Good morning. And thank you for standing by. Welcome to the SkyWater Technology Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker for today, Ms. Heather Davis. Thank you. Please go ahead.

Good morning. And welcome to SkyWater's third quarter fiscal 2021 conference call. With me on the call today from SkyWater are Thomas Sonderman, President and Chief Executive Officer; and Steve Manko, Chief Financial Officer. I'd like to remind you that our call is being webcast live on SkyWater's Investor Relations website at ir.skywatertechnology.com. The webcast will be available for replay shortly after the call concludes. During the call, any statements made about our future financial results and business are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. For a discussion of these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including our earnings release filed on Form 8-K yesterday and our prospectus filed April 22, 2021. All forward-looking statements are made as of today, and we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release, which is available on our Investor Relations website. Unless noted, all comparables referenced today are versus the prior year or third quarter of fiscal 2020. With that, let me turn the call over to Tom.

Thank you, Heather. And good morning to everyone on the call. I've often spoken up and will continue to emphasize the historic nature of the post-Moore's Law technology paradigm shifts that are occurring right now, as well as the role SkyWater is playing to enable and drive this change. Every day, we are working with our customers to co-create solutions through our highly differentiated Technology-as-a-Service model in areas such as radiation-hardened microelectronics, photonics, MEMS, superconducting, imaging, microfluidics and advanced packaging. The disruptive technologies that we enable support megatrends across the economy that are shaping our world, like next-generation communication networks, advances in quantum computing, autonomous vehicles, electrification, renewable energy, rapid bio-diagnostics, genetic sequencing, smart biomedical devices and state-of-the-art defense systems. Interestingly, in addition to technology and market-driven paradigm shifts, the supply chain challenges across industries, which you are no doubt hearing about, highlight the need for our nation to enhance domestic infrastructure. As the country is coalescing around the concept of semiconductor sovereignty, SkyWater plays an increasingly critical role in supporting the vision of re-establishing the U.S. as a technology manufacturing leader. I share all this to highlight our collective excitement about SkyWater's opportunity to address major needs in the industry for disruptive technologies, the unique infrastructure these technologies require to scale and to make SkyWater and the U.S. leaders in these emerging categories at the same time. In our call today, I will cover our high-level Q3 financial results, do a deep dive into our Advanced Technology Services business, highlight several exciting areas of our expected long-term growth and then spend some time unpacking some of the challenges we see in our business today. In the third quarter, total revenue grew to $35 million compared to last year, led by increased wafer services revenue, which offset a decline in Advanced Technology Services revenue. Supply constraints and delays in expected U.S. government funding had a near-term effect on the company and our customers, resulting in a revenue recognition delay for certain programs. We incurred higher cost of goods as we ramped up hiring and employee retention efforts to support our demand outlook. In addition, we continued investments in building our radiation-hardened and advanced packaging capabilities. These investments outpaced revenue growth in the quarter and were the primary drivers of gross margin of negative 5.2% and negative adjusted EBITDA of $2.7 million in Q3. We continue to aggressively ramp our Advanced Technology Services and wafer services businesses and made important progress on our rad-hard and power management platform qualifications. We also completed the transfer of two ATS programs to wafer services last quarter with another five underway. In the last 12 months, we have added 25 ATS customer programs and have substantially grown our sales pipeline. All of this gives us a strong conviction in our long-term model. As the past two quarters demonstrate, our business can fluctuate on a quarter-to-quarter basis and due to a confluence of factors, our third quarter results were below our expectations. We underestimated some of these factors, which are the consequences of our rapid growth, but we've learned from them and believe that this will make us stronger in the long term. In addition to what we believe are favorable market conditions for semiconductors today, we believe SkyWater is well aligned to the long-term growth trends that demand services offered through our unique engagement model for the development and production of new technologies. Our approach to the market is called Technology-as-a-Service, or TaaS. This business model combines traditional volume manufacturing services, or what we call wafer services, with Advanced Technology Services, which is an embedded R&D capability that enables us to monetize this competency. In the TaaS model, customers come to SkyWater with an idea, and we develop the manufacturing process together. In addition, we are a volume manufacturer, which means customers also get the benefit of high yields and automotive-level quality when their product goes into production, as well as the IP security benefits of performing development and manufacturing onshore. We have honed an exceptional proficiency creating novel and disruptive technology with our customers inside a production environment. This unique combination of Advanced Technology Services and wafer services inside a single operation is one of our key differentiators and facilitates customer engagement throughout the development cycle, where we demonstrate and optimize their products while refining our capabilities. This symbiotic relationship allows customers to create unique offerings and allows SkyWater to serve customers with differentiated technologies not easily produced elsewhere. The ability to handle development projects from R&D to volume production gives us a lot of stickiness with our customers. When faced with the requirements of establishing an operation capable of producing their device, customers typically decide that investing in their own facilities or engineering teams is not economical and simply takes too long to capitalize on the market opportunity. This is where SkyWater's value maps to customer needs again and again to help them innovate, drive customization and accelerate their time to market. We make it easy for customers to engage with us at any point in the technology and product development cycle, but our ATS projects typically initiate during concept and feasibility, technology demonstration or process development. Ultimately, a successful ATS program will conclude with customers moving into wafer services, which is when they scale their product to buying production and do so with their process flow designed to run at SkyWater. In the ATS phase of our customer engagement, we focus on margin proactively, targeting a high margin. These are all R&D programs centered around cycles of building and validating technology. As customers move into wafer services, the margin proactivity decreases as volume grows, but also requires substantially less engineering support, enabling those resources to focus on the next ATS program. The other key component of our TaaS model is that it lowers our