satisfy a performance obligation. The Company accounts for a contract when it has approval and commitment from all parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of transaction price is reasonably assured. At contract inception, the Company applies judgment in determining a customer's ability and intentions to pay amounts entitled to the Company when due based on a variety of factors including the customer's historical payment experience.
The Company primarily derives revenue from the performance of ATS wafer manufacturing process development services and the manufacture and delivery of wafers via Wafer Services.

12

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
ATS - ATS contracts are focused on the performance of wafer manufacturing process development services, the output of which is a manufacturing plan that defines the steps and activities needed to produce customer wafers at high volumes and with high yields. Wafer manufacturing development services do not include services to manufacture customer wafers at scale. ATS contracts are complex and wafer manufacturing development services are often either the lone performance obligation in an ATS contract, or the performance obligation to which the majority of the contract value is allocated. The Company has both fixed price and time-and-materials contracts with its ATS customers. The Company's ATS customers receive the benefits of these services, and revenue from performance of these services are recognized, over time as they are performed.
Revenue on fixed price contracts is recognized using either an output or input method based upon the method that best measures the value of the services performed for the Company's customers. Whether an input or output method is selected is judgmental and subject to thorough analysis of the terms of each fixed price contract. The Company consistently uses either its output method or input method for similar performance obligations and in similar circumstances.
The Company's output method of revenue recognition evaluates the steps and activities needed to complete manufacturing development services and relies on surveys of steps and activities completed and partially completed as of the reporting date in relation to the current manufacturing development plans to measure the level of progress on the service. There are many steps and activities included in the Company's manufacturing development plans. The time and effort to complete the steps and activities are very similar which demonstrates a level of uniformity. This uniformity accurately conveys the steps and activities successfully validated during development in relation to the development plan and therefore provides a faithful representation of the progress achieved on wafer manufacturing development services. Based on the level of progress, the Company records the proportion of the transaction price allocated to wafer manufacturing development services as revenue in the period. Manufacturing development plans are subject to change as data is analyzed and the plans are revised. Development of production plans are technical endeavors and adjustment to manufacturing development plans may impact the percentage of progress achieved and result in cumulative adjustments of revenue.
The Company uses the input method of revenue recognition for larger customer programs that are focused on development of new applications or whose manufacturing processes will rely on new or emerging technologies. Wafer manufacturing development services for these customers is inherently more complex, requiring more changes to manufacturing development plans over the period of service performance. Given the level of technical complexity and the expectation that there will be more changes to manufacturing plans as compared to other customer programs, the Company measures progress for larger customer programs by comparing costs incurred to date to estimated total cost required to complete wafer manufacturing development services. The Company records that proportion of the transaction price allocated to wafer manufacturing development services as revenue in the period. Costs include labor costs, manufacturing costs, material costs, and other direct costs incurred while performing the services. The estimation of total costs requires significant judgment and any adjustment to estimates of total cost may impact the proportion of progress achieved and could result in cumulative adjustments of revenue.
When contracts are fixed price, the Company completes an evaluation of onerous ATS contracts as of the reporting date for each separate contract, not for separate performance obligations in each contract. The Company recognizes losses on onerous ATS contracts depending on whom the customer is based on the following:
U.S. Federal Government – The Company designates all ATS contracts with the U.S. Federal Government as production-type service contracts; accordingly, it accrues liabilities for onerous contracts in the period it becomes evident the contract will result in a loss.
Customers other than the U.S. Federal Government – As the Company generally develops wafer manufacturing plans for its customers under ATS contracts, ATS contracts with non-U.S. Federal Government ATS customers do not represent production-type service contracts; accordingly, the Company recognizes losses as the losses are incurred; it does not accrue liabilities for anticipated losses.