capital intensity. Customers invest in their development, not just for nonrecurring engineering, but also for tool acquisition. If there's a program that requires tooling we do not possess, our customers typically fund the acquisition of the tool. It's not SkyWater's practice to offer exclusivity, which means that we are able to use that tool not only for the lead customer, but also for other development and volume manufacturing programs. This approach enables the necessary development and subsequent production required to monetize the IP, co-develop with our customers with low capital intensity and strong mutual benefit. The positive momentum we've generated with the TaaS model continues to grow, and we believe strongly in our highly successful approach. This is evidenced by our ATS wins during third quarter, bringing our total number of active customer engagements to 55, an increase from the 35 we disclosed during our IPO. It's important to recognize that it can take customers 24 to 48 months to move through the ATS funnel into buying production. Revenue generation from these programs typically accelerates as the programs mature. This year, we began the transition of several customers into wafer services. These new programs deliver higher margins than our legacy wafer services business. The biomedical space is one of four important growth areas for SkyWater. Multiple bio-health programs are moving quickly at our company. Our highly collaborative engagement model is well aligned to needs in this space as conventional microelectronics and microfabrication technologies are rapidly merging with screening and intervention technologies. This ability to co-create across fields along with SkyWater's ISO 13485 medical certification brings a strong value proposition from development through production for new capabilities in the areas of rapid diagnostics, genetic sequencing and a wide range of biomedical devices. We remain encouraged by the pipeline for ATS projects in the biomedical space. We achieved an important milestone with our radiation-hardened technology platform fabricating in Q3 the first fully integrated test wafers with copper back end-of-line processing. Domestic production of rad-hard wafers is significant for the U.S. government in both space-based and defense applications. This work is progressing and ongoing, and we continue preparations to serve this critical high-value market. For our Florida advanced packaging facility, we recently announced an agreement with Deca related to their second-generation fan-out wafer-level packaging technology. We are working with Deca to become the first pure-play foundry to offer this competitive advanced packaging technology solution in the United States. The Gen 2 Deca technology is state of the art in its ability to reduce die pitch and fan-out wafer-level packaging integration schemes. We previously announced that two SkyWater Minnesota customers have selected our Florida facility for their advanced packaging needs. We continue to see increasing momentum and customer interest for our unique advanced packaging capabilities, and I'm very excited about the future of our Florida facility. The fourth growth platform for SkyWater is high-performance power management and connectivity. We have partnered with several customers in this category as we work to transition them from ATS into wafer services. One of these customers is working with us to commercialize a new innovative fin-based MOSFET architecture that will provide substantial benefit to high-speed power switching applications. This partner is currently working with their end customer on system qualification, and we anticipate that the wafer services ramp for this platform will begin with revenue generation in 2022. We believe the strategic and national importance of improving domestic manufacturing of semiconductors cannot be overstated. The CHIPS Act received bipartisan support in the Senate and we remain confident that it will ultimately become law. SkyWater continues to engage with multiple state governments to secure the matching funding necessary to capitalize on our nation's strategic investment in semiconductor research and manufacturing. Last month, we were honored to have Minnesota Governor Tim Walz tour our facility and discuss several opportunities we see to quickly increase the output and capabilities of our Minnesota fab. We believe SkyWater is an excellent example of how public-private partnerships can collaborate to deliver domestically produced semiconductors for government and commercial customers. As the U.S. looks to build infrastructure in this area, we are optimistic that there are various scenarios for which we are uniquely positioned. We intend to be a leader in building our nation's manufacturing infrastructure for technologies that will be major industry drivers in the years to come. In the near term, we expect to continue to face challenges with supply chain and labor constraints. But as highlighted, there is ample opportunity for long-term revenue growth for SkyWater to deliver increased shareholder value. Skilled labor is a key pillar of our growth. Starting in the second quarter of 2021, we began hiring for a range of roles, key to scaling the output in our Minnesota fab in response to strong customer demand. The market for skilled labor is highly competitive in general, but the current market is as challenging as I have seen in my career. As we work through this, we are also focused on employee retention for all roles and view it as critical to our future. We're significantly expanding our learning and development capabilities to reduce the time required to achieve high levels of productivity while creating a foundation for all employees to reach their maximum potential. SkyWater was not immune to the challenges in the supply chain for semiconductors this quarter. We talked about increased lead time for tools in our last call. In the third quarter, both SkyWater and our customers experienced increased challenges sourcing spare parts, substrates and the chemicals used in production, which did impact our wafer output and ATS activities in the quarter. We have now entered into multiple long-term agreements to secure supply into the future. Q3 revenue was also impacted by a significant, complex multiyear ATS program that is now expected to be completed in the first quarter of next year, moving revenue recognition from 2021 into early 2022. These large-scale programs have multiple dependencies, and it's sometimes challenging to forecast the exact timing of these R&D-related milestone achievements. I'll stress that this is a movement of revenue to the right in the model. In 2021, we hired three senior operational leaders with many years of product experience. They are already making a strong impact driving important performance improvements as we ramp our two paths. Output was constrained by the ongoing labor and supply chain challenges. Even so, wafer outs for the third quarter in our Minnesota fab increased nearly 60% from the prior year. We were able to achieve this increase despite moving in new tools, improving infrastructure and onboarding new hires. These challenges are real, but well understood in our organization. We are a rapidly growing company, ramping a complex business in a dynamic macro environment. These stressors continue to forge our teams and processes as we scale and optimize our operations to deliver long-term growth and increase shareholder value. I am very proud of all of our employees and what we are doing every day to co-create technology solutions with our growing list of customers. I will now turn the call over to Steve for information on our financial performance in our recently completed quarter. Steve?

Thank you, Tom. As we've grown our business and made long-term investments to deliver outsized growth, our financial results are anticipated to be choppy quarter to quarter. Total revenue for the third quarter of 2021 was $35 million, an increase of 6% compared to the third quarter of 2020. Advanced Technology Services revenue declined 8% to $22.4 million and wafer services revenues increased 44% to $12.7 million. ATS revenue was impacted by the customer program that is being restructured and expected to recommence in 2022. This contract contributed $4.3 million in third quarter 2020 and $23 million in fiscal 2020. Excluding this program from third quarter 2020 results, we would have shown ATS growth in the third quarter of 2021. We have a large multiyear ATS R&D program, originally scheduled to be completed in the fourth quarter of 2021. It is pushing out into early 2022. This means revenue recognition from the third and fourth quarters of 2021 into early 2022. Customer-funded tool revenue, which is included in our ATS revenue in the third quarter of 2021, was $300,000, roughly flat to the $400,000 in the third quarter last year. Wafer output for the quarter increased by nearly 60% compared to the prior third quarter and wafer services revenue increased 44% to $12.7 million. Cost of revenue was $36.9 million, an increase of 43% year-over-year. Gross loss was $1.8 million, decreasing from the gross profit of $7.3 million in the third quarter last year. Gross margin of negative 5.2% declined versus the prior year of 22.1%. Non-GAAP gross loss was $0.5 million compared to gross profit of $7.4 million in the third quarter last year. Non-GAAP gross margin was negative 1.4% and 22.4%, respectively. Both GAAP and non-GAAP gross profit and margin declined due to increased cost of revenue. Cost of revenue increases were driven by three primary factors: volume, labor and long-term investments. The increased wafer services output of approximately 60% in the quarter drove increased starting material cost and other variable costs. At our Minnesota fab, we continue to hire fab technicians and maintenance engineers to support our expanding volume outlook heading into 2022. We continue to make investments for the long-term growth of the company by building out our rad-hard and advanced packaging capabilities. Both programs are expected to be long-term growth drivers; in the quarter, depreciation related to the rad-hard program was $2 million and we incurred $2.9 million in cost of revenue for Florida. Year-to-date, these investments in rad-hard and advanced packaging were $10.9 million combined in cost of revenue. R&D in the third quarter was $2.3 million compared to $1.1 million in third quarter 2020, as we added executive leadership, engineers to support our ATS growth and expanded design enablement capabilities to accelerate and support the development of our technology platforms. We are enhancing process design kits to continue building out our technology platforms and completed our S130 PDK in Q3. We're also investing in R&D to bring power MOSFETs to market which is expected to occur in the fourth quarter of 2021. SG&A was $9.6 million compared to $5.8 million in the third quarter last year. The increase was driven primarily by public company costs and stock-based compensation. Excluding non-cash costs of $2.1 million for stock-based compensation, SG&A was $7.5 million in the third quarter of 2021. This is lower than our previous expectation as we have not met our internal plans for the year and reversed most of the annual bonus accruals for 2021. Adjusted EBITDA was a loss of $2.7 million, declining from a positive $5.3 million last year, reflecting the decrease in gross profit flow-through this quarter. Cash used in operations during Q3 was $6.4 million. We invested $17 million in capital expenditures this quarter on fab improvements aimed at increases in capacity and efficiency. We ended the quarter with $8.4 million in cash and cash equivalents. We paid down $30.3 million on our revolver in the third quarter. As a result of this pay down, total debt outstanding was $35.6 million as of October 3, 2021, and we had $60.6 million available on our $65 million revolver. Total inventory at the end of Q3 was $30.9 million compared to $27.2 million at the end of fiscal year 2020. The temperature differential sensing wafers we discussed in Q2 remained in inventory at $13.4 million. As you update your SkyWater models, the following give some additional color for our expected operating costs for the fourth quarter of 2021. Research and development expenses are anticipated in the $2.0 million to $2.5 million range. SG&A expenses are expected to be approximately $9.5 million, excluding stock-based compensation, and we anticipate annual stock-based compensation to be approximately $13 million. As Tom highlighted, the current headwinds resulted in a delay of approximately $15 million of revenue recognition from third quarter 2021 and fourth quarter 2021 into 2022. Our business with new and existing customers is growing in both ATS and wafer services, and we are continuing to transition ATS programs to wafer services. This gives us confidence in our long-term top-line growth model of 25%. With that, I'll turn the call back to Heather and welcome your questions on SkyWater.