13

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Wafer Services - Wafers are goods that are generally customer specific, highly customized and have no alternative use to the Company. Wafer Services customers contract with the Company to manufacture wafers based on their manufacturing design specifications. The terms of Wafer Services contracts dictate when control over wafers is transferred to the Company's customers.
For contracts where orders are non-cancelable and the Company thereby maintain enforceable rights to customer performance, including rights to payment for partially completed wafers at reasonable margins, control over wafers transfers to its customers as wafers are manufactured. For these contracts, the Company recognizes revenue using an input method. This method measures the percentage of completion of wafers still in the manufacturing process by comparing total costs incurred to date to the total estimated costs to manufacture the wafers. The Company records that proportion of the transaction price as revenue in the period. The input method provides the best method of progress as it considers the steps and activities needed to manufacture a wafer and the costs associated with those steps. Costs include labor costs, manufacturing costs, material costs, and other direct costs required to manufacture customers' wafers. The estimation of total costs requires significant judgment and any adjustment to estimates of cost to complete manufacturing may impact the proportion of completion achieved and could result in cumulative adjustments of revenue.
When the Company's contracts allow for orders to be canceled and it does not maintain enforceable rights to customer performance on canceled orders, including a right to payment for partially completed wafers at reasonable margins, control of wafers transfers to its customers at the point in time when wafer manufacturing is complete, and wafers have been shipped to the customer. In these instances, the Company recognizes revenue based on the agreed shipping terms with its customers.
The Company has a long-standing relationship with a significant Wafer Services customer. The terms and conditions of this relationship have evolved over time and have dictated the manner in which the Company recognized revenue for the manufacture of their wafers. Prior to 2021, transfer of control of wafers, and revenue recognition occurred, as completed wafers were shipped to the customer. In 2021, this customer requested that it be able to purchase wafers and for those wafers to be shipped to them at a later date of their choosing. With the introduction of these bill and hold terms, transfer of control of the wafers, and revenue recognition occurred, as wafers completed post-manufacturing electrical testing and became available for shipment to the customer. In March 2022, the Company signed a new contract with this customer pursuant to which orders became non-cancelable and thus there was a right to specific performance by the customer, including an enforceable right to payment for the cost of partially completed orders plus a reasonable profit margin. Given that the wafers produced for this customer are for customer-specific applications with no alternative use, the introduction of these contract terms demonstrated that control of the wafers transfers to the customer over time as the wafers are manufactured pursuant to ASC Topic 606, "Revenue from Contracts with Customers" ("Topic 606"). Accordingly, the Company's revenue recognition method for wafers produced for this customer transitioned from point in time to over-time using the Company's input method of revenue recognition. In March 2022, the Company recorded a one-time, cumulative adjustment to revenue of $8,290 for wafers still being manufactured at the time the new contract became enforceable.
Between 2021 and March 2022, wafers manufactured while bill and hold provisions were in place, were separately identified as belonging to this customer, the wafers were denoted as ready for shipment to this customer in their then current form, and the Company did not have the ability to direct or sell the wafers to a different customer. Upon completion of post-manufacturing electrical testing, the Company had the right to invoice this customer. This customer also obtained legal title and the risks and rewards of ownership at this point.
14

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 and Wafer Services revenues pursuant to our revenue recognition policies as updated and revised in Note 3 – Summary of Significant Accounting Policies. The following tables disclose revenue for the three- and nine-month periods ended October 1, 2023 and October 2, 2022 by product type and the timing of recognition of revenue for transfer of goods and services to customers:
Three-Month Period Ended October 1, 2023
Topic 606 Revenue
Point-in-TimeOver Time
Lease Revenue Per Topic 842
Total Revenue
ATS
Time and materials contracts
$ $30,905 $ $30,905 
Fixed price contracts 25,062  25,062 
Other  1,167 1,167 
Total ATS (1)
 55,967 1,167 57,134 
Wafer Services124 14,366  14,490 
Total
$124 $70,333 $1,167 $71,624 
__________________
(1) Total ATS revenue includes $3,243 of tool revenue.
 Three-Month Period Ended October 2, 2022
Topic 606 Revenue
 Point-in-TimeOver Time
Lease Revenue Per Topic 842
Total Revenue
ATS
Time and materials contracts
$ $21,021 $ $21,021 
Fixed price contracts 12,984  12,984 
Other  1,167 1,167 
Total ATS (1)
 34,005 1,167 35,172 
Wafer Services1,645 15,509  17,154 
Total
$1,645 $49,514 $1,167 $52,326 
__________________
(1)Total ATS revenue includes $219 of tool revenue.