Thank you, Steve. Please visit the Investor Relations section of our website for upcoming investor presentations. Operator, please open the line for questions.

Your first question comes from the line of Mark Lipacis with Jefferies.

Hi, guys. Thanks for taking my questions. So the first one, Steve, if you could just play back the additions to your fixed cost structure in COGS, it looks like on a year-over-year basis a similar revenue level has translated to gross margins going from the high teens, like the 20% range, to flat. So could you—I've got two questions— it sounds like I got $2 million of depreciation expenses added into COGS. And it sounds like there was some labor costs also that are going into COGS that raised the fixed cost. If you could just break that down one more time and just help us understand the fixed cost basis now in COGS?

Sure. Happy to do so. Good morning, Mark. It's very important to understand the cost structure of the business because what you'll see in there, we continue to remind of the investments we're making that are flowing through our cost of revenue right now for the long-term growth of the company. So we really highlighted three things: it was volume, labor and long-term investments that are driving the increase you're seeing in cost of revenue. So given that we had a 60% greater output comparing third quarter 2021 to third quarter 2020, obviously there would be a higher cost of personnel, starting materials and other variable costs that go with that higher output. Secondly, as I mentioned, we're adding fab technicians and equipment maintenance personnel as we get to our target utilization for 2021, and we want to be well prepared for the forecast we have for 2022 and the target utilization for 2022. As I mentioned, long-term investments, in the quarter, we had $4.9 million of costs flow through related to the rad-hard technology as well as the advanced packaging platform. That does add to our cost structure that wasn't there over the course of 2020. And on a year-to-date basis, we had $10.9 million of additional costs come through that I would call investments in rad-hard and the advanced packaging platform for the long-term growth of our company. So our cost structure did change primarily related to those investments we're making for rad-hard and advanced packaging for the long term.

So on a quarterly basis, we have $2 million higher depreciation expense, right?

That's right.

Okay, in-house. Okay. And then can you give us—I appreciate that you're hiring more fab techs and whatnot—can you give us a sense of—I guess I'm just trying to get to the variance here, like the cost structure has increased $2 million on depreciation, there is labor that's gone up and then there's the rad-hard investments. Is this something that now is a—are these costs that you've capitalized and now are amortizing? And so is that rad-hard element now a permanent part of the cost structure, and we don't get to absorb those from rad-hard until you start shipping revenues there? Is that kind of the idea? Or is this like a one-time event on that input to the COGS?

You're correct on the rad-hard. This will be part of our cost structure going forward, and it will be part of the cost of revenue that started coming through from a fully baked basis in the second quarter of this year. This will remain part of the investment we're making; the investment will be recurring. Again, rad-hard is very important for the long-term growth of our company, but we won't really start generating any significant revenues from that rad-hard platform until late 2023 at the earliest. So significant headwinds against us on our margin structure, but really good foundational investment for long-term growth of the company.

Okay. Fair enough. And then a second question. On the $15 million of Q3 and Q4 revenues that pushed into Q1, can you give us a sense, again, of the variance here, like what part of that $15 million was from the supply chain or from constraints or the delays in the government programs? And I just want to be clear, so is this revenue that you have high conviction hits in Q1? And so is that like a $15 million high-conviction part of your Q1 revenues? Thanks.

Sure. So on the government side, that was a delay in about $3.5 million of revenue. The rest of that would be allocated over what we'd call supply chain constraints that would impact the efficiency of getting wafers out of the fab on a wafer services perspective, as well as the delays in some customer qualifications for wafer services and delays, as we mentioned, in our large ATS program. There is high conviction for that revenue. It's very defined on what those revenue opportunities are. Again, we are seeing those headwinds and some supply constraints remaining, and that's why it was pushed out of Q3 and out of Q4 into 2022. We'll see how we handle what those headwinds continue to remain on the supply chain and some of the constraints that we're currently dealing with. But that revenue is very well-defined and identified. It's just a matter of executing on that, given the challenges that we're facing at the macro level.

Okay. So I just wanted to make sure that I was clear on that. So that's not $15 million that you expect to recognize in Q1, but rather some time in 2022?

That's correct.

Got you. Thank you.

Your next question comes from the line of Christian Carr with Cowen & Company.

Thanks for taking my question. I have a couple of them for Tom or Steve. Given the fact that the cost structure has changed, I'm curious: in the past you said your long-term gross margin target is 40%. So is that a realistic expectation or are you going to reset it to something lower, given that the fundamental structure of the business is changing?

I still think that's the long-term target that we've established. But we still have conviction and belief in that long-term target. Obviously, we're seeing some near-term headwinds, specifically making the investments in the rad-hard and advanced packaging platforms. As I talked about in the last quarter, obviously, as the revenues grow, that will help us to expand our gross margins. But we're seeing more of the opportunities for our long-term growth materializing, and that's why we still have conviction in our long-term growth model of 25% top-line revenue as well. And as we achieve that and realize the return on the investment—the significant investments we've been making over the course of 2020 and 2021—we believe we can achieve those levels in the long term.

And I'll just add that the thing we're doing this year that's very important is moving programs out of ATS and into wafer services. Today, a lot of our wafer services volume is legacy technologies that we're running for Infineon, for example. As those new technologies ramp, which is underway and more to come—certainly a major power management platform is coming into the fab from a wafer service perspective—you're going to see that gross margin improve on the wafer services side, while at the same time remaining strong on the ATS side, especially as we bring in all these new customers. So over time, we absolutely believe that not only the long-term revenue model is going to hold, but also the improvements in gross margin. We are starting up again new capability here in Minnesota and a new facility in Florida, and those are drags in the near term but are all enabling capabilities to drive margin growth in the years ahead.

Got it. Then Tom, I just wanted to dig a little deeper on your 25% long-term revenue target. Can you help us understand how much of the 25% is coming from ATS, how much from wafer services, how much from tool revenues, and how much is dependent on future government funding? I'm trying to quantify the 25% growth into those buckets.