15

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Nine-Month Period Ended October 1, 2023
Topic 606 Revenue
Point-in-TimeOver Time
Lease Revenue Per Topic 842
Total Revenue
ATS
Time and materials contracts
$ $86,651 $ $86,651 
Fixed price contracts 68,299  68,299 
Other  3,500 3,500 
Total ATS (1)
 154,950 3,500 158,450 
Wafer Services7,312 41,767  49,079 
Total
$7,312 $196,717 $3,500 $207,529 
__________________
(1)Total ATS revenue includes $4,715 of tool revenue.

Nine-Month Period Ended October 2, 2022
Topic 606 Revenue
Point-in-TimeOver Time
Lease Revenue Per Topic 842
Total Revenue
ATS
Time and materials contracts
$ $59,929 $ $59,929 
Fixed price contracts 28,140  28,140 
Other  3,501 3,501 
Total ATS (1)
 88,069 3,501 91,570 
Wafer Services (2)
18,369 37,915  56,284 
Total
$18,369 $125,984 $3,501 $147,854 
__________________
(1)Total ATS revenue includes $1,516 of tool revenue.
(2)As discussed in Note 3 – Summary of Significant Accounting Policies, in March 2022, the Company signed a new contract with a significant Wafer Services customer that resulted in a change from point in time revenue recognition method to an over-time, input revenue recognition method. As a result of the transition, the Company recognized a one-time, cumulative adjustment to Wafer Services revenue of $8,290 for wafers still being manufactured at the time the new contract became enforceable. For the nine-month period ended October 2, 2022, $11,049 of Wafer Services revenues were recognized using the point in time method related to the period before the new contract was enforceable and $35,080 of Wafer Services revenues, inclusive of the one-time, cumulative adjustment, were recognized using the over-time method after the contract was enforceable.
16

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
The following table discloses revenue for the three- and nine-month periods ended October 1, 2023 and October 2, 2022 by country as determined based on customer address:
Three-Month Period EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
United States$67,064 $44,902 $185,185 $125,811 
Canada1,889 1,020 6,395 4,245 
Hong Kong289 1,562 6,291 4,603 
United Kingdom265 1,868 4,139 5,402 
All others2,117 2,974 5,519 7,793 
Total
$71,624 $52,326 $207,529 $147,854 
The following customers accounted for 10% or more of revenue for the three- and nine-month periods ended October 1, 2023 and October 2, 2022:
Three-Month Period EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
Customer A27 %18 %23 %19 %
Customer B19 %29 %19 %31 %
Customer E19 %17 %16 %*
Total
65 %64 %58 %50 %
__________________
* Represents less than 10% of revenue.
The loss of a major customer could adversely affect the Company's operating results and financial condition.
Deferred Contract Costs
The Company recognized accretion of deferred contract costs in its interim condensed consolidated statements of operations totaling $43 for the three-month period ended October 1, 2023. The Company recognized amortization of deferred contract costs of $486 for the three-month period ended October 2, 2022, and $757 and $1,080 for the nine-month periods ended October 1, 2023 and October 2, 2022, 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 $37,973 and $34,625 at October 1, 2023 and January 1, 2023, respectively, and are presented net of allowances for expected credit losses of $227 and $0, respectively.
17

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 significant components of contract liabilities at October 1, 2023 and January 1, 2023 are as follows:
 October 1, 2023January 1, 2023
Contract
Deferred Revenue (1)
Lease Deferred
Revenue
Total
Contract Liabilities
Contract
Deferred Revenue (1)
Lease Deferred
Revenue
Total
Contract Liabilities
Current$20,007 $4,667 $24,674 $23,519 $4,667 $28,186 
Long-term52,525 3,111 55,636 61,356 6,611 67,967 
Total$72,532 $7,778 $80,310 $84,875 $11,278 $96,153 
__________________
(1)Contract deferred revenue includes $62,103 and $68,917 at October 1, 2023 and January 1, 2023, respectively, related to material rights provided to a significant customer in exchange for the customer's assistance funding the expansion of the Company's Minnesota fabrication facility. Of these amounts, $11,123 and $10,882 were classified as current as of October 1, 2023 and January 1, 2023, respectively.
The decrease in contract liabilities from January 1, 2023 to October 1, 2023 was primarily the result of completion of specific performance obligations for the Company's customers. Of the Company's total contract liabilities at January 1, 2023, 20% have been recognized in revenue during the nine-month period ended October 1, 2023. Of the Company's total contract liabilities at January 2, 2022, 12% were recognized in revenue during the nine-month period ended October 2, 2022.
Remaining Performance Obligations
At October 1, 2023, the Company had $159,159 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 contracts. The Company expects to recognize those revenues as it satisfies its performance obligations, which is not expected to exceed 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 financing 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.

18

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 EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
Allowance for credit losses - Accounts receivable
Balance at beginning of period$4,209 $ $1,638 $ 
Add
Adoption of Credit Loss Standard (Topic 326)  168  
Provision for credit losses490  4,113  
Deduct
Accounts written-off  1,220  
Less recoveries of accounts charged-off    
Net account charge-offs (recoveries)  1,220  
Balance at end of period$4,699 $ $4,699 $ 
Three-Month Period EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
Allowance for credit losses - Contract assets
Balance at beginning of period$186 $ $ $ 
Add
Adoption of Credit Loss Standard (Topic 326)  207  
Provision for credit losses41  20  
Deduct
Accounts written-off    
Less recoveries of accounts charged-off    
Net account charge-offs (recoveries)    
Balance at end of period$227 $ $227 $ 
October 1, 2023January 1, 2023
Inventory
Raw materials$5,189 $3,991 
Work-in-process22 359 
Supplies and spare parts11,437 9,047 
Total inventories, current
16,648 13,397 
Inventory, noncurrent
3,166 2,605 
Total inventory
$19,814 $16,002 
19

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
October 1, 2023January 1, 2023
Prepaid expenses and other current assets
Prepaid expenses$2,371 $2,395 
Prepaid inventory374 129 
Equipment purchased for customers (1)
4,277 5,669 
Deferred contract costs1,407 2,097 
Other225  
Total prepaid assets and other current assets$8,654 $10,290 
__________________
(1)The Company acquired equipment for a customer that is being installed and calibrated in its facility. Prior to the customer obtaining ownership and control of the equipment, the Company recorded costs, including the acquisition costs of the equipment, incurred to date within prepaid expenses and other current assets.
October 1, 2023January 1, 2023
Property and equipment, net
Land$5,396 $5,396 
Buildings and improvements88,182 88,141 
Machinery and equipment193,495 187,276 
Fixed assets not yet in service9,664 9,746 
Total property and equipment, at cost (1)
296,737 290,559 
Less: accumulated depreciation (1)
(130,919)(110,644)
Total property and equipment, net (1)
$165,818 $179,915 
__________________
(1)Includes $13,332 and $12,521 of cost and $(3,748) and $(2,781) of accumulated depreciation associated with capital assets subject to financing leases at October 1, 2023 and January 1, 2023, respectively.
Depreciation expense was $6,719 and $6,635 for the three-month periods ended October 1, 2023 and October 2, 2022, respectively, and $20,275 and $19,349 for the nine-month periods ended October 1, 2023 and October 2, 2022, respectively, substantially all of which was classified as cost of revenue.
October 1, 2023January 1, 2023
Intangible assets, net
Software and licensed technology$10,889 $10,277 
Less: accumulated amortization
(6,046)(4,669)
Total intangible assets, net$4,843 $5,608 

Intangible assets consist of purchased software and license costs from the acquisition of Cypress Semiconductor Corporation in 2017. Additionally, the Company has entered into license agreements for third-party software and licensed technology. During the nine-month period ended October 1, 2023, the Company acquired third-party software and licensed technology of $612, which will be amortized over a weighted average estimated life of 3 years.
20