I think ATS will continue to be a strong driver. As I noted, we've continued to bring in a lot of new customers. The business today is roughly two-thirds ATS and one-third wafer services. Think of ATS again as a high-margin business, but it funds our pipeline for future wafer services business. So having a strong ATS business today indicates long-term wafer services growth in the long term. Of course, we have rad-hard. That platform will be coming to market. As Steve alluded to, we're going to complete process technology qualification early next quarter. We will then go into manufacturing qualification and product qualification with end customers and then system qualification leading into volume ramp in 2023, all that plus our work platform is another very important program we're doing with the government. These are all long-term growth drivers. Advanced packaging, many of the capabilities we're putting in Florida don't exist today in the United States. We partnered with IMAX, we've now partnered with Deca, and we have another partnership we're working on for DBI. These are all foundational capabilities that we believe are going to be long-term growth drivers. And I would not think of tool purchases as the primary mechanism—sometimes the tool doesn't exist or we get the customer to buy the tool, but that is an infrequent mechanism. It's really going to be driving growth in ATS and then the transition of ATS into high-margin wafer services. And that's what's going to enable the model we're talking about.

Got it. And then I just wanted a quick follow-up. I understand your argument about the CHIPS Act and its usefulness for U.S. manufacturing. I'm curious: there's also an incentive that's been floated around where you get a tax subsidy for investing in the U.S. I'm curious if that helps you, given the fact that you don't have very high profits resulting in large taxes. How does government funding benefit you if it comes as a tax subsidy versus direct investment?

Great question. A lot of the mechanics of what the CHIPS Act will actually look like are yet to be defined. There's the USICA which is the broader component tied to innovation investment in addition to manufacturing investments. SkyWater will benefit from more innovation and more investment going into R&D, which plays very well into our ATS model. But we're also working with state governments on public-private partnerships. The way the CHIPS funding will likely work is the government will supply investment for new manufacturing capacity that will be complemented by state governments, and then industry will also be expected to invest. The goal is to not only innovate in the United States but add scale. That scale will occur in out years; it's not going to have an immediate impact. So I mentioned we're talking with the state of Minnesota at both the executive branch and congressional representatives about how we can accelerate adding capacity into our Minnesota fab to resolve some of these near-term supply constraints. We have a great long-term strategy tied to CHIPS and USICA. But the delays that we're talking about are programs that are already awarded and have nothing to do with whether or not that bill ultimately passes. We have a great relationship with the U.S. government. We're doing things critical to national security and getting these programs reconfigured around new contracts, longer timelines and more tiered pricing are all things that will benefit SkyWater in the long term, even though they've created some near-term headwinds in terms of timing.

Your next question comes from the line of Harsh Kumar with Piper Sandler.

Hey, guys. Maybe I missed it, but did you give any idea of what revenues you're expecting in the December quarter?

No. We didn't give specific guidance on that. We did talk about the $15 million that was pushed out from the second half of 2021 into 2022. And so that was the information we gave on some revenue expectations from the forecast we have going forward.

Okay. So can I ask you on the same topic then: should we expect in the absence of the $15 million or any other such items that we should expect a kind of flattish trend for the December quarter on the top line? Or is there any reason to believe that there'd be more wafer services or ATS contracts that might come to fruition and raise revenues?

Yeah. You can compare the fourth quarter of this year to the fourth quarter of last year for comparison purposes. But remember, in the fourth quarter of 2020 we had an extra week in the year that was about $2.5 million of revenue that came through in the fourth quarter of last year, given that extra week, which is not repeating again in the fourth quarter of 2021 this year.

Okay. Great. So it might again be down then, is the way to look at it because I think you guys were $39 million. Okay, got it. And then maybe, Steve, you could talk about the $15 million. What is your visibility like? I think Mark asked earlier about this piece of revenue; could you talk about the timing and the certainty and the visibility into this? Will it be spread out uniformly into next year or come as one big chunk at some point? Do you have visibility into that timing?

Yeah. So we definitely have visibility into the tangible nature of what that revenue is. Again, what we don't have visibility into is the exact timing of when that comes through. Given what we are facing right now, we still see some of those constraints coming through in the fourth quarter and we know that, which is why that revenue was pushed out into 2022. So depending on how we navigate some of the macro impact that we're seeing as well as some of the ramping and efficiency that we're seeing in the fab, that will clearly impact the timing of when that revenue actually materializes over the course of 2022.