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
For the three-month periods ended October 1, 2023 and October 2, 2022, amortization of software and licensed technology was $373 and $448, respectively, and $1,376 and $1,391 for the nine-month periods ended October 1, 2023 and October 2, 2022, respectively.
Remaining estimated aggregate annual amortization expense is as follows for the years ending:
Amortization
Expense
Remainder of 2023$344 
20241,018 
2025816 
2026590 
2027308 
Thereafter1,767 
Total$4,843 
October 1, 2023January 1, 2023
Other assets
Inventory, noncurrent
$3,166 $2,605 
Operating lease right-of-use assets108 141 
Other assets1,779 944 
Total other assets$5,053 $3,690 
October 1, 2023January 1, 2023
Accrued expenses
Accrued compensation$10,245 $5,705 
Licensed technology1,000 1,500 
Accrued commissions380 30 
Accrued fixed asset expenditures 20 
Accrued royalties3,348 4,734 
Current portion of operating lease liabilities46 44 
Current portion of finance lease liabilities636 786 
Accrued inventory1,527 1,294 
Accrued consulting fees7,720  
Other accrued expenses14,479 11,099 
Total accrued expenses$39,381 $25,212 
October 1, 2023January 1, 2023
Other long-term liabilities
Finance lease obligations$9,402 $9,257 
Operating lease liability 64 100 
Accrued customer payable 3,728 
Licensed technology 500 
Total other long-term liabilities$9,466 $13,585 
21

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 6 Debt
The components of debt outstanding at October 1, 2023 and January 1, 2023 are as follows:
October 1, 2023January 1, 2023
Short-term financing
Revolver$48,461 $60,093 
Unamortized debt issuance costs
(3,208)(4,276)
Total short-term financing, net of unamortized debt issuance costs
45,253 55,817 
Long-term debt
VIE Financing36,035 36,826 
Tool financing loans
8,509 3,037 
Unamortized debt issuance costs
(2,574)(2,827)
Total long-term debt, including current maturities41,970 37,036 
Less: Current portion of long-term debt(4,241)(1,855)
Total long-term debt, excluding current portion$37,729 $35,181 
Revolver
The outstanding balance of the revolving line of credit under the Company's Loan and Security Agreement with Siena Lending Group LLC (the "Revolver") was $48,461 as of October 1, 2023 at an interest rate of 10.7% due in December 2025. The remaining availability under the Revolver was $43,783 as of October 1, 2023. As of October 1, 2023, the Company was in compliance with applicable financial covenants of the Revolver.
VIE Financing
On September 30, 2020, Oxbow Realty, the Company's consolidated VIE (see Note 12 – Related Party Transactions and Note 13 – Variable Interest Entity), entered into a loan agreement for $39,000 (the "VIE Financing") to finance the acquisition of the building and land 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, 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. Based on the level of SkyWater's earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs relative to gross rents paid from SkyWater to Oxbow Realty, as defined in the loan agreement, a trigger event exists and the lender's protective rights are currently enforceable. Pursuant to its protective rights, the lender has retained in a restricted account amounts paid by SkyWater to Oxbow Realty pursuant to the Company's related party lease agreement that are in excess of the scheduled debt payments paid by Oxbow Realty to the lender. The funds held in the restricted accounts become remittable back to Oxbow Realty once the trigger event is cured. As of October 1, 2023, Oxbow Realty maintained a $6,230 receivable for the cumulative amount of excess payments held by the lender in the restricted account.
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. Between fourth quarter 2022 and third quarter 2023, SkyWater entered into arrangements to sell manufacturing tools and other equipment to financing lenders for $9,592. 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 sheet.
22

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Maturities
Future principal payments of the Company's long-term debt, excluding unamortized debt issuance costs, are as follows:
Remainder of 2023$1,387 
20244,275 
20254,354 
20262,172 
20271,219 
Thereafter31,137 
Total$44,544 
Note 7 Income Taxes
The Company's effective tax rates for each of the three- and nine-month periods ended October 1, 2023 and October 2, 2022 differ from its 21% U.S. statutory corporate tax rate due to the impact of state income taxes, permanent tax differences, the tax impact of restricted stock unit vestings, and changes in the deferred tax asset valuation allowance. The effective tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The effective income tax rates for the three-month periods ended October 1, 2023 and October 2, 2022 were 1.4% and (1.4)%, respectively, and the effective income tax rates for the nine-month periods ended October 1, 2023 and October 2, 2022 were 0.4% and 0.1%, respectively.
Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance as necessary. Management recorded a valuation allowance of $26,354 and $19,855 at October 1, 2023 and January 1, 2023, respectively, to reduce the net deferred tax assets to the amount that is more likely than not to be realized after evaluating whether taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income supported the realization of these net deferred tax assets.
No liability has been recorded for uncertain tax positions. If applicable, the Company would accrue income tax related interest and penalties in income tax expense in its interim condensed consolidated statement of operations. There were no interest or penalties incurred during the three- and nine-month periods ended October 1, 2023 and October 2, 2022.
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 nine-month period ended October 1, 2023, the Company sold approximately 2,081,167 shares at an average sale price of $10.10 per share, resulting in gross proceeds of approximately $21,029 before deducting sales commissions and fees of approximately $631. The Company used the net proceeds to pay down the Revolver and fund its operations.
As of October 1, 2023, approximately $74,930 in shares were available for issuance under the Open Market Sale Agreement.
23

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 9 Equity-Based Compensation
Equity-based compensation expense was recorded in the interim condensed consolidated statements of operations as follows:
Three-Month Period EndedNine-Month Period Ended
October 1, 2023October 2, 2022October 1, 2023October 2, 2022
Cost of revenue$438 $444 $1,242 $2,018 
Research and development expense
218 115 597 449 
Selling, general and administrative expense1,197 1,033 3,834 4,175 
$1,853 $1,592 $5,673 $6,642 
Note 10 Fair Value Measurements
ASC Topic 820, "Fair Value Measurement and Disclosure" ("Topic 820"), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The Company uses the fair value hierarchy defined in Topic 820 to categorize assets and liabilities subject to fair value reporting into three levels, as follows, based on the inputs used to derive the fair value of these balances.
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Level 3 inputs were used in the valuation of the Company's contingent consideration obligation. The change in level 3 assets measured at fair value on a recurring basis is summarized as follows:
Nine-Month Period Ended
October 1, 2023October 2, 2022
Beginning balance$ $816 
Payments (816)
Change in fair value  
Ending balance$ $ 
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Non-financial assets, such as property and equipment and intangible assets, are initially recorded at acquisition cost when purchased, or at fair value if acquired via a business combination. Non-financial assets are remeasured at fair value only if it is determined the carrying amount of the asset, or asset group, is not recoverable pursuant to ASC Topic 360, "Property, Plant and Equipment."
24

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 11 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 its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the resolution of these ordinary-course matters will not have a material adverse effect on its business or consolidated operating results, financial condition and cash flows. Even if any particular litigation is resolved in a manner that is favorable to the Company's interests, such litigation can have a negative impact on its results 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 that primarily relate to the completion of a building expansion project to increase manufacturing capacity at its Minnesota facility. The Company has approximately $6.5 million of contractual commitments outstanding as of October 1, 2023.
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 5 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, it is required to continue to operate the CfN until the earlier of either a replacement operator is found, or the 18-month's notice period expires, and it may be required to make a payment of up to $15,000 to Osceola.
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 October 1, 2023, SkyWater has not been obligated to pay any portion of the matching contribution to which it has committed.
25

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 12 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 2023, the agreement was amended to extend the term through March 2025. 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 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. 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 October 1, 2023 were as follows (such amounts are eliminated from the Company's condensed consolidated financial statements due to the consolidation of Oxbow Realty, see Note 13 – Variable Interest Entity):
Remainder of 2023$1,245 
20245,031 
20255,132 
20265,234 
20275,339 
Thereafter78,776 
Total lease payments100,757 
Less: imputed interest(72,956)
Total$27,801 
26

SKYWATER TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited in thousands, except share and per share data)
Note 13 Variable Interest Entity
Oxbow Realty was established by Oxbow for the purpose of holding real estate and facilitating real estate transactions. This included 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 12 – Related Party Transactions). Management determined that Oxbow Realty meets the definition of a VIE under ASC 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 to direct operating and maintenance decisions of the Minnesota facility during the lease term, which would most significantly affect the VIE's economic performance. 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 the Company because the owners of SkyWater's common stock do not legally have rights or obligations to the profits or losses of Oxbow Realty. 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 October 1, 2023 and January 1, 2023. The assets and liabilities are presented prior to consolidation, and thus do not reflect the elimination of intercompany balances.
October 1, 2023January 1, 2023
Cash and cash equivalents$54