Got it. And then I had one on cash as well. You guys paid down quite a bit of debt, leaving your cash balance at $8 million. How much do you need to have on the books to run a well-funded operation? And do you think you might be stretching here? What was the rationale for paying down that debt as a young growing company that might need cash?

Sure. So you saw that we paid around $30 million down on that revolver; that's what we did in the third quarter. Again, we can at any point in time draw that amount back over the course that we need that funding. So that's perfectly accessible. At the end of the quarter, we had access to over $60 million on that $65 million revolver to draw upon. We were making significant investments over the course of 2020 and 2021. We talked about $17 million of capital expansion that we made in the quarter. We also had some nonrecurring expenses of about $10 million that we've funded and paid this year, which are a one-time event so we don't expect them to continue into 2022. On another note, we talked about some of the royalties that we're paying on our ATS revenues. Those cash outflows were approximately $9 million on a year-to-date basis. We're excited about that rate decreasing and dropping by 50% in 2022 and going forward. So we're getting a lot of investments behind us over the course of 2021 that won't be repeatable over the course of 2022 on cash outflows going forward. We do expect to make draws on our line over the course of the next four quarters; the amounts that you'll see drawn on that line should decrease as we grow our revenue and start to recognize some of the return on the investments that we've made over the course of 2020 and 2021.

Understood, guys. Thank you.

Your next question comes from the line of Raji Gill with Needham & Company.

Yeah. Thanks for taking my questions. Appreciate it. Just a follow-up on the $15 million push of revenue. Can you clarify: you said multiple programs in ATS where the revenue is being pushed into 2022. I'm trying to understand the piece parts of that. You mentioned there was a government deal of $3.5 million. Is that isolated? And then separately there are other ATS programs pushed out because of supply constraint issues or delays in qualifying products. Could you talk about how much of that $15 million is recoverable in 2022, how much is dependent on customer qualification versus government funding being delayed?

Yeah. I can give you additional color. If we go to wafer services first, that's where we're seeing some of the constraints on really getting the efficiency out of the fab. The orders for those wafers are there; they're concrete. It's a matter of us getting those wafers out. We're hitting some of those constraints on having our tools up and running, the availability of spare parts, the availability of the equipment maintenance personnel, hiring and training those personnel and also executing on our third-party suppliers that provide maintenance services. With everything taking place in the market, our third-party providers are also constrained and not as timely as they would have been previously. So those orders on the wafer services side are there; it's a matter of getting efficient, getting our fab up and running to the capacity and efficiency that we believe it can reach and getting those wafers out the door. On the ATS side, ATS is really—it's not a matter of if that revenue comes, it's more a matter of when. Some of the milestones that we were working on we already identified would not be achieved in the fourth quarter of 2021, and those are pushing out into 2022. So as we achieve those milestones, that's when that revenue will be recognized, and that was one item that we saw on the milestone push. Then we had another item that is a customer qualification given the constraints that they're facing as well, which delayed that by approximately a quarter as well. And so those are the items that pushed out the amount of the $15 million in addition to the $3.5 million related to the government funding.

Just to add, the power management platform that's going to be coming to market later this quarter into next year not only requires the wafer fabrication but also the assembly test and system-level qualification from the end customers. That process is also feeling the effects of some of the supply chain constraints. The ability for us to ramp that program and move it into wafer services in volume is somewhat dictated by getting those final qualifications completed. We remain very confident that there will be a highly differentiated platform created—a lot of disruption—and frankly we think it will allow us to reset some of the conditions in the market as it relates to foundry-delivered power management devices. We're really excited about that program coming into volume as we enter next year. But the original plan was to have it go into volume in Q4, and because of some of these constraints, we have not been able to get that done as originally planned.

Okay. Just to clarify again, so there's a $3.5 million government deal being pushed because of delays in funding from the government related to that program; that's a separate item. Then there's a power management platform which was part of ATS that was supposed to hit in Q4 but is going into next year given constraints. And there are orders on wafer services that you're trying to get out of the fab but because of constraints and third-party ramp issues it's all combining to have this revenue pushed out. Is that a fair statement? Then on the cost structure: thank you for the insight on the details related to the investment for rad-hard and advanced packaging—$4.9 million this quarter and year-to-date $10.9 million. How do we think about margins going forward? Are there going to be more investments in rad-hard and AP into next year that will keep cost structure elevated? It appears that cost structure will remain fairly high for some time to come. Just clarify that, please.

Happy to clarify. Those will be headwinds; that's accurate. Those are recurring items running through cost of revenue over 2022 and 2023. As far as additional investments go, we have about $29 million or $30 million in capital investment that hasn't been placed into service yet. Once that $29 million is placed in service, typically we depreciate over a seven-year life. So once that $29 million is placed in service, that will have an impact on our depreciation, which will run through cost of revenue in the near term. We'll continue to make investments in advanced packaging in Florida as we continue to build that out, but both of those programs—rad-hard and advanced packaging—require getting the fab up and running, qualifying tools and building out those technology platforms over the next 12 to 24 months to allow us to have a foundation for growth going forward. We don't expect that growth and that return to really start to materialize until late 2023.

Got it. Last question, Tom. You mentioned there's a 24- to 48-month timeframe to move designs in the ATS funnel into volume production. You're racking up more ATS wins, which is good. Could you remind us how that process works? There's potentially a mismatch of timing of revenue relative to growth. How much of the 25% long-term growth is based on customers moving into volume production, and how should we think about the timing?

I'll outline it and Steve can add any color. The way we look at it is there's new ATS and mature ATS and then new wafer services and mature wafer services. We have been bringing in a lot of new ATS customers—25 over the last 12 months. Those typically start out at a relatively small run rate and then as the programs pick up momentum, the resources get fully deployed and the R&D cycle of learning begins to accelerate, you'll see them move into mature ATS. Depending upon complexity, that can be a three- to four-year window. As programs approach the end of development in years two to four, they'll be preparing for wafer services; you'll experience a J-curve effect as R&D spending slows and volume begins to pick up. Over time, the customer base grows and we fill out that entire funnel; individual programs will have less significant impact on our overall model. We certainly expect the biomed programs we're doing tend to be more in the two-year timeframe to get to wafer services, whereas complicated programs like rad-hard take longer. The whole idea is to have customers constantly moving out of ATS into wafer services while backfilling the funnel. The unique thing about SkyWater is these technologies are being developed on our TaaS platform, which makes us the single-source provider on new technologies and platforms. Our customers are partnering with us to fund our development pipeline to bring new competitive products to market. That's a new paradigm for the market and as the industry brings more manufacturing back to the U.S., demand for resources and equipment will intensify. That's all good for our company and our country because we're creating capabilities not made elsewhere and SkyWater is at the center of that.

You have a follow-up question from the line of Christian Carr with Cowen & Company.

My follow-up: in the past, your reluctance to give near-term guidance was driven by the difficulty forecasting the ATS business. Is that still the case? If so, how should we think about wafer services heading into December and into March, given you might see some revenue overflow from the $15 million in March, but at the same time seasonality may go against you?

Over time we'll see better visibility. The ATS contracts will be extending and being longer, which gives us better visibility. We'll also have more confidence in the services we're delivering. With the R&D we're doing, a lot of it is new, but as we build out and turn individual programs into platform technologies, that gives a baseline to build off of and reduces the learning curve in new R&D programs. That will give us better visibility into ATS. But as you've seen over the past couple of quarters, there is lumpiness with these contracts, especially on timing of milestone achievement. You have seen output increasing on the wafer services side year-over-year. There's still more revenue on the table, high demand for our wafer services, and we expect to continue to optimize and drive more wafers out the door and get better at that each quarter going forward.

Does wafer services grow into Q4 or slack?

There is significant demand for our wafer services, and we're becoming more efficient in driving that wafer services revenue.

Got you. Thank you.

There are no further questions at this time. I would like to turn the call back over to Tom Sonderman for closing remarks.

Thank you. As I shared at the beginning of our call, SkyWater's TaaS model is perfectly aligned to accelerate the realization of disruptive ideas into the market at a time when demand for beyond-Moore's Law technologies is growing to satisfy megatrends across industries. Additionally, a great opportunity is in front of our nation to act in pursuit of semiconductor sovereignty and to ensure the next generation of technologies are produced domestically. Our goal at SkyWater is to differentiate, disrupt and then dominate the markets we choose to participate in. These factors drive our collective enthusiasm for the future of our company and U.S.-based high-tech manufacturing. Thank you for your interest in SkyWater.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